Volume 26, No. 6

S&P 500’s Untaxed Foreign Earnings Kept Growing Last Year: It seemed like such a done deal: a new president who had vowed to replace the tax code with something simpler, and hinted at holidays on taxation of overseas earnings that had been “indefinitely reinvested.” That is, they’re indefinitely reinvested until they are not - which happens to be when the tax coast is clear.

So where is the tax holiday? Hard to say, but “limbo” seems like a good guess. It’s not likely there will be any major tax reform before the end of summer, and maybe not until next year. Smaller fixes like a tax holiday on foreign earnings haven’t been floated yet.

Meanwhile, the earnings continue to grow: at the end of 2016, the cumulative balance of indefinitely reinvested earnings swelled nearly another 9%, to $2.4 trillion dollars among a mere 307 firms in the S&P 500. Estimated total indefinitely reinvested earnings grew another $185.5 billion in 2016, comprising 22% of total earnings for 282 of the companies. The numbers are huge, growing and concentrated in a handful of companies and industries. While the indefinitely reinvested earnings power consolidated earnings to levels unattainable if they were fully taxed on a deferred basis, they represent lower quality earnings - and they encourage managers to take on debt they otherwise might not incur, just to monetize the indefinitely reinvested earnings. While any change in the taxability of such earnings is in a holding pattern for now, it’s worth understanding which players will be most affected by any forthcoming changes.


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