A tax holiday for US treasury teams

Following the tumultuous US election season in 2016, and to kick-off 2017, America’s corporate accounting, tax and treasury teams have been busy planning ahead for the new administration led by Republican president Donald Trump, and the inevitable changes it will bring.

With a Republican majority in the House and Senate, the new US president 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 US trading measures. While these changes are not certain, we have seen currency markets shift and it’s clear that corporates are busy updating their hedging policies. There is also confidence that the new administration will dramatically change America’s corporate taxes, including the potential for a one-time cash repatriation tax relief.

Looking back through the presidential campaign, we witnessed Trump’s plans to change corporate tax policies. Back in April 2015, he addressed the topic in an interview with the newsweekly Time. Commenting on offshore cash hoards, Trump said “we should let them back in – everybody. Even if you paid nothing it would be a good deal.”

He added that corporations “will have to pay something. Ten percent, they’ll pay something.” 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.

A massive cash pile

US corporations have more than US$2.5 trillion sitting offshore – and there it will most likely stay and grow, since under the current US repatriation tax companies are faced with a 35% 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 programmes, rather than using offshore reserves.

A decrease in the repatriation tax rate, or a potential tax-holiday with ultra-low rates, would incentivise American corporations to mobilise 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:
  Ultra-low interest rates, following the last US recession in late 2007 to mid-2009, 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 earnings per share (EPS). Increased cash flow could see the continuation of repurchasing and dividend programmes by corporations leveraging the new inflow of offshore cash.
• Mergers and acquisitions:M&A activity could see spikes in activity following tax changes. In a global survey of chief financial officers (CFOs) by US broadcaster CNBC, M&A was voted the highest capital allocation priority should the corporate tax structures change, with 28% ranking it as top.

Freeing up this offshore 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 chief executive officer (CEO) and CFO who are looking to ramp up on the Trump administration’s decisions will be focusing their attention on how their financial teams, accounting and treasury can create the best path to mobilise 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.

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. Team members 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 US. 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 teams 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 multinational corporations (MNCs). While there is still a high level of uncertainty (and admitted trepidation) about what changes the newly-elected officials in the US will bring, they’re sure to keep finance and treasury teams active for the foreseeable future.

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