U.S. companies like General Electric, Microsoft, Apple and Pfizer may regret stashing such a large percentage of their profits abroad, at least according to a February 4th report from Goldman Sachs Portfolio Strategy Research. GS analysts Amanda Schneider and colleagues suggest that there is some chance that these firms could be vulnerable to a major tax hit if Congress gets serious and uses President Obama’s proposal as a starting point for a bipartisan tax reform bill.
GS High Overseas Balance basket includes Apple and Microsoft
In this report, Amanda Schneider and colleagues discuss, “highlight and rebalance our basket of 50 S&P 500 stocks with high accumulated earnings held overseas.”
They note that foreign sales for these firms totaled $1.7 trillion in 2013 and represent around 50% of total S&P 500 overseas sales. The GS High Overseas Balance basket includes 50 S&P 500 stocks with $1.4 trillion of permanently reinvested foreign earnings in 2013 and 2014. Obviously companies with high accumulated balances of earnings abroad are more likely to be impacted by a repatriation tax holiday or a tax on deferred foreign earnings.
Of note, the median stock in the HOB basket receives 57% of its revenues from sales ex-U.S., relative to 29% for the median S&P 500 stock and 33% for the S&P 500 in aggregate.
Low likelihood of serious corporate tax reform
Schneider et al. argue that while Obama’s proposal on business tax reform provides new details that could be helpful in advancing the debate, “enacting corporate tax reform this year will be difficult.” They believe the probability of significant corporate tax reform legislation passing in 2015 is less than 25%. The GS analysts see an equally low likelihood of tax repatriation becoming reality this year.
President Obama’s proposal
The Goldman Sachs report also discusses a related but separate proposal by the White House — a one-time 14% tax on the deferred overseas profits of U.S. firms like GE and Microsoft as a way to transition to the new system of taxing foreign earnings. However, unlike the tax on future foreign earnings, the 14% tax rate would not be offset by taxes paid to foreign governments.