How and Why Corporate Cash Hoarding Must End – Part I
S&P 500 corporations continue to grow cash and short-term holdings abroad, struggle with taxefficient repatriation and apply short-sighted views to surplus investment, Kisandka Moses asks, what
must be done to bring an end to practice of cash hoarding.
When asked to define their central purpose within a corporate entity, the vast majority of treasurers
would most likely refer to their roles as central to the ‘purveying and optimization of corporate funds’.
By the end of last year, the largest 500 corporations listed on either NASDAQ or the New York Stock
Exchange had stashed approximately $2.4 trillion in foreign subsidiaries and bank accounts, according to
an analysis of corporate financial statements by the research group Citizens for Tax Justice.
Of late, corporate and retail reactions to adverse economic conditions have been near identical. Most
notably, residents of Switzerland responded to the introduction of negative interest rates with a largescale cash withdrawal from domestic banks; essentially stashing salaries, savings and inheritance funds
at home under the mattress or in safe-deposits boxes. Similarly, after the Bank of Japan announced
negative interest rates on some reserves, Japanese private security firm Secom cashed in on heighted
demand from tense savers on cash deposit boxes which saw shares increase by 5.3% in a single week.
With Apple accumulating by far the largest hoard of cash at nearly US$200 billion, Google’s parent
company Alphabet holding over $80 billion in global bank accounts and short-term investments and
General Motors maintaining nearly half of its value in cash; politicians, institutional investors and even
ordinary citizens of the U.S. have expressed exasperation at the unwavering practice.
The roots of the corporate practice extend further with hoarding having increased significantly since the
mid-to-late 1990s before briefly dipping during the global financial crisis and picking back up thereafter.
Largely confined to MNC’s across the technology, pharmaceutical, telecommunication industries, the
post-2008 recession produced a precautionary preoccupation from the CFO-Treasurer dynamic to
reenergise efforts into monitoring rising profits made everywhere but the USA. In optimal
circumstances, the overseas cash would then most likely be used as a cushion to gain first-mover
advantages - think research and development or mergers and acquisitions.
Yield-seeking corporates bemoan short-sighted investment policies
Putting capital conservative theory aside; with regional cash pools and treasury shared service centres
used to centralize regional revenues and ultra-short intercompany loans relied upon to funnel across
monies generated overseas, one may ask what led to a record $1.9 trillion of U.S. corporate profits
languishing abroad. To add insult to injury, a wave of cash conservatism has also spread to the very
institutions designed to re-invest corporate cash. The Bank of America Merrill Lynch’s February Global
Fund Manager Survey revealed that,
‘…the average cash balances of the 198 [investment firms] surveyed was as high as 5.6 per cent, at their
highest point since November 2001 in the wake of the dotcom bubble burst, global energy giant Enron's
collapse and the September 11 attacks’1.
Essentially, investment managers are treading carefully and protecting fund performance by taking
profits and moving from illiquid options to cash assets. Reactionary advice from Ian Spreadbury, a
senior portfolio manager for the second largest fund group, Fidelity Investors prompted institutional
investors to re-prioritize liquid investments with a heady warning to preserve cash in saving accounts.
He also advised investors to re-allocate surplus to physical currencies to guard against systemic
economic risk2.
Essentially year-on-year growth of foreign corporate cash hoards is also partly a product of short-sighted
investment policy as multi-nationals opt for a “hands-off” approach to no-yield, low-risk options for
surplus reinvestment.
‘Panama Papers’ leak and crackdown on inversions spark fresh U.S. repatriation row
Conservative re-investment is far from the only cause of hoarding as the pains of U.S. cash repatriation
for most multinationals headquartered in the U.S. as the fall out from global tax avoidance discourse
reveals.
In the wake of an unprecedented leak of 11.5m files from the database of an offshore Panamanian law
firm, Mossack Fonseca dubbed ‘Panama Papers’ in April, the row over cross-border tax avoidance
intensified. The leak revealed how wealthy investors, high-powered entertainers and politicallyexposed-persons sought out both the fast-growing economy as a tax-haven and the law-firm to help setup shell companies and offshore accounts to shield wealth and avoid domestic taxes.
Tax-efficient repatriation has long been a challenging responsibility for the U.S-based corporate
treasury-tax duo as the statutory corporate tax rate progressed to 35% on incomes over $18.3bn.
