Info Service on Finance and Development (Feb18/03)
9 February 2018
Third World Network
US tax reform could lead to repatriation of $2 trillion
Published in SUNS #8616 dated 7 February 2018
Geneva, 6 Feb (Kanaga Raja) - The United States tax reform bill adopted
in December 2017 could lead to the repatriation of almost $2 trillion
of overseas funds held by US multinational enterprises (MNEs), leading
to sharp reductions in global FDI stocks, the UN Conference on Trade
and Development (UNCTAD) has said.
In a special edition of its Investment Trends Monitor focusing on
the US "Tax Cuts and Jobs Act", UNCTAD said the bill will
have significant implications for global FDI patterns. It will affect
MNEs and foreign affiliates accounting for almost 50% of global FDI
UNCTAD said that the overview of the tax reform measures relevant
for international investment provided in the Investment Trends Monitor
is necessarily succinct and incomplete.
It does not consider all detailed provisions and measures applicable
to specific industries.
Specific measures have been adopted affecting, for example, the energy
sector and the financial sector, which could also have implications
for cross-border investment, it said.
"The discussion also does not take into account broader macro-economic
effects. Increased budget deficits due to the tax cuts could affect
interest rates and the investment climate."
Decisions by the Federal Reserve could offset the fiscal stimulus,
And developments in other policy areas, notably international trade,
would have a strong impact on the activities of MNEs and on international
According to UNCTAD, the outcomes will also very much depend on reactions
in other countries. For example, China has recently put in place measures
to encourage reinvestment by foreign MNEs in its territory.
Also, with the move to a territorial tax system the motivation to
engage in a degree of tax competition increases for United States
trade and investment partners that are small open economies (not offshore
In fact, said UNCTAD, a number of countries have recently announced
cuts in corporate income tax (CIT) rates.
"Increased tax competition could have a negative impact especially
on lower-income countries, where corporate income taxes are more important
for government revenues and rates are still relatively high."
Investors will face some uncertainty as the detailed effects of the
tax reform bill are clarified, and as they wait to see how other countries,
including United States tax treaty partners, react to some of the
According to the UNCTAD Monitor, concerns have been raised that provisions
in the reform bill may violate United States double taxation treaties
(DTTs) and trade rules.
What seems clear is that global investment patterns could see important
developments over the coming period, as the full implications and
workings of the tax reform bill become clear.
In this context, UNCTAD highlighted the following findings:
* Repatriation of overseas funds, possibly to the tune of almost $2
trillion, will lead to negative outflows and a sharp reduction of
United States outward stock (and inward stocks elsewhere);
* The removal of the need to keep earnings overseas could lead to
structurally lower retained earnings in foreign affiliates of United
* This, combined with the anti-avoidance measures, could lead to a
re-routing of FDI links in the international corporate structures
of United States MNEs;
* The greater degree of freedom in the use of overseas cash might
lead to a further increase in M&As (although perhaps more domestic
M&As than cross-border M&As), but the curbs on interest deductibility
might dampen this effect.
* The stimulus to investment in the United States provided by a lower
CIT rate and full investment expensing might lead to higher inward
investment in the United States, and possibly to further re-shoring
of manufacturing activity.
"The impact on investment in the developing world remains to
be seen. However, developing countries need real investments in productive
assets, not cash parked overseas," said UNCTAD Secretary-General
Dr Mukhisa Kituyi, in a press release.
At a media briefing on Monday (5 February), James Zhan, Director of
the UNCTAD Division on Investment and Enterprise, said that this is
a preliminary assessment in the sense that some of the details of
the US tax reform act are still unfolding (or) still in the making
and we need to bear that in mind.
He also said that firms are still studying the implications of the
tax reform. "So the current assessment is more based on the parameters
we have at the moment - the broad indicators that we can identify
from the tax reform package."
