Apple's balance sheet is swelling with cash held overseas, and the company isn't alone. More than $1 trillion worth of cash is held on the balance sheets of U.S. companies, and the majority of it is held overseas. The reason? The United States levies a repatriation tax on corporate profits. If a company paid 10% taxes overseas on profits, it would need to pay up to 25% -- the remaining tax amount to hit top corporate tax rates in America -- to bring that money home.
Yet relief may be on the way. The U.S. Senate is considering a temporary tax break allowing companies to bring back the money they have in banks abroad, which would generate income the government wants to use for infrastructure improvements. Allowing companies such as Apple to repatriate money from overseas accounts at a lessened tax rate would also be a big boon across the entire tech industry, as most large tech companies have accumulated large cash piles. Apple alone has roughly $132 billion held abroad.
Any such measure would likely be a huge catalyst across the technology sector. Larger tech companies that are so large and dominant in their spaces that they've become value stocks -- companies such as Cisco Systems (NASDAQ:CSCO) and Qualcomm (NASDAQ:QCOM) -- could use money from abroad to increase their dividends. For example, while Qualcomm currently has more than $30 billion in cash and investments on its balance sheet, it's hampered in its ability to increase dividends by how much available cash it has in the United States. Likewise, Cisco and other large tech companies have been taking on debt to pay their dividends, even while their total cash piles continue to grow. The debt allows them to pay dividends to shareholders, while it keeps overseas profits out of U.S. bank accounts.
In this episode of The Next, Motley Fool tech analyst Eric Bleeker and Rule Breakers analyst Simon Erickson talk about the United States' repatriation tax system and what a tax holiday -- or a complete overhaul of it -- would mean for businesses.
Leaked: Apple's next smart device (warning -- it may shock you)
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Eric Bleeker, CFA, owns shares of Cisco Systems. Simon Erickson has no position in any stocks mentioned. The Motley Fool recommends Apple and Cisco Systems and owns shares of Apple and Qualcomm. Try any of our Foolish newsletter services free for 30 days. 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.