Unsurprisingly, the comparatively high rates have led to a variety of tax-avoidance strategies gaining
popularity in recent decades with the latest row over corporate inversions sending shockwaves through
corporate M&A, treasury and FP&A departments alike.
1
Desloires, V, ‘Cash highest since 2001, signals ‘buy’: Bank of America Merrill Lynch’, The Sydney Morning Herald,
http://www.smh.com.au/business/markets/cash-highest-since-2001-singals-buy-bank-of-america-merrill-lynchth
20160217-gmx1cr.html (February 18 , 2016)
2
Oxlade, A, ‘It’s time to hold physical cash, says one of Britain’s most senior fund managers’, The Telegraph,
http://www.telegraph.co.uk/finance/personalfinance/investing/11686199/Its-time-to-hold-physical-cash-saysth
one-of-Britains-most-senior-fund-managers.html, (June 20 , 2015)
Under current rules, U.S. companies can relocate their headquarters abroad if they can acquire a foreign
company and transfer more than 20% of their shares to foreign owners with the Obama administration
pledging to raise the share threshold to over 50%. The term corporate inversion refers to the prominent
tax loophole and practice of big multi-national corporations either merging with or acquiring foreign
businesses located in a country with a lower-tax rate, moving headquarters and saving billions on
domestic taxes.
In just under two decades, over 40 publicly-traded U.S. have become “expatriated entities’” following
high-profile tax inversions; most notably, AbbVie’s planned $54bn acquisition of Ireland’s Shire and
Burger King Worldwide’s merger with Canadian headquartered Tim Hortons Inc.
By some strange political osmosis, opposing fractions appear united on the ‘tax-clampdown’. If the
forthcoming President of the United States is sought from the centre-left’s Democratic Party, then we
can expect a path of tough corporate tax reform to continue with Hillary Clinton proposing an ‘exit tax’
policy to deter U.S. corporates from relocation. Bernie Sanders is pledging to end loopholes altogether
by requiring firms to pay taxes on offshore profits.
Such is the media fever and law-maker outrage surrounding corporate tax avoidance that Republican
presidential frontrunner and business tycoon Donald Trump has joined the fore in outlining plans to
introduce a ‘repatriation tax holiday’. Trump’s manifesto outlines plans for a one-time deemed
repatriation of corporate cash held overseas at a 10% tax rate and followed by an end to the deferral of
taxes on corporate income earned abroad.
The largest pharmaceutical merger in history valued at $160bn which was set to take place between U.S.
giant Pfizer and Ireland’s Allergan was scrapped this month amid a crackdown on “serial inverters“ led
by the Obama administration and US Treasury Department.
U.S. multinationals continue to flee corporate America in droves seeking tax shelters in Dublin, London
and Zurich. With a planned merger between Tyco International and Johnson Controls underway, CocaCola Enterprises set to move its headquarters from Atlanta, Georgia to Central London after a megamerger between CCEAG and Coca-Cola Iberian Partners and the $49.9bn purchase of Ireland’s Covidien
by U.S-based Medtronic on the horizon; inversions are essentially the “symptoms of bad tax policy”3.
In response to Bernie Sanders’ scathing attack on General Electric’s operations abroad, Jeff Immelt,
Chairman and CEO at General Electric, responded with a 641-word tirade on the social networking site
Linkedin defending the ethics of global business growth and laying the fault for cash hoarding, inversions
and the like at the door of tax lawmakers;
3
Winegarden, W, ‘Corporate Inversions Are The Symptoms, Bad Tax Policy Is The Disease’, Forbes,
http://www.forbes.com/sites/econostats/2016/03/08/corporate-inversions-are-the-symptoms-bad-tax-policy-isth
the-disease/#665ddf1814ce (March 8 2016)
Immelt stated, “…US companies continue to wrestle with an outdated and complex tax code that puts
them at a distinct competitive disadvantage…the U.S. tax system has not been updated in 30 years and
isn’t designed for today’s economy which is why we support comprehensive tax reform – even if it raises
our tax rate”4.
It is no wonder that under the premise of a 35% repatriation cost on honest corporate revenues, that
multinationals have opted to stash the cash instead and law-makers must act now to reform an ancient
tax-code – even if a greater percentage of tax on profits is the underlying goal.
4
Immelt, J, ‘Bernie Sanders says we’re destroying the moral fabric of America. He’s wrong’, Linkedin,
th
https://www.linkedin.com/pulse/facts-matter-jeff-immelt?trk=hp-feed-article-title-comment (April 6 2016)