Repatriation

What is 'Repatriation'

Repatriation, in financial terms, is the process of converting a foreign currency into the currency of one's own country. The dollar amount resulting from the repatriation of funds depends on the exchange rate between the two currencies at the settlement time of the conversion. For example, Americans returning from the United Kingdom repatriate their currency by converting British pounds back to U.S. dollars.

BREAKING DOWN 'Repatriation'

In more general terms, repatriation refers to a return to a country of origin. In these broad terms, it can refer to people, refugees or deportees. In the context of investments, repatriation is most often used as a reference to the conversion of offshore capital back to the currency of origin or the country where corporations are domiciled. During the period that foreign currencies are held, the funds are subject to foreign exchange risk until they are repatriated back to U.S. dollars. For corporations, there is typically a heavy tax bite.

Repatriation of Invested Funds

While investors are not burdened with the actual repatriation of capital invested in foreign stocks and global investment funds, the exchange rate risk can have a material effect on returns. Generally speaking, the exchange of dollars for foreign currencies takes place within each fund, as does the repatriation of that capital. When performed in this way, investors typically do not see the direct effects of exchange rates on their returns.

For example, imagine that a fund that invests in emerging markets converts U.S. dollars into local currencies to buy shares. If local currencies appreciate prior to the time of repatriation, the gains in exchange rates can either add to investment gains or mitigate losses. If, on the other hand, the dollar strengthens against those currencies, repatriating the funds extends losses or subtracts from any achieved gains.

Corporate Earnings and Repatriation

In a globalized economy, corporations domiciled in the United States have the potential to generate revenues and earnings from around the world. In the state of affairs as of May 2016, however, many companies are opting out of repatriating offshore earnings due to the corporate tax rates charged on repatriated funds.

At the highest tax rate, corporations must pay 35% to repatriate capital, minus local taxes charged by countries in which the funds are held. On average, offshore taxes are in the mid-single digits. In this environment, companies that are not repatriating funds are saving approximately 30% by keeping their capital offshore.