Volume 25, No. 6: S&P 500: Untaxed Foreign Earnings in 2015 Kept Growing
Untaxed foreign earnings are full of paradoxes. A single untaxed dollar is worth more to net income than one-and-a-half times a dollar that’s taxed. They can be a tremendous source of earnings power for a company, yet for all of their importance to earnings and their continued growth, there’s scarcely a mention of them in the financial statements. They can account for all of the earnings of a firm, but you can only read about them if you read between the lines of the footnotes. The Management’s Discussion & Analysis, with its focus on presenting a firm’s performance, resources, and liquidity “through the eyes of management,” is no more helpful than the basic financial statement package.
Despite the lack of robust disclosures, some information is available from 10-Ks. In 2015, the total amount of cumulative untaxed, undistributed foreign earnings at 312 S&P 500 firms reached $2.246 trillion – about the same size as India’s GDP. The total dollar amount of untaxed earnings created in 2015 equaled that of 2014, but it mattered more in 2015 because total earnings declined.
Investors have become complacent on the subject, but the Treasury Department might give them a wake-up call. If a proposed change becomes law, it might make current cash management practices much more difficult to accomplish without triggering tax liabilities. Intentions to “indefinitely reinvest” might not be enough to escape liability.
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