But tax and regulatory factors are not the only reasons why companies may have issues around trapped cash. “Poor visibility or inaccurate data can impede efficient cash management,” says Hagopian. “Zero balancing may need to be watered down to target balancing, with substantial local buffers if there is the risk of overdrawing the local account and incurring a hefty local overdraft charge. Similarly, organisational factors may have some bearing on how cash is managed.”
Hagopian points out that in organisations where payments are decentralised across different markets, local operations will require a degree of control over their cash flows, as well as the certainty that their payments have adequate access to funding on an intraday basis. “In this way, factors that should not normally lead to a trapped cash problem can contribute to the outcome.”
Weighing the risks
As Hagopian explains, there is a dilemma in that the markets which present the most challenging environments for cash repatriation “often present the greatest concern regarding country risk”. As such, she says that these considerations are best contemplated at the outset when investment in a particular market is being reviewed.
“The decision to invest may still be upheld, but the capital and funding structure of the local operation may be different as a result of a holistic review, given the reliance on dividends and royalties as the primary mechanism for repatriating cash. In addition, the attraction of a taxation rate for profits has to be weighed against the restrictions upon repatriation.”
Naturally, there’s no one size fits all when it comes to managing cash effectively. Where Wolters Kluwer is concerned, Dessing says that the group faces a variety of financial risks, including liquidity risk, market risk and credit risk, all of which are managed via a strict financial framework, policies and procedures. Against this backdrop, the company’s total debt is around €2bn – “and therefore you want to reduce that by having access to all available cash on a global basis.”
Dessing says that Wolters Kluwer tackles this task via a three-pronged approach. “First of all, we are using global cash pooling structures to gain access to cash, even in countries which have certain limitations,” he says. “Secondly, our intra-group financing includes certain netting and settlement structures that we use internally. And finally, we reduce the restricted cash via our internal dividend policy.”
Impact of the US tax reform
While the issue of trapped cash has long been a concern for treasurers, conditions in specific markets can and do change over time. One notable development in recent months has been the US tax reform: as well as cutting corporation tax from 35% to 21%, the reform set out to encourage US corporations to repatriate foreign earnings, offering a reduced one-off repatriation tax rate on profits brought back to the US.
The consequences of this development could be significant. “The United States Worldwide system meant around US$2.5trn of cash was parked abroad by some estimates, discouraging onshore investing, debt restructuring and dividend payments,” says Hagopian. “At 35%, the rate of US Federal Income Tax was considerably higher than the average across the OECD, resulting in a deemed lack of competitiveness for attracting and retaining business in the US.”
Consequently, Hagopian says that the reduced transition tax, reduction in income tax rate and the ruling that foreign subsidiary earnings and dividends from foreign subsidiaries will not be subject to US tax in future, “has led many US multinationals to reconsider their repatriation policies”.
Some companies have been quick to take advantage of the opportunity. Apple, for example, announced in January that it anticipated repatriation tax payments of approximately US$38bn – implying that the company planned to repatriate around US$245bn.
But there are other factors to consider. Hagopian notes that there is a new minimum tax on ‘global intangible low-taxed income’ (GILTI), while CFC rules still apply to certain ‘passive’ income, making it subject to full US tax rate. “Of course, foreign capital gains remain subject to US taxation and local withholding or dividend taxes may still apply in local markets,” she adds.
To repatriate or not to repatriate?
When it comes to taking advantage of the changes, not all companies are alike. Bank of America Merrill Lynch’s Smith points out that large companies in sectors such as pharmaceuticals and technology may have built up large cash balances which they may have placed in short-term investments – “and they were waiting for repatriation to happen so that they could bring that cash onshore.”
For other companies, however, the situation may be somewhat different. “A lot of overseas cash is actually needed to run the overseas operation, so not all cash is eligible for repatriation,” says Smith. “Another factor is that companies have put together structures for their overseas cash that are sometimes complex, but ultimately efficient – and that efficiency may still hold post-tax reform. In any case, these structures can be quite time consuming and sometimes costly to unwind.”