Highlighting some of the key findings, he said one implication of
the US tax reform is the stimulus that is put in place for investment
in the US that will provide a lower tax rate, where the statutory
rate of corporate income tax has been reduced from roughly 35% to
This is slightly lower than the average corporate income tax in the
European Union at about 22% and the average in the OECD countries
which is about 24%.
He noted that this is only the statutory corporate income tax. In
reality, according to analysis by UNCTAD and that of other international
organisations, the average effective corporate income tax rate is
already much lower.
So the impact of the lowering of the corporate income tax on inflows
of foreign investment into the US may not be that obvious.
Overall, Zhan concluded that "the US tax reform will affect global
FDI flows significantly in scope, but maybe less so in scale. It all
depends, and the impact is unfolding."
Asked if the repatriation of cash will have any actual effect, Zhan
said, with respect to the $2 trillion of overseas funds, it is more
of cash rather than real investment or potentially big investment
either in countries where the cash is located or potentially repatriated
back to the US, and therefore for the US, investment in real sectors.
He said that we do see some companies that have announced their intention
to use the funds to invest back in the US.
The question is in what form? It could be more of expansion of existing
production in the core business rather than expansion in other areas.
For example, if the US needs investment in infrastructure like roads,
bridges and railways, then perhaps those companies that have a huge
amount of cash in the IT industries may not be able to do much in
Zhan also said that the repatriation of cash may be used for the buyback
of shares or paying dividends. There are many other ways of using
that, he added.
Richard Bolwjin, Head of the Investment Research Branch at the Division
on Investment and Enterprise, also highlighted its macro-economic
He said that even if the money at the moment is not being invested
in tangible assets, it is still a part of financing financial flows
to developing countries and as such is part of the external sources
of finance that are helping to make up for savings shortfalls in developing
So, even if the money is not currently invested in tangible assets,
it is still doing something, he added.
The UNCTAD document highlighted some of the main features of the US
"Tax Cuts and Jobs Act" adopted last December, noting that
although details are still being worked out and it will be some time
before firms have assessed all the implications, the bill included
changes to the corporate tax regime that are likely to have important
consequences for international investment.
These changes will affect both cross-border investment into the United
States and the investment positions of United States MNEs abroad.
As such, they could have a significant impact on global investment
patterns, given that almost half of global investment stock is either
located in the United States or owned by United States multinationals
According to UNCTAD, measures that will directly affect the investment
climate in the United States include:
(i) A reduction of the statutory corporate income tax (CIT) rate from
35% to 21% effective from 2018.
(ii) Immediate full expensing of investment cost.
(iii) The capping of deductible interest to 30% of taxable income.
Measures directed at the international tax regime for MNEs include:
(i) A switch to a territorial tax system through a 100% deductibility
of dividends of foreign affiliates.
(ii) A transitional measure for existing overseas retained earnings
in the form of a mandatory deemed repatriation subject to a one-off
tax payment (15.5% on cash, 8% on illiquid assets).
(iii) A set of anti-avoidance measures, including a tax on global
intangible low-tax income and a tax on payments to overseas affiliated
firms that erode the tax base in the United States.
According to the UNCTAD document, the headline measure of the bill
is the reduction in corporate income tax from 35% to 21%.
The measure is undoubtably beneficial for business in the United States,
and it brings the nominal rate in line with the rate in most major
developed economies - such as the 22% average rate in the EU and the
24% average in the OECD countries.
However, said UNCTAD, the effect on international investment of this
measure per se is likely to be limited.
The many tax breaks in the complex fiscal environment in the United
States already resulted in an average effective tax rate (AETR) close
to the OECD average.
And MNEs (both United States MNEs and foreign investors in the United
States) enjoyed an even lower rate than domestic businesses due to
opportunities to avoid tax through their international networks.
According to UNCTAD, the impact of the rate reduction on international
investment is also likely to be limited because while nominal income
tax rates can be a factor in investment decisions, they are not among
the most important investment determinants.
Other locational factors, such as access to markets, technology, R&D
facilities and labour costs are generally far more significant determinants.
