On Jan. 1, 2018, one of the most important regulations of the last 30 years took effect for U.S. companies – the Tax Cuts and Jobs Act (TCJA) of 2017. Under the TCJA, U.S. firms now find themselves in a more territorial tax system, as compared to a worldwide tax system. And they were offered a 15.5 percent reduced rate on pre-2018 overseas profits on liquid assets like cash.
The range of cash held by American companies overseas started at $2.4 trillion prior to the tax cuts, and now there is a consensus that that number is around $3 trillion.
Let’s look at what has happened in regard to what seems to be a gigantic opportunity.
Cash repatriation jumped from $155 billion in 2017 to $655 billion in 2018, which seems like a big increase. However, if you look at the potential $3 trillion in overseas cash, this seems low for such a great opportunity. Furthermore, $583 billion was brought back in the first three quarters of 2018 and only about $60 billion in Q4 2018. It appears that U.S. companies were initially using the TCJA to their advantage by bringing back some cash, but since then that trend has slowed.
So, what happened?
Some would argue that the slowdown is due to the fact that repatriation already existed. Repatriation is less a geographical concept more so than it is some accounting and tax rules that enable corporations to defer paying taxes on profits earned abroad if the earnings are not used for specific purposes, such as paying dividends, acquiring domestic companies, guaranteeing debt, etc. This argument doesn’t make sense because all of the above operations are targeted at one thing: shareholder value. And the ultimate goal of CFOs and CEOs is shareholder value. Therefore, they would have used cash repatriation to fund all of these operations.
Others argue that there are M&A opportunities overseas or foreign tax regulations prohibiting cash repatriation. This is true, but it does not explain the following three elements:
- A strong rush to repatriate in the first half of 2018
- A significant slowdown in Q4 2018
- The huge opportunity gap that still exists between $3 trillion and $655 billion
What if these three trends had a very simple common cause – the extreme difficulty that U.S. companies have in predicting and forecasting the daily working capital needs they have in all of their foreign subsidiaries and business units?
It’s the same problem they face domestically – unlocking the cash that was trapped in dozens of U.S. bank accounts through automated cash forecasting, but at an international level.
What if all the zero balance account (ZBs) structures not combined with international cash forecasting are just scraping the surface of the international cash that can be untrapped?
My opinion is that we are in front of an amazing opportunity that has not been tackled because of three reasons:
- The affordable tools capable of this have a domestic-only perspective
- These tools are too expensive and too cumbersome to deploy
- The ZBA structures do not take into account international cash forecasting
As a conclusion, and without entering into a political debate about the use of corporate cash, I would say that the key to leveraging the incredible TCJA opportunity is as follows:
- Finding a truly international solution from a U.S.-based vendor to untrap international cash and lower international working capital by forecasting daily international cash needs
- Ensuring that this solution is easy to deploy internationally and has a proper ROI analysis
- Ensuring that this solution is well received by international subsidiaries by being available in multiple languages with support centers in local regions that follow local best practices