US company profits remain in tax havens
It has been a year since the US enacted the corporate tax reform that helped boost corporate earnings to new heights in 2018. The results for the first quarter of 2019 are for many companies the first results on a like-for-like basis and earnings growth has screeched to a halt as this tax stimulus has disappeared and the global economy has slowed.
However, one of the provisions of the tax reform was to incentivise US corporations to repatriate potentially large amounts of money held in international subsidiaries. This did indeed happen, as a new analysis by Brian Setser and Cole Frank of the Council on Foreign Relations shows, but the sums are much smaller than the trillions of US Dollars the most optimistic pundits expected. US corporations have withdrawn c. $220bn of international profits, roughly two thirds of which have been distributed to shareholders in the form of dividends and share buybacks and the rest reinvested in the US. This is a remarkably low reinvestment of international profits, but it is a start and moves capital in the right direction.
What certainly has not changed at all (and why should it?) is the regulatory arbitrage US businesses engage in when they book international profits. The chart below shows the amount of US corporate profits held in seven major “tax havens” compared to seven large economies. The vast majority of international profits remain in different low tax jurisdictions and hardly any profits are booked in Germany, Japan or China, where corporate taxation is much more onerous. The big winner in terms of corporate profit inflows over the last year has been the Netherlands, where regulatory changes have made it even more attractive for businesses to create subsidiaries and book their foreign profits.
International profits of US companies
Source: New York times via Brian Setser and Cole Frank.