What Will You Do with Your Tax Holiday?

By Kyriba January 27, 2017

Following the tumultuous U.S. election season in 2016, and to kick-off 2017, corporate accounting, tax and treasury teams have been busy planning ahead for the incoming administration led by Republican President Donald Trump, and the inevitable changes it will bring. 

With a Republican majority in the House and Senate, Mr. Trump may be able to make some of the changes he promised during his campaign. It’s expected that the new government leadership will transform foreign policy, and revise United States trading measures. While these changes are not certain, we have seen currency markets shift and we know corporates are busy updating their hedging policies. There is also confidence that the forthcoming administration will dramatically change corporate taxes, including the potential for a one-time cash repatriation tax relief.

Additional reading: Five Questions CFOs Should Ask Themselves to Maximize Growth

Looking back through the Presidential campaign, we witnessed President Donald Trump’s plans to change corporate tax policies. In April 2015, he addressed the topic in his interview with TIME Magazine saying that in relation to offshore cash hoards, he said “we should let them back in. Everybody. Even if you paid nothing it would be a good deal.” He also said, “[corporations] will have to pay something. Ten percent, they’ll pay something.” (1) From that point, many US Corporations with cash reserves existing offshore began assessing their current liquidity profile in order to determine how this could be restructured should a one-time tax relief be offered to bring cash back into the US.

US Corporations have more than 2.5 Trillion dollars sitting offshore, and there it will most likely stay, and grown, since under the current US repatriation tax, companies are faced with a 35 percent repatriation tax, forcing them to leave those assets elsewhere, and to invest in foreign companies.  For example companies may fund off-shore acquisition projects with cash reserves and newly issued debt. Alternatively, companies have been leveraging low-interest rates for shareholder dividends or stock repurchase programs rather than using offshore reserves.

A decrease in the repatriation tax rate, or a potential tax-holiday with ultra-low rates, would incentivize corporations to mobilize off-shore cash holdings back the US. Assuming that tax policy is changed, it’s only economically logical that we will see US-based multinationals active in the following cash management strategies:

  • Debt Repayment: Ultralow interest rates following the recession has seen balance sheets become overly leveraged in many corporations with rising debt levels.  Bringing cash back onshore could result in companies looking to pay down their debt levels.
  • Stock Repurchasing: Stock repurchasing for companies has been at an all-time high, often times funded by debt, and used to help boost EPS.  Increased cash flow could see the continuation of repurchasing and dividend programs by corporations leveraging the new inflow of offshore cash.
  • Mergers and Acquisition: M&A activity could see spikes in activity following tax changes. In a CNBC Global CFO Council survey, M&A was voted the highest capital allocation priority at 28% should the corporate tax structures change (2).

Freeing up this off shore trapped cash is a hot topic of debate. The outcome of these cash management strategies impacts treasury and financial professionals globally, but mainly in the US. Interestingly, the CEO and CFO who are looking to ramp up on the new administrations decisions will be focusing their attention on how their financial teams, accounting and treasury can create the best path to mobilize cash, which will depend upon the company’s financial profile, market standing, and of course on any governmental stipulations that may be imposed along with the tax changes. 

Additional reading: Hedge Accounting: It doesn’t need to be complicated

These initiatives will be led by the accounting and tax teams within corporations. Treasury will be responsible for assisting these groups in understanding the implications of any decision to repatriate cash – should they decide to act on the anticipated tax changes. Treasury should be ready to provide guidance on cash positions around the world, including:

  • Global Cash Availability:  CEOs and CFOs will want to know what their global liquidity profile is in order to make decisions about their cash on hand. Evaluating their bank accounts quickly and accurately will depend on how their bank connectivity is set up, and what technology they use for reporting.
  • Forecasting in partnership with Finance:  A tax holiday does not automatically assume cash will flows directly into the United States.  Companies will evaluate their strategy both domestically and internationally. Why would a US corporate, for example, repatriate foreign cash, if they already had plans to invest that cash in a foreign subsidiary? Treasury will need to solidify their forecasting for working capital needs for all entities so that future obligations can be met. This consolidation of information will come from various business segments spread throughout the globe. Treasurers should look to leverage technology to help in this collection and analysis process. 
  • Evaluation of Cash Pools:  It’s important to plan for the anticipated long-term changes to corporate taxes. Should a company look to make significant changes to their concentrations in the event of a tax holiday they will want to understand how their pooling structures will proceed, as these should remain where the highest returns can be achieved and where treasury can retain the most control.

For a variety of reasons, 2017 will be a unique year for multi-national corporations. While there is still a high level of uncertainty, and admitted trepidation, about what changes the newly elected officials in the US will bring, it’s sure to keep finance and treasury teams active for the foreseeable future. 


(1) http://time.com/4003734/donald-trump-interview-transcript/

(2) http://www.cnbc.com/2016/12/14/companies-to-trump-bring-cash-home-but-dont-tell-us-how-to-spend-it.html

Activate Liquidity.

Transform how you use liquidity as a dynamic vehicle for growth and value creation

Find out how