Repatriation

What Is Repatriation?

The term repatriation refers to the conversion or exchange of foreign currency into someone's home currency. In a larger context, the term refers to anything or anyone that returns to its country of origin, which can include foreign nationals, refugees, or deportees. In most cases, in the financial industry, it involves moving money back after someone returns home after living or working abroad.

Repatriation is also a common occurrence in other areas of the financial sector, such as business transactions, foreign investments, or international travel. The act of repatriating currency can result in losses and certain risks, including foreign exchange risks.

Understanding Repatriation

Repatriation is a process that occurs when people return to their home country after living, visiting, or working abroad. For instance, someone from Canada may take a contract job in the United Kingdom for two years. When their contract is up, they may decide to return home. The act of returning home is known as repatriation.

This process also applies to the financial industry. For instance, repatriation commonly refers to the conversion of offshore capital back to the home currency of a corporation. In the global economy, many corporations based in the United States generate earnings abroad. There are legal steps corporations take to repatriate their currency, including:

• Share repurchasing
• Loans
• Dividend programs
• Repayment of capital
  

Individuals might also repatriate funds. For example, Americans returning from a visit to Japan typically repatriate their currency, converting any remaining yen into U.S. dollars. The number of dollars they receive when they exchange their remaining yen will depend on the exchange rate between the two currencies at the time of the repatriation.

Special Considerations

American taxpayers, including individuals and corporations, have historically been taxed on any income they earned abroad. This includes any foreign income earned and repatriated. For example, U.S. corporations were taxed for dividends issued by a foreign subsidiary. Tax rates for repatriated currency were as high as 35%.

This changed following the signing of the Tax Cuts and Jobs Act (TCJA) by President Donald Trump in late 2017. Once signed, the law cut the corporate repatriation tax, which is referred to as a transition tax, from that rate of 35%. It allowed U.S. companies to repatriate money earned overseas at 15.5% for any foreign earnings held in cash and cash equivalents and 8% for any foreign income that doesn't fall in this category.

These changes could bring in as much as $340 billion between 2018 and 2027 in tax revenue. U.S. corporations repatriated $777 billion of cash stored overseas in 2018, according to the Federal Reserve.

Repatriation Risks

Companies that operate in more than one country generally accept the local currency of the economy that they transact business. When a company earns income in foreign currencies, the earnings are subject to foreign exchange risk, meaning they could potentially lose or gain in value based on fluctuations in the value of either currency.

For example, though Apple (AAPL) is a U.S.-based corporation, an Apple store in France accepts euros as payment for product sales since the euro is the currency used in France. If Apple earned one million euros from product sales in France at an exchange rate of 1.15 dollars per euro, the earnings would equal $1.15 million or (one million euros x 1.15). But if it earned one million euros during the next quarter and the exchange fell to 1.10 dollars per euro, the earnings would equal $1.1 million or (1.1 million euros x 1.10).

In other words, Apple would lose $50,000 in earnings based on the exchange rate decline despite having the same amount in sales in euros for both quarters. The volatility or fluctuations in the exchange rate is called foreign exchange risk, which companies are exposed to when they do business internationally. As a result, the volatility in exchange rates can impact a company's earnings.

Example of Repatriation

At the time that the TCJA was passed, Apple had the largest amount of cash holdings abroad of any U.S. company. Following the changes made to the U.S. tax laws with the passing of the act, the company said it was bringing home roughly all of the $250 billion held overseas. As a result, Apple agreed to a one-time tax payment to the Internal Revenue Service (IRS) of $38 billion to repatriate its foreign cash holdings.