Commentary: Seizing the cash repatriation opportunity

The signing into law of the Tax Cuts and Jobs Act in December represents the most extensive overhaul of the U.S. tax code in more than 30 years. Although the consequences stemming from the far-reaching reforms may take several years to fully emerge, for corporate treasurers and cash managers the most immediate impact will be the ability to bring overseas earnings into the U.S. at a markedly lower tax rate.

While executive management determines the best long-term use for these returned funds, treasurers need to act quickly and smartly to take advantage of the opportunity. Key to this will be ready access to short-term investment options, such as money market funds, and just as importantly, ensuring the right internal permissions are in place to allow utilization of these options.

Under the repatriation holiday, "deferred foreign income" held overseas can be brought back to the U.S. at a 15.5% tax rate and at an 8% rate for non-cash assets. Determining just how much income we can expect to see repatriated, however, is challenging.

The Urban-Brookings Tax Policy Center estimates there is "$2.6 trillion in such (foreign) earnings that has so far gone untaxed by the United States." This number is also cited by the Institute on Taxation and Economic Policy, which notes a mere four of the Fortune 500 companies account for a quarter of the total cash held overseas, and just 30 of the Fortune 500 account for 68% of the offshore profits — or $1.76 trillion.

One of the few companies to have disclosed its repatriation plans is Apple Inc., which announced Jan. 17 that it would pay repatriation taxes of $38 billion to bring about $245 billion in deferred foreign income into the U.S. This is almost all of the $252.3 billion in cash and cash equivalents held by its foreign subsidiaries as of Sept. 30.

Assuming that a large proportion of U.S. companies follow suit in repatriating the majority of foreign income, what can these firms be expected to do with the sudden windfall?

Following the last U.S. tax repatriation holiday in 2004, the Congressional Research Service found that 843 of approximately 9,700 eligible corporations took advantage of the tax deduction and repatriated $312 billion in qualified earnings. Rather than making capital investments, most corporations appeared to use repatriated earnings to fund acquisitions, make share repurchases, pay down corporate debt and deliver increased dividends to shareholders. It seems logical to expect that some firms might opt to do the same in 2018.

Once overseas assets have been repatriated to the U.S., most corporations will likely hand the cash balance to their treasury departments for safekeeping. Treasurers will then have to determine the best short- to medium-term uses for these funds.

They will need to balance three primary considerations in looking at investment choices: the safety of the investment; the liquidity of the asset; and the yield it generates.

The simplest investment that meets all three criteria is a money market fund, combining a high level of security and liquidity with attractive returns and wide diversification across counterparties. Investment in money market funds is broadly permissible under the investment guidelines within which most corporations operate, as opposed to alternatives such as prime funds, which many entities cannot invest in because of the funds' floating net asset value and redemption gates.

Other investment options cash managers could explore include U.S. Treasuries, agency debt, commercial paper, brokered certificates of deposit and short-term credit. In many instances, however, investment rules prevent treasurers from investing in some of these credit products.

If cash managers wish to have the latitude to invest in a wide spectrum of instruments, the time to start this conversation with the investment committee is now.

The importance of having a variety of investment avenues at the disposal of treasurers is reinforced by the fact that leaving large cash balances with bank counterparties as unsecured deposits is today a less feasible option due to the regulatory capital charge non-operating deposits generate for banks under the liquidity coverage ratio.

The pressure to make the right investment decisions for these cash stockpiles is compounded by the rising rate environment. Following three rate hikes by the Federal Reserve in 2017, many economists are expecting three further increases in the federal funds rate in 2018. This means we could be ending the year with Fed base rates at 2%, a level last seen in April 2008.

The transition from a low interest rate landscape into a rising rate environment adds a further impetus for treasurers to be particularly shrewd in how they allocate funds across the liquidity spectrum.

Cash managers need to start thinking now about how they intend to position themselves for managing potentially very large balances. One question they should ask themselves is whether they have access to short-term investment vehicles that will allow them to earn yield on these repatriated balances in a flexible and easily redeemable manner.

Money market funds could be an ideal choice — but treasurers should ensure they have the requisite banking relationships and permissions in place to invest in a broader range of services. If easy access to such services is not already in place, now is the time to start putting those wheels in motion.

Jonathan Spirgel is head of global liquidity and segregation services at BNY Mellon Markets in New York. This content represents the views of the author. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.