After tax reform bulletinContributor Paul Przybylski
The new context for international liquidity transactions
When U.S. tax reform went into effect this month, lowering corporate rates and making significant changes to individual and business taxes, the duty of managing its many implications fell to corporate treasurers. One highlight of the new law is how substantially it lowers the tax rate on multinationals’ cash assets held overseas when they are repatriated. Previously, taxes were not levied on U.S. corporations’ foreign profits until these assets were brought home— at which time the tax rate was 35%. Under the new law, multinationals are taxed on assets held offshore, but pay a much lower one-time tax rate when repatriating them: 15.5% for liquid assets and 8% for holdings with maturities of greater than one year.1
Every company must perform its own due diligence to choose the optimal strategy for asset repatriation. Among the many variables to take into account during the planning process: How much is held offshore? In what currencies are the assets denominated? What retained cash level is adequate for the offshore entity? What is the proper timing of asset repatriation? And once repatriation has been executed, how, where and when should those assets be put to work in the U.S.?
Understanding the following options can help corporate treasurers grappling with the challenges of tax reform to assess the issues involved and make informed decisions about which approach to repatriating cash held offshore can best address their circumstances.
Two options for bringing cash assets back onshore
Option 1: Letting securities mature
The simplest option for repatriation with the fewest impacts on the corporation’s balance sheet will be to allow the offshore securities to mature and then, rather than reinvesting the proceeds, the cash can be wired into the company’s existing U.S. account—or into one newly opened. Similar securities to the portfolio that were previously held can then be repurchased, effectively replicating the portfolio in an onshore version at a new cost basis.
Option 2: Transferring securities at market
A more operationally complicated option is to transfer securities in kind. An in-kind transfer of assets is typically done at a current market price, from the offshore entity to the company’s U.S. account. The U.S. entity would typically receive the transfer of assets at a current market price. (In some countries, this may be allowed without marking to market gains or losses; in other countries, it will not be.) The benefit of an in-kind transfer is that the portfolio retains its historical performance record, even as the cost basis changes. There are challenges, however, in aligning a transfer between offshore and onshore entities, such as increased transactional costs, the need to provide compensation for an associated agent and potentially, legal costs. Transferring securities with a custody agent could lessen some of these complications.
Beyond the mechanics of repatriation, corporations will also need to think about:
- The timing of the repatriation tax payment. The tax may be paid over an eight year period.
- The speed at which a U.S. account can be set up. An open account is required for repatriating offshore assets; if there is a time constraint, J.P. Morgan can begin the account onboarding process and expedite it before liquidation begins.
- How to put repatriated cash assets to work in the U.S. If they will be invested, consider your investment options. Possible uses of the money may include capital expenditure, share buy-backs and retiring debt. Certain investment options may be more or less appropriate, depending on the timeline in which the money will be used.
J.P. Morgan Global Liquidity’s global scale and resources can help streamline the sometimes complex transactions involved in cash repatriation. If you have any questions or would like additional information, please contact your J.P. Morgan Global Liquidity Client Advisor.
Build stronger liquidity strategies with J.P. Morgan
- Rigorous credit and risk management, combined with access to J.P. Morgan’s global resources and expertise, help us to deliver the most effective short-term fixed income solutions for our clients.
- Global coordination, lasting partnerships
- Harness the power of our research-driven, globally coordinated investment process, led by our dedicated team of liquidity professionals.
- Make investment decisions based on actionable insights from our senior investors, and build portfolios based on the output of proprietary benchmarking tools.
- Select from a breadth of outcome-oriented solutions designed to help you build the most effective cash strategy.
- Tap into award-winning innovation and success of one of the world’s top liquidity fund managers, with over 30 years of demonstrated results across market cycles.
1A liquid asset is any obligation with a term of less than one year.