It said the reduction of the CIT rate by 14 percentage points is dwarfed
by the labour cost differentials between the United States and, for
example, the Asian economies that have been the manufacturing location
of choice for many United States MNEs; hourly labour compensation
costs in manufacturing in the United States are three times higher
than the average of the five Asian economies that host most United
States outward FDI stock in the sector.
According to the UNCTAD document, a more impactful measure, in terms
of stimulating investment, may be the full deduction of capital expenditures
This will provide a significant boost to firms in capital intensive
sectors. A few large firms, including AT&T, Boeing and Apple announced
significant new investments in the United States shortly after the
adoption of the bill.
The effect is partly diluted by the cut in the CIT rate (full deductibility
of expenditures would have been a greater boon under the 35% headline
"Further dilution might occur through potential upward price
pressures for capital equipment, but on balance past studies have
shown a significant impact of comparable investment tax credits on
capital expenditures in the United States."
However, said UNCTAD, while the measure will positively affect capital
expenditures by both domestic firms and affiliates of foreign MNEs,
the effect is likely to be most pronounced for expansions or upgrades
of existing operations (with the possibility to reduce tax liabilities
on existing income streams).
"The impact on new foreign investment flows into the United States
is much less clear," it said.
A dampening effect on investment might come from the cap on the deductibility
of interest expenses to 30% of taxable income.
In the current low-interest rate environment, and after the deleveraging
that has taken place among corporations over the past decade, this
cap will not pose a significant limitation for most businesses.
However, it could increase the cost of capital for highly leveraged
businesses and for private equity investors, and it could affect M&A
deals, including cross-border M&As, that rely on adding high levels
of debt in acquisition targets.
According to UNCTAD, the most significant change to the tax regime
for MNEs is the shift from a worldwide system (taxing worldwide income,
with credits for taxes paid overseas) to a territorial system (taxing
only income earned at home).
This brings the United States regime closer to the majority of OECD
economies. The shift is accomplished through a 100% deductibility
of received foreign dividends.
The switch to a territorial system removes the anomaly of the regime
whereby overseas earnings incurred tax liabilities that became payable
only upon repatriation of funds to the United States, leading to vast
amounts of deferred tax liabilities parked overseas.
As a result, United States outward FDI stock is made up to a large
extent of accumulated overseas profits, or retained earnings.
As these retained earnings could be deployed for capital expenditures
on a pre-tax basis, the possibility to defer tax liabilities indefinitely
has effectively acted as a stimulus measure for the overseas operations
of US MNEs.
The possibilities provided by the United States international tax
regime have allowed some of its MNEs to operate with significantly
lower global average effective tax rates than their competitors from
For example, General Electric has been found to have a global AETR
of less than 10% compared to more than 30% for its direct competitor
UNCTAD said as the incentive for United States MNEs to maintain large
stocks of retained earnings overseas will be much reduced, the impact
on FDI patterns could be significant.
The shift to territoriality and the huge existing stock of overseas
deferred taxes necessitate a transitional measure included in the
All deferred taxes will be treated as if they were being repatriated,
and taxed at relatively favourable rates (compared to the full statutory
rates) of 15.5% for retained earnings held as cash, and 8% for non-cash
assets i.e. earnings that have actually been reinvested.
This measure is widely expected to have the most significant and immediate
effect on global investment patterns, said UNCTAD.
It noted that a tax break on repatriation has been long awaited by
MNEs, since the last such break in 2005 in the form of the Homeland
Investment Act (HIA).
At the time, a one-time reduced rate was offered for repatriated funds,
which led to about $300 billion of retained earnings being brought
back to the United States - causing significant negative outward FDI
Overseas retained earnings of the United States MNEs are now much
higher. At $3.2 trillion - with some $2 trillion held in cash - they
are now about seven times the level in 2005.
"Mandatory deemed repatriation could thus potentially lead to
very large capital flows back to the United States to the extent that
it could affect the dollar exchange rate."
