As Donald Trump's victory for the White House rocks global markets, global tax havens may soon become an afterthought if the president-elect holds true to his promises.
Because of the high tax rate in the U.S., some of America's largest corporations such as Apple, Inc. (AAPL) and Microsoft Corporation (MSFT) have built massive stockpiles of cash offshore, estimated to be worth some $1.4 trillion. Apple ranks number one on the list, holding an estimated $230 billion offshore fortune, according to Moody's, while Microsoft has almost $115 billion. (See also: Taking a Look at Tax Havens.)
These companies face a huge tax hit if they bring that cash home to pay dividends or for other purposes. The U.S. government levies a 35% tax rate on repatriated cash, which is a much higher rate than many companies currently pay. Business executives have resorted to borrowing cheap money to fund their operations. But CFOs may no longer need to get financially creative.
According to Mr. Trump's website, "The Trump Plan will lower the business tax rate from 35% to 15%, and eliminate the corporate alternative minimum tax. This rate is available to all businesses, both small and large, that want to retain the profits within the business."
A lower tax rate would give corporations more flexibility to fund for growth by investing in research and development, while adhering to their policies of returning cash to shareholders via dividends and stock buybacks. It would limit the need to go to the debt market or issue more shares to raise cash. Plus, the lower tax rate not only could allow for wage increases, but it might also help create jobs.
But what about the overseas cash? Apple CEO Tim Cook said in December last year that he would "love to" repatriate the funds, but that he can't because "it would cost me 40%." The 40% refers to what Apple would owe in combined U.S. federal and state taxes. But Trump's plan states that "It will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%.
It's hard to imagine Cook and other corporate leaders would not see the appeal in a 30-percentage point reduction in the repatriation tax. Combined with a business tax rate of 15%, down 20 percentage points, companies may soon have the financial freedom they need to compete globally. (See also: How a President Trump Would Disrupt Tech.)