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

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:



Cash Held Abroad



$124.4 billion



$75.7 billion


Cisco (NASDAQ: CSCO  )

$43.8 billion



$33.6 billion


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.

Read/Post Comments (0) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2864026, ~/Articles/ArticleHandler.aspx, 9/2/2015 8:09:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Dzombak

Dan Dzombak has written for The Motley Fool since 2008. He covers value investing, investing process, and success among other things. You can follow him on Facebook or Twitter by clicking the buttons below or head over to his blog at

Today's Market

updated Moments ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:00 PM
AAPL $112.34 Up +4.62 +4.29%
Apple CAPS Rating: ****
CSCO $25.65 Up +0.53 +2.11%
Cisco Systems CAPS Rating: ****
GOOGL $644.91 Up +15.35 +2.44%
Google (A shares) CAPS Rating: ****
MSFT $43.36 Up +1.54 +3.68%
Microsoft CAPS Rating: ***
QCOM $55.86 Up +0.84 +1.53%
Qualcomm CAPS Rating: ****