The total indefinitely reinvested earnings of U.S. companies listed on the Russell 1000 increased by 12 percent to $2.119 trillion in 2013, according to data by Audit Analytics.
“According to our analysis, […] companies are holding more profits overseas than ever before. As of their most recent annual filings, the Russell 1000 companies now have over $2 trillion of indefinitely reinvested earnings – earnings that are not subject to U.S. corporate income tax,” Audit Analytics said.
For the past six years the data provider has analyzed earnings that are generated by U.S. firms abroad but not repatriated. During this time the amount of reinvested foreign earnings has nearly doubled (93 percent) and the number of firms keeping their profits offshore grew by 12 percent, from 487 in 2008 to 547 in 2013.
The U.S. tax code allows companies to defer corporation tax on foreign generated earnings provided they are permanently reinvested abroad. U.S. tax is only due on earnings that are repatriated and typically only applies to the difference between the tax rate paid in the country where the profits were generated and the U.S. corporation tax rate.
As the top corporation tax rate in the U.S. is 35 percent, this difference is often incentive enough to keep those profits abroad indefinitely. Last year Apple raised eyebrows when it preferred to raise debt in the U.S., by issuing a $17 billion bond, rather than to repatriate its foreign cash holdings, because the cost of capital was lower.
U.S. lawmakers have been arguing for some time that the size of indefinitely reinvested earnings is a sign for the need of corporate tax reform. Some are seeking to scrap the offshore corporate income tax deferral law, while others are advocating a tax holiday or one-off reduced tax rate for repatriated earnings.
“The new numbers … certainly highlight what is one of the key challenges for tax reform. I do think there need to be some reforms in this area,” U.S. Senate Finance Committee Chairman Ron Wyden said.
Offshore financial centers like the Cayman Islands have benefited from the law because multinationals tend to park offshore earnings or invest them through offshore centers in the knowledge that there will not be an additional layer of tax in a tax neutral jurisdiction. Others have structured their operations in such a way that certain income generating assets, such as intellectual property and other commercial rights, are sold to entities in offshore centers.
Conglomerate General Electric Co., which alone has $110 billion of earnings held outside of the U.S., says the vast majority of the funds are reinvested in active business operations.
The other largest offshore earnings holders are Microsoft, with $76.4 billion; Pfizer, with $69 billion, Merck & Co., with $57.1 billion,and Apple, with $54.4 billion.