Foreign firm cash management and U.S. tax reform

Impact of U.S. tax reform, on foreign firm cash management, $2T: Amount of cash likely to be repatriated in 2018

Sweeping changes stemming from U.S. tax reform translate to a series of opportunities for treasurers of firms with headquarters outside the United States. The pressure is on for treasurers to optimize specific tax provisions to increase cash visibility, reduce risk and cost and to maximize organizational cash availability and flexibility.

U.S. tax reform and related global tax reform efforts are likely to shape the international tax landscape for years to come, according to the World Economic Forum. Despite the fact that more changes are coming, there’s no time to waste in kicking off planning efforts and setting deadlines. That’s because U.S. tax law contains “sunset” provisions, under which many tax provisions revert to their pre-reform status after a five-to-10-year period.

Treasury executives, managers and practitioners are exploring potential changes to their international liquidity practices in light of tax law changes. More than three-quarters of NeuGroup members surveyed are investigating potential strategies around their international liquidity management practices. NeuGroup is a peer group platform, advocate and thought leader for global finance and treasury practitioners.

International tax environment overview

The move within U.S. tax reform to reduce the incentives for corporations to shift profits to low or non-tax jurisdictions is part of an ongoing effort to prevent what is known as base erosion and profit shifting across the developed world. Base erosion provisions are designed to ensure that a specific country’s taxable base of corporate income doesn’t suffer from corporate maneuvers to shift revenue to low and non-tax destinations overseas by employing gaps in existing tax regulations.

Such provisions are part of an ongoing effort to reduce incentives for corporations to avoid taxation under territorial tax systems, which are employed by many developed countries, including Japan, Germany and Australia. A territorial tax system taxes only the income of a company that is earned in the taxing jurisdiction.

As part of the 2017 tax reform, the United States adopted a modified territorial system in which income earned here is taxed here and much of the income earned outside the country is not subject to tax. However, our modified territorial system does impose taxes on foreign income in certain areas, mostly to avoid base erosion and tax-shifting.

These efforts are designed to create more international uniformity and consistency in tax treatment, providing treasurers with the certainty they need to make decisions on how to leverage the international tax landscape for maximum visibility, flexibility and risk and cost reduction.

Besides a widespread anti-base erosion and profit shifting crackdown and U.S. tax reform, the European Union is engaged in an effort to reign in tax competition between EU member states.

These three major endeavors, along with ongoing tax reform in many other jurisdictions, will keep Treasurers focused on how they can maximize current and upcoming changes for departmental flexibility and overall organizational profitability.

How to manage repatriation

Many treasurers are preoccupied with the implications of foreign profit and cash repatriation. More than half of treasury executives, managers and practitioners report their organizations plan to repatriate cash.

Plans vary for utilization of cash and include:

  • 46.7%: Share repurchases
  • 40%: Dividends
  • 33.3%: CapEx
  • 26.7%: Debt paydown
  • 26.7%: Mergers & Acquisitions
  • 26.7%: Other
  • 6.7%: Increase in employee compensation and benefits
Source: NeuGroup 2018 survey of Treasury executives, managers and practitioners

Don’t forget that the switch to a limited territorial tax system means that organization’s overseas earnings will no longer be trapped off-shore. Companies will have an ongoing ability to repatriate their profits back into the United States at a lower tax rate. However, there are often local restrictions around taking cash out of a jurisdiction. These restrictions may prove to be more costly than the value of repatriation. Or there may be other cost considerations such as labor. In these instances, it may benefit you more to consider how to put cash to work in region through vehicles like dynamic discounting, which also enables a cash management strategy that can vary for the unique needs in each region.

For example, it may make sense to leave the cash in country and use it to drive higher gains than the company get can get elsewhere. Using the cash to pay suppliers early is a smart short term investment strategy that can get a company much higher returns than leaving it in bank where there may even be negative returns. While this strategy will only generate more cash in country as it will increase income, it is far better to have more cash than less on the balance sheet.

There’s the potential to employ multiple strategies for repatriation because it essentially becomes an ongoing rather than a one-time event. Examining the issue from a strategic perspective, organizations could decide to repurchase shares, engage in M&A, change their investment strategy or invest in operations, and paydown debt, rather than having to choose one strategy over the other.

Strategy is the key word here – even a one-time event requires a tactical approach to maximize the benefit of the event. More than a third of the treasury executives, managers and practitioners in the NeuGroup Survey reported their organization plans to repatriate between $1 and $9 billion in offshore cash and profits.

Streamline and optimize Treasury

Ongoing repatriation as well as depreciation, interest expenses limit, and limited territorial tax provisions translate to a once-in-a-lifetime opportunity for treasurers to capitalize on the treasury function to create ongoing organization value-add. With the United States now a competitive destination for cash, operating units, and intellectual property, now is the time to:

  • Realign debt structure
  • Refinance debt
  • Re-design cash management procedures
  • Revise deal models
  • Separate U.S. and overseas cash pools
  • Review capital investment strategy
  • Assess impact of net interest limitation
  • Employ alternative financing models
  • Maximize liquidity flexibility
  • Develop a supplier finance solution
  • Upgrade treasury technology platforms

Such steps, when executed in alignment with organization operating and profitability goals, have the potential to transform the Treasury function into a value-add financial partner rather than a cost center.

Learn more

If you would like to understand how dynamic discounting benefits your global cash management strategy, our Working Capital Advisory team can help.

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Sources

Tax Reforms in the United States: Implications for International Investment,” United Nationals Conference on Trade and Development,” February 2018

Tax rules are changing around the world. This is what you need to know.” World Economic Forum, March 13, 2018