Multinationals Stash Billions Overseas, What Choice Do They Have?

Nicholas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Multinational corporations based in the U.S and Europe face accusations for using their overseas subsidiaries as tools in tax avoidance practices. Tech giants, Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG), Microsoft (NASDAQ: MSFT), and Cisco among others dominate the charts in terms of the percentage of cash stashed in overseas subsidiaries. Apple holds the highest amount of cash overseas with about $82.5 billion or 68 percent of its $121 billion.

The companies have established some kind of cash havens in countries with favorable tax policies. From the look of things, tax avoidance seems to be the ultimate reason, which has lead to stashing billions of cash overseas. However, a closer look may yet reveal other reasons, albeit subjective to specific companies.

For instance, Lee Pinkowitz of the Department of Finance at Georgetown University and others established that Research and Development is one of the driving factors behind stashing cash overseas. Pinkowitz et al published a paper titled, "Multinationals and the High Cash Holdings Puzzle" in May 2012, which proves that the topic has been under scrutiny for quite some time. The report also suggested that companies culpable to high levels of uncertainty also tend to favor holding cash in order to cater for adverse cases.

The authors also established that the increase in cash holdings for U.S firms was above the global average in post financial crises while the reverse is true for the late 1990s. The median cash holdings ratio (Cash Holding divided by Average Assets) was high for the foreign firms before the year 2000 as compared to that of U.S multinationals. After the year 2000, the tables turned.

Since the beginning of the 21st century, competition between companies has intensified as technological advancements and globalization coupled with the economic slowdown expose multinationals to global risk. Additionally eCommerce has taken entrepreneurship by storm with so many internet-based companies started, which are revolutionizing the way people do business.

Several reports have also revealed some interesting statistics, which indicate that Republic of Ireland tops the list of countries branded as cash havens for multinationals. Other countries highly exploited by the tech giants include Bermuda and the Cayman Islands. However, just what kinds of reasons do these multinationals give?

In a report published last Tuesday, Cadie Thompson reported that Google stashed about $9.8 billion worth of revenues, to its shell company in Bermuda, which in return, resulted into $2 billion in proceeds as the company dodged a hefty income tax burden linked to its parent books of account. This provides one of the pleasant veils placed in front of the real deal. The search engine giant simply posted this as revenue under its Bermuda subsidiary, a country that charges no income tax on corporations. In reality, this was not a general accounting practice; Google was simply avoiding the tax burden on Group revenues.

Cadie also noted that Microsoft’s overseas, sales proceeds are deposited in foreign accounts and never find their way back to the U.S unless the Windows maker identified a particular use for the funds. Microsoft is believed to have stashed nearly $58 billion in overseas accounts while software maker Oracle (NYSE: ORCL) stashed about $25.3 billion, or 80 percent. Cisco has stashed 83 percent of its cash overseas representing about 37.35 billion.

Looking at the companies mentioned, they all operate in the technology industry, which as explained, innovation happens to be a key driver in terms of outlook for the companies involved. Other companies that are believed to have stashed billions of cash overseas include Pfizer, a multinational company operating in the pharmaceuticals industry, Johnson & Johnson, as well as, ExxonMobil of the oil and gas industry.

Merck (NYSE: MRK), Johnson & Johnson, and Pfizer require the approval from Food and Drug (FDA) before they can start selling a certain drug. This hurdle along with the possibility of the drug failing to meet expectations is one of the major reasons pharma companies are exposed to high levels of uncertainty. ExxonMobil on the other hand faces a high degree of uncertainty in shell gas exploration, as high initial costs are incurred during the drilling process.

There are two common factors in the mentioned companies. To begin with, Research and Development is a key element, as innovation remains a major competitive advantage. Secondly, Pharma companies face a lot of uncertainty, as they must invest in new drugs and products, which despite all the investment, may yet fail. On the other hand, tech companies like Apple, Google, Cisco, Oracle, and Microsoft must continue testing new technologies to give them the edge over their rivals as well as royalties on patents when companies use their technologies.

The two factors link well with Pinkowitz findings, which justifies why, the companies tend to shy away from heavy taxes. Nonetheless, it is common knowledge that a company would prefer keeping as much cash as possible. However, these companies do it with a purpose, survival. Alternatively, some do use the overseas cash to finance mergers and acquisitions, as in the case of Merck, which used $9 billion early this year to finance its Merger with Schering-Plough. Merck held more than $40 billion worth of untaxed foreign profits from its overseas subsidiaries.

It seems as though cash is of the essence for these multinationals, but the U.S tax bill appears to be unfriendly to their plans, which begs the question, do they really have a choice?


Nmaithya has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, Microsoft, and Oracle. Motley Fool newsletter services recommend Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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