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

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



$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.

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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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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