American corporations are holding something in the neighborhood of $1.5 trillion in cash in the coffers of their offshore entities, often in tax havens where they don't have to pay U.S. corporate taxes. For example, tech-giant Apple is sitting on $100 billion in cash offshore. If that money were brought back to the States, it would be subject to a 35% tax rate, which would equate to $35 billion in lost cash for the company and $35 billion in tax revenue for the U.S. government. Instead, Apple paid Uncle Sam a tax rate of about 2%.

Apple's maneuver is legal, but also controversial. As overall corporate cash stockpiles have grown since 2007, Congress has become concerned. Hearings on the tax implications of the cash hoard were held in mid-2013. While the matter remains unresolved despite nearly a decade of rising interest and attention, the tremendous sums of money involved have kept this topic in the spotlight.

The IRS Perspective

From the government’s perspective, arrangements in which American companies set up offshore entities in order to avoid paying taxes may not violate the letter of the law, but they certainly violate its spirit.

Technology firms such as Apple have become the target of the Internal Revenue Service's attention. These firms often have a small number of highly skilled workers in the U.S. responsible for designing the tech toys and tools that are generating massive profits which accumulate in offshore entities. From the government’s point of view, these firms benefit from American talent in Silicon Valley in addition to a business environment that fosters innovation, creativity and productivity. Accordingly, the argument goes, they should pay their fair share of U.S. taxes.

Moreover, corporate tax laws allow companies to take loans from their overseas entities without paying tax, thus giving them access to these cash hoards. Uncle Sam believes that forgone tax revenue could go a long way toward helping the country pay its debts, create jobs, rebuild its infrastructure and fund social programs to help those in need.

The Corporate Perspective

CEOs, on the other hand, argue that companies are in business to make money and thus should minimize their tax payments. Corporate executives have a fiduciary duty to make every effort they can to further that goal. They also argue that having large stockpiles of cash puts companies in a good position to weather an economic downturn.

Apple (Nasdaq:AAPL) is far from being the only company to hold its profits offshore. Other big tech companies, including Microsoft (Nasdaq:MSFT), IBM (NYSE:IBM), Google (Nasdaq:GOOG), and Cisco (Nasdaq:CSCO) also have significant cash holdings offshore. The tech firms are notable for the size of their cash hoards, but other firms in other industries - from pharmaceuticals to credit card companies - engage in the same behavior. (read the full USPIRG report here)

Shareholders’ Perspective

Shareholders, on the other hand, don't all buy this reasoning. Investors such as the legendarily successful Carl Icahn take a different view. 

That overseash cash earns next to nothing for shareholders in a low-interest-rate environment. The money could instead be put to work through acquisitions or investments. If there are no attractive opportunities in either of those areas, those funds could be used to buy back stock (thus increasing the value of outstanding shares), or it could be returned to shareholders through dividend payments.

Citizens' Perspective

Stepping back from the investment angle and looking at the situation as an ordinary citizen, you can see all sides of the argument. As a taxpayer, having companies pay their fair share of taxes seems like a good idea. On the other hand, if you are business owner, reducing expenses is an understandable goal. With your IRA or 401(k) plan likely holding shares in some of these companies, putting that money to work probably seems like the way to go. Finally, if you or any member of your family works for a company that is sending jobs and money overseas, you can see the whole issue from yet a different perspective.

What’s Next?

America’s tax laws are notoriously complex. It is one of the few nations with a tax code that penalizes companies for bringing profits home. Tax reform is a perennial discussion point in Washington, without significant change.

If companies can bring the money home with no penalties, it will likely be good news for the companies and their shareholders but not so great for the government’s tax coffers. Changing the laws to tax offshore profits could boost government revenues while cutting in to corporate profits. A tax amnesty would bring some money home without an immediate boost to government revenue.

The Bottom Line 

A number of U.S. corporations over an array of industries have been holding large amounts of cash in offshore funds and thus avoiding paying tax on their profits. It's legal but controversial. From the corporation's point of view, avoiding tax liability may seem like an attractive prospect; however, many members of the U.S. government take issue with that. It's a complex issue with many discordant viewpoints, and history would suggest that legislation is not likely to bring about a rapid resolution.

Related Articles
  1. Taxes

    How New Offshore Bank Rules Will Affect Americans

    FATCA is being implemented in 2013. Here is how it will affect the personal banking and taxes of Americans who hold offshore bank accounts.
  2. Personal Finance

    Pros And Cons Of Offshore Investing

    Tax loopholes are shrinking, but there are still plenty of viable prospects. Get the big picture.
  3. Savings

    How To Open And Access An Offshore Bank Account

    You don't have to be a master criminal or billionaire to open an offshore bank account. This article will walk you through the process.
  4. Investing Basics

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
  5. Investing Basics

    What's a Holding Company?

    A holding company is a corporation that owns enough voting stock in another company to control its management and policies.
  6. Taxes

    Employers: Don't Forget IRS Form 941

    Your obligations as an employer include various employment taxes. Use this form to report them.
  7. Entrepreneurship

    What's the Purpose of IRS Form 1065?

    Business partners need the information on this form to complete their own tax returns. Here are the details.
  8. Taxes

    What's IRS Form 2848 Used For?

    It's a power of attorney tax form and here's what it can, and cannot, do.
  9. Retirement

    How IRS Form 5498 Helps You

    If you have an IRA, you'll be getting this form. Here's the useful information it contains.
  10. Economics

    What Does Human Resources Do?

    Human resources (HR) is the department within a company that handles all matters relating to employment.
RELATED TERMS
  1. Cash Hoard

    A large amount of available money held by a company in anticipation ...
  2. Offshore Mutual Fund

    A mutual fund that is based in an offshore jurisdiction, which ...
  3. Offshore

    1. Located or based outside of one's national boundaries. The ...
  4. Offshore Portfolio Investment Strategy ...

    A tax shelter product designed to create large, seemingly real ...
  5. Corporate Culture

    The beliefs and behaviors that determine how a company's employees ...
  6. Dividend Payout Ratio

    The percentage of earnings paid to shareholders in dividends. ...
RELATED FAQS
  1. How do you calculate penalties on an IRA or Roth IRA early withdrawal?

    With a few exceptions, early withdrawals from traditional or Roth IRAs generally incur a tax penalty equal to 10% of the ... Read Full Answer >>
  2. Are credit card rewards taxable?

    Credit card rewards are taxable in the United States some of the time. The Internal Revenue Service (IRS) classifies credit ... Read Full Answer >>
  3. How is market value determined in the real estate market?

    Anyone who has ever tried to purchase or sell a home has probably heard a lot about the property's fair market value, or ... Read Full Answer >>
  4. In what instances does overhead qualify for certain tax allowances?

    Businesses are just as keen as anyone else to keep their tax burdens low by any means possible. Overhead expenses often qualify ... Read Full Answer >>
  5. How do alimony and child support factor into my taxable income?

    The Internal Revenue Service, or IRS, applies a different tax treatment to alimony than child support. Most forms of alimony ... Read Full Answer >>
  6. How do I avoid a tax lien on my property?

    The best way to avoid a tax lien on your property is to make sure you pay all your state, municipal and federal taxes in ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!