The Solution to the Tech Sector's $300 Billion Problem

Apple, Microsoft, Google, Cisco, and Qualcomm are hoarding a combined $300 billion in cash abroad. The recently proposed "Tax Reform Act of 2015" would make them happy to bring it back to the U.S.

Mar 5, 2014 at 6:30PM
Images

American companies have hoarded foreign profits abroad for years, as bringing the cash back to the United States would subject it to the highest corporate tax rate in the industrialized world. Now, Ways and Means Committee Chairman Rep. Dave Camp (R-Mich.) has released his proposed tax reform, which would close loopholes, enact a repatriation tax holiday, and exempt from taxes 95% of foreign profits repatriated to the U.S. Read on to find out more on what the proposed tax reform means for U.S. companies -- particularly the tech sector -- and how you may profit.

The problem
The U.S. tax system creates incentives for companies to move their profits offshore and keep them there. This is because any profits brought back to the U.S. are then taxed at the U.S. rate. Companies can hold off on paying taxes on these profits by keeping them abroad, which is what many do.

Facing the highest corporate tax rate in the industrialized world, many U.S. companies go to great lengths not to pay it. Apple (NASDAQ:AAPL)Google (NASDAQ:GOOGL)Microsoft (NASDAQ:MSFT), and countless others use loopholes and strategies with names like the "Double Irish" and the "Dutch Sandwich" to convert U.S. profits to foreign profits and thus pay minimal taxes on their earnings. While many people don't like this, as a recent Senate investigation of Apple and Microsoft found, it's perfectly legal.

This has led U.S. companies to hoard massive amounts of cash abroad. The top five are:

 

Company

Cash Held Abroad

1

Apple

$124.4 billion

2

Microsoft

$75.7 billion

3

Cisco (NASDAQ:CSCO)

$43.8 billion

4

Google

$33.6 billion

5

Qualcomm (NASDAQ:QCOM)

$22.9 billion

Source: Company financials as of Dec. 31, 2013.

These five tech companies are sitting on a combined $300 billion in cash abroad, while U.S. companies as a whole are sitting on nearly $1 trillion worth of foreign earnings. Companies have been waiting for Congress to announce a repatriation tax holiday or reform the tax system. Unexpectedly, Congress recently proposed both.

The Camp Plan
After three years of work, last week Rep. Camp put forward the proposed "Tax Reform Act of 2015," also known as the Camp Plan. The first major tax reform proposal in years, the bill proposes changes to the tax code for both individuals and companies. Here are the biggest ones under discussion:

  • U.S. corporations would get a new income tax rate of 25%, bringing the U.S down from its No. 1 spot in the industrialized world.
  • The U.S. would switch to a participation exemption system for the taxation of foreign income for corporations. Under this system, 95% of dividends paid to U.S. corporations by their foreign subsidiaries (which must own at least 10% of the foreign corporation) would be exempt from U.S. taxation.
  • To facilitate the switch to the new system, U.S. corporations would be allowed to repatriate pre-2015 profits at a special rate of 8.75% for cash, or 3.5% for earnings and profits that were reinvested in foreign operations.
  • The bill would also close the loopholes that allow big tech companies to convert U.S. profits to foreign profits by enacting neutral tax treatment of income attributable to intangible property, whether held in the U.S. or in a foreign country.

If the Camp Plan passes, it will allow U.S. companies to pay a fraction of the taxes on foreign profits that they would have paid if they had brought back the money before. It also removes the disincentive to bring profits back to the U.S. Overall, the Camp Plan is expected to result in an estimated 1.5% GDP boost to the economy over the next decade.

How you can profit
Shareholders in many companies -- in particular the big five tech companies mentioned above -- could be in for a treat in the form of buybacks or special dividends. I've written before about how a repatriation tax holiday could provide a major boost to the economy, why tech companies should pay large dividends, and how Apple in particular could use private equity's secret to make its shareholders a 100% return.

Bottom line
It's anybody's guess at this point whether the bill will pass and, if it does, what will change. But one thing is certain: In both the public and private sectors, governance functions best when stakeholders educate themselves, take an active interest in what's going on, and hold their representatives accountable. Educate yourself and tell your representative now what you think of the Camp Plan.

It works the same way with public companies. Educate yourself, take an active interest in the companies you own, and hold management accountable for how they allocate your cash.

Who Doesn't Like Dividends?
One of the secrets that few finance professionals will reveal is that dividend stocks as a group handily outperform their non-dividend-paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. Dan wishes Apple shareholder's would read this article.He owns shares of Cisco Systems. The Motley Fool recommends Apple, Cisco Systems, and Google. The Motley Fool owns shares of Apple, Google, Microsoft, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers