Viewpoint October 12, 2010, 7:45PM EST

Time to Bring U.S. Corporate Profits Home

American businesses have massive profits overseas. Unless U.S. tax policy is changed, that's where the cash will stay, says columnist Frank Aquila

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Imagine if U.S. companies could add well over $1 trillion to their U.S. coffers in an instant without having to sell a subsidiary, issue a single share, or incur a penny of debt. While every company would no doubt use its repatriated cash differently, the windfall could fund a return of capital to shareholders through increased dividends and share buybacks. It might instead be used to repay existing debt, fund capital expenditures, or make strategic acquisitions.

It doesn't really matter how companies would eventually deploy the cash. The important thing is that the cash would be used—put to work here in the U.S.

Given the weak domestic economy, why hasn't this already happened? The answer is clear: U.S. tax policies penalize the repatriation of so-called "foreign source income," essentially the profits earned by foreign subsidiaries of U.S. corporations. The corporate cash pile is not being hoarded or held on the sidelines, as many pundits have suggested. It is being kept offshore by our tax structure.

Unlike most other countries, the U.S. taxes profits earned overseas by its corporations. The federal tax code then defers the tax on the non-U.S. profits until the corporation brings them into the country. Since repatriating these profits means incurring taxes of up to 35 percent, most overseas profits ultimately remain offshore.

Given the weak economy and the debate over the need for additional stimulus and further quantitative easing by the Federal Reserve, bringing home hundreds of billions—possibly trillions—of dollars should be an economic priority. Although most companies would need to keep some cash overseas for working capital and capital expenditures for non-U.S. operations, clearly U.S. firms have far more cash overseas than is needed there.

A Terrible Choice: Hoard or Pay?

Repatriation on such a scale would effectively amount to the largest-ever economic stimulus event. Not only would the cash go right where it is needed most—the private sector—but this stimulus would not add a single dollar to the federal budget deficit. In fact the economic growth created through the deployment of this corporate cash would generate billions in additional tax revenue.

Most successful U.S. multinational companies face this dilemma: Keep the cash overseas or bring the profits home at a cost of up to 35¢ on every dollar repatriated. This is not merely a theoretical debate over tax policy. It has profound practical implications.

Recently Microsoft (MSFT) opted to sell billions of dollars in debt to fund its dividend payments, even though it has approximately $37 billion in cash and short-term investments on its books. Since most of the cash is overseas, borrowing makes better economic sense than repatriating it because the cost of borrowing is far lower than paying tax would be.

Microsoft is not alone. Cisco Systems (CSCO), whose Chief Executive Officer John Chambers is a vocal critic of U.S. tax policy, has an estimated $30 billion in cash outside the U.S. Other leading tech companies with significant cash overseas include Dell (DELL), Hewlett Packard (HPQ), International Business Machines (IBM), and Intel (INTC). Pharmaceutical giants Johnson & Johnson (JNJ), Merck (MRK), and Pfizer (PFE) also have billions in unrepatriated foreign profits.