The biggest companies in the U.S. are multinational corporations, Johnson & Johnson, GE, etc. When these companies make money overseas, more often than not, they do not bring this money back to the U.S., instead the money is translated onto their balance sheets.
(par example: A U.S. company has a subsidiary in Germany. They make €12 million at the subsidiary, instead of bringing the cash home, they leave it in Germany.)
All of the cash that is outside of the U.S. is translated into U.S. dollars in order to list it on the balance sheet for their annual/quarterly reports. So once again, the cash does not move and is not literally converted to US$; the current exchange rates lets investors know how much cash they have available total.
The reason this cash is not returned to the U.S. is because our corporate tax structure requires that the funds returned to the U.S. pay the standard corporate tax rate of 35% (after already being taxed in the host country). Leaving the cash overseas saves the 35% of those profits from taxes.
Company % Cash Overseas Amount of Cash Overseas
Johnson & Johnson 100% $24.5 billion
General Electric 66% $56.5 billion
Microsoft 87%
(This is just a snippet of data from *WSJ)
So what is the problem?
The problem is that investors when they see the amount of cash on the balance sheet, they are (mostly) unaware where the cash is being held.
For instance, Johnson & Johnson has $24.5 billion cash listed on their balance sheet (see link below). As an investor, you would see this information and utilize it in making your decision. The problem is that it is not adequately disclosed that this cash has not been repatriated, as seen above WSJ reports that 100% of that cash is overseas. What this means is that this cash cannot be used by the parent company in the U.S. to pay dividends or finance buy-backs unless it repatriates it, incurring a 35% tax (unfortunately, we are not delving into loopholes or true effective corporate tax rates here). In other words $24.5 billion is really closer to $16 billion after taxes. This is a problem concerning asymmetric information which could have adverse effects on share prices
Now,
Notice the problem discussed is not that the companies are not repatriating the capital back to the U.S. This is a problem which is the fault of the people responsible for electing the officials who are responsible for creating the corporate tax structure (uhm, uhm...you and me and other voters).
One of the most obvious flaws I saw with the Occupy Wall Street movement was that protestors seemed to want to blame individual companies for being "evil" or "unethical". Undoubtedly there are activists who would read the article in the WSJ and claim that these corporations are manipulating and taking advantage of our government for profits sake. Taking this side misses the point; misunderstands the way it works.
Companies work like an equation, they are not conscious beings. They do not play favorites, have political agendas, or hold grudges. They have one function: maximize shareholder returns.
To some this sounds evil and self-destructive, but what these people do not realize is that "they" (all of the customers as a whole) control how the firms operate.
Many companies are seeking "green" initiatives now. Although it sounds nice to assume that the company is just doing it for gratification, these initiatives are a product of attempting to maximize long-term shareholder wealth. ==>When the customer base shifts towards being more "green conscious", the company shifts with them; realizing that customers will be lost otherwise (hence, maximizing shareholder return through customer retention).
So what's the point? I'm sick of reading your long boring article....
The point is that if people are dissatisfied with the way companies function and would like changes,efforts need to be focused on changing the customers and the laws which regulate the companies. Awareness needs to be increased on the flaws of the corporate tax structure, hopefully leading to tax reform.
The Wall Street Journal, "Top U.S. Firms Are Cash-Rich Abroad, Cash-Poor at Home" B1, December 4th, 2012. -Kate Linebaugh
JNJ Annual Financial Statement
Finance.Yahoo.com
<http://finance.yahoo.com/q/bs?s=JNJ+Balance+Sheet&annual>
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