Why the biggest opportunity to free trapped cash is not repatriation
In our recent article for GT News, C2FO team member Andrew Burns discusses the real opportunity to unlock trapped cash and an economic boom.
Surprisingly, the opportunity is not the proposed tax holiday that would allow U.S.-based multinational corporates to bring home profits earned outside the U.S. Estimates of this trapped cash total around $2.5 trillion in assets.
Here are some key points from the article.
Three reasons why cash is not really trapped
- Corporates are free to bring foreign profits back to the U.S., but choose not to due to the comparatively high 35% tax rate if they repatriate the funds
- Companies can use the cash in countries of origin, putting it to work in the global economy rather than erode in value with inflation while sitting on a balance sheet
- Some of those funds already are in use in the US through lending from global banks
Repatriation may not have as significant of an impact on the economy as proposed
Because repatriation is optional, the potential total to be repatriated may differ from the actual amount firms choose to repatriate given a tax holiday. How the repatriated funds are used will determine the actual economic benefit as well. The “how” may depend on the cash situation for a given corporate.
For capital constrained companies, about 26% of total corporates:
Repatriated funds may be used to invest in their domestic economic activities or to reduce debts. These investments could create job growth.
For corporates who are not capital-constrained:
Historically, these companies have used repatriated cash for stock buybacks, shareholder dividends, and mergers and acquisitions. According to an article published by Bloomberg3, nearly ninety percent of cash repatriated in a 2004 tax holiday funded these activities.
The US federal government benefits most:
The primary benefit of cash repatriation to the U.S. economy is a one-time tax revenue for the federal government. This could create jobs if used for infrastructure projects, with a limited economic benefit.
There is a way to access trapped cash with a larger economic benefit than repatriation
A lack of liquidity currently traps the estimated equivalent of a $3 trillion economy on balance sheets of corporates across the globe.
Total corporate cash stockpiles for non-financial corporations:
- $1.68 trillion in the United States4
- $672 million (US) in the UK5
- $1.1 trillion for Eurozone countries6
- $2 trillion in Japan.7
Cash stockpiling by corporations is at an all-time high despite historically low and even negative interest rates in most markets.
At the same time, globally, small- to mid-size firms (SMEs) have less borrowing power. The World Bank reported in September of 2015, “More than 50% of SMEs lack access to finance, which hinders their growth.”
The net result of this is a liquidity paradox.
Corporates have excess cash that is earning low returns. SME suppliers cannot access affordable financing while managing longer payment terms.
Yet, SMEs form the broadest base of both the economy and supply chains. Create liquidity for SMEs, and they create economic growth.
C2FO offers a way to free trapped cash and solve the liquidity paradox
C2FO helps free trapped cash from balance sheets across the globe while benefitting both suppliers and customers.
C2FO benefits SMEs in the supply chain:
- Access to working capital at a lower cost than traditional borrowing
- Ability to invest in growth, add jobs and build local economies — without adding debt
Corporates, as buyers, benefit by:
- Receiving a discount on what they’ve already ordered
- Cost reduction can be rolled up into consolidated company accounts, netting a higher, risk-free return than possible otherwise
- Supply chains are strengthened by reducing supplier financial risk and, subsequently, the physical delivery risk to the buyer