U.S. companies stand to bring back $250 billion in foreign profits should Republicans manage to pass tax legislation, according to an analysis from Goldman Sachs (GS) - Get Report , and tech companies would lead the way.
The New York-based investment bank in a research note late Monday laid out the math on a repatriation tax break likely to be included in a tax bill put forth by the GOP. Analysts estimate S&P 500 companies would bring back about a quarter of their total untaxed overseas cash by the end of 2018, basing their analysis on a Bush-era repatriation holiday, when U.S. firms repatriated 25% of their total estimated overseas earnings, and current corporate investment trends.
S&P 500 companies have about $2.5 trillion in permanently reinvested overseas earnings currently, including about $920 billion of untaxed cash overseas. Goldman estimates a repatriation tax reduction like that proposed by House Republicans -- an 8.75% tax on cash and 3.5% tax on earnings -- would result in $250 billion gradually coming back to the United States next year, while $540 billion would remain at foreign subsidiaries.
While firms that benefited from the 2004 holiday enacted under President George W. Bush largely spent their money on stock buybacks, Goldman analysts Arjun Menon, David Kostin, Ben Snider, Ryan Hammond and Cole Hunter argue that this time would be different. Equity prices are high, and recent cash spending patterns of companies with money stashed abroad suggest they would be less likely to favor buybacks over other potential uses.
"We expect firms would allocate repatriated cash evenly between returning cash to shareholders (buybacks and dividends) and investing for growth (capex, R&D, and cash M&A)," the analysts wrote.
Perhaps unsurprisingly, the biggest beneficiaries of a repatriation tax would be tech companies -- 11 of the 20 S&P stocks with the highest overseas cash as a percent of market cap are in the IT sector. In fact, tech accounts for 70% of total S&P 500 taxable cash stashed abroad, including nearly a quarter from Apple Inc. (AAPL) - Get Report alone.
Beyond Apple, Goldman also identifies Cisco Systems Inc. (CSCO) - Get Report , NetApp Inc. (NTAP) - Get Report , QUALCOMM Inc. (QCOM) - Get Report , Oracle Corp. (ORCL) - Get Report , Microsoft Corp. (MSFT) - Get Report , TE Connectivity (TEL) - Get Report , Western Digital (WDC) - Get Report , Citrix Systems Inc. (CTXS) - Get Report , Juniper Networks (JNPR) - Get Report and VeriSign Inc. (VRSN) - Get Report as tech companies that stand to benefit most from a reduced repatriation tax.
Non-tech companies that would reap the most benefits are Amgen Inc. (AMGN) - Get Report , Ralph Lauren Corp. (RL) - Get Report , Waters Corp. (WAT) - Get Report , Foot Locker Inc. (FL) - Get Report , General Electric (GE) - Get Report , Abbott Laboratories (ABT) - Get Report , Priceline Group (PCLN) , Johnson & Johnson (JNJ) - Get Report and Merck & Co. Inc. (MRK) - Get Report .
Tech and healthcare combined account for 85% of total S&P 500 untaxed cash overseas. Energy and financials comprise only 2%, and real estate and telecom have almost no taxable cash abroad.
The so-called "Big Six," a group of Republicans hammering out the details of tax legislation, are expected to release more details on their tax plan on Wednesday.
Possible provisions in the new blueprint could include a 20% corporate tax rate, temporary full and immediate expensing, a reduction of the pass-through rate to 25%, a doubling of the standard deduction and the elimination of state and local deductions. However, it is only a starting point, and complete legislation is still a long way from being written.
Moreover, the budget resolution instructions being considered reportedly include cuts of $1.5 trillion over a 10-year period. And as The Tax Foundation's Kyle Pomerleau pointed out over the weekend, Republicans appear to be trying to fit $5 trillion of tax cuts in.
"This is still just a blueprint and, as its framers admit, it's just the beginning of the process," analysts at Height Securities LLC wrote in a Tuesday note.
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