However, a key contrast with the 2005 HIA is that, at the time, funds
had to be repatriated in order to benefit from the reduced rate.
As a result, an estimated two-thirds of the total funds available
for repatriation were brought back (with the remainder presumably
reinvested in non-liquid assets, or required for overseas operations).
The current tax reform bill does not include such a requirement (or
incentive) to actually repatriate funds.
Therefore, MNEs may opt to keep a larger share of retained earnings
overseas, either to finance future expansion and M&As, or because
yields in emerging economies are higher.
Ultimately, the impact will depend on the actions of a relatively
small number of very large MNEs that, together, hold the bulk of overseas
UNCTAD noted that five high-tech companies alone (Apple, Microsoft,
Cisco, Alphabet and Oracle) together hold more than $530 billion in
cash overseas i.e. one quarter of the total amount of liquid assets
that are estimated to be available for repatriation.
The 50 top overseas cash holders in the S&P 500 have parked about
$925 billion of cash outside the United States. The largest cash holders
are IP-intensive MNEs in high-tech, pharmaceuticals, engineering and
a few branded consumer goods companies.
It said the potential impact on global FDI positions is clear. Mass
repatriations could cause significant negative outward FDI flows and
a large drop in the outward FDI stock position of the United States,
from the current $6.4 trillion to possibly as low as $4.5 trillion,
with adverse consequences for inward FDI stocks in other countries.
About one quarter of United States outward stock of FDI is located
in developing countries. However, it is likely that a relatively large
share of the stock located in developing countries is invested in
productive assets and therefore non-liquid or not easily repatriated.
Looking only at holdings of liquid assets, the largest portion (almost
40%) of funds available for repatriation appear to be located in the
United Kingdom and its offshore territories.
"The impact of funds repatriations on actual investment in the
United States is a great unknown," said UNCTAD.
The 2005 HIA has been widely criticised as a "windfall"
for MNEs and their shareholders, which did not lead to significant
additional capital expenditures and jobs.
Current expectations are again that a significant part of the funds
will either be returned to shareholders through dividends or share
buy-backs, spent on M&As (which do not lead to immediate investment
in additional productive capacity), or used for debt reductions or
higher pension contributions.
"Projections for the actual stimulus effect vary wildly, with
proponents of the reform predicting significant new investment, and
others (including the Federal Reserve in its projections underpinning
monetary policy) adopting a more cautious stance."
According to UNCTAD, the tax reform package includes further measures
to persuade MNEs to bring back certain assets and activities to the
United States, and at the same time to combat tax avoidance and erosion
of the tax base in the United States.
A key measure aimed at MNEs that hold intangible assets and intellectual
property (IP) overseas for the purpose of booking profits from royalties
in lower tax jurisdictions is the global intangible low-taxed income
(GILTI) regime and the foreign-derived intangible income (FDII) rules.
According to UNCTAD, the effects of these measures will be felt by
"the most GILTI MNEs" including high-tech and pharmaceutical
Tech MNEs in particular will be affected. Their overseas retained
cash holdings are almost eight times their tangible assets, compared
to two times for other MNEs. And their global AETR is significantly
The GILTI and FDII measures could lead to changes in practices and
international corporate structures in United States MNEs with the
associated re-routing of FDI positions, it said.
UNCTAD said the reform package also aims to tackle other types of
erosion of the tax base in the United States.
The bill includes a base erosion anti-abuse tax (BEAT), which is an
alternative minimum tax designed to curtail excessive earnings stripping
through payments to foreign related parties.
The BEAT measure could lead to affiliates in the United States of
foreign MNEs paying more tax under the new regime, despite the reduction
in the statutory CIT rate.
The tax reform bill has been, and is, controversial in many quarters,
and the ultimate effect of the measures in it is hard to predict.
The intent of the combination of provisions is clear: to bring back
overseas funds of United States MNEs and to stimulate the investment
of these funds in productive assets.
Equally clear is that the reform package will have significant implications
for global FDI patterns over the coming years, UNCTAD concluded.