Volume 24, No. 5: S&P 500: 2014 Untaxed Foreign Earnings
All good things must end – but until then, party on. Or as a former Citigroup CEO famously said of leveraged lending, circa 2007: “…as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
When it comes to maximizing earnings by minimizing taxes, the music will never stop playing – only the tune will change. Unless the corporate income tax is repealed (don’t hold your breath), managers who have the duty and incentive to maximize the earnings for shareholders will have a complementary duty and incentive to minimize taxes.
While there seems to be no appetite for tax reform at the moment, there’s not much mystery these days to the way the untaxed foreign earnings game is played – and politicians are starting to be more vigilant about overseas inversions of U.S. companies for the purpose of lowering taxes. For example, last September saw the issuance of Treasury and Internal Revenue Service interpretations that killed the AbbVie/Shire deal. No notable inversion has occurred since.
The pool of cumulative untaxed foreign earnings for 322 companies in the S&P 500 is now over $2.1trillion. Just last year’s untaxed foreign earnings totaled $182.4 billion – about 19% of the total net income for the index firms. If you’re worried about a company’s dependency on untaxed foreign earnings, it might not be a bad idea to start adding a pro forma deferred tax on foreign earnings when assessing a company’s earnings reports. In 2014, that pro forma charge would have sliced almost 9% from the earnings of affected companies – and over 6% from the total S&P 500 earnings.