The one-year tax break has clearly opened the floodgates: U.S.-based companies are on track to repatriate upwards of $520 billion by the end of December, estimates Henry "Chip" Dickson, chief U.S. equity strategist at Lehman Brothers Inc. (LEH
) The drug industry is far and away ahead of the pack. Led by Pfizer Inc. (PFE
), which is returning $36.9 billion in foreign earnings alone, pharmaceutical and biotech companies could bring $120.5 billion into their U.S. coffers at the lower tax rate. High-tech equipment makers such as IBM (IBM
) and Hewlett-Packard Co. (HPQ
) come next, with an estimated $62.9 billion in repatriated earnings.
But if there's little doubt the money is pouring in, figuring out exactly where it's going is another matter. Though the bill was promoted as a job-creation measure, regulations set by the U.S. Treasury leave companies wide leeway in how they use their repatriated profits. Hiring, capital investment, research and development, marketing, acquisitions, pension funding, and debt repayment all qualify -- and companies do not have to disclose specifics of their spending plans. They also have three years to allocate the cash. Moreover, if a company plows its foreign profits into research and development, for instance, it could take money previously earmarked for research and use it elsewhere. "You can't trace the money," points out Mickey D. Levy, chief economist at Bank of America Corp. (BAC
Still, some companies are starting to show how they're putting their newfound treasure to use. In June, Pfizer paid $1.9 billion for Vicuron Pharmaceuticals Inc. (MICU
), a King of Prussia (Pa.) biotech firm. Pfizer also has initiated a $5 billion stock buyback -- though the company says that isn't a direct result of the profits it's shipping home, since share repurchases aren't allowed under the Treasury regs. But a spokesman for the New York-based drugmaker acknowledges: "It's hard to say where money is going to and coming from."
One thing is clear, however: The money piling in from abroad as the result of the Jobs Creation Act has done little to actually spur hiring. In fact, six of the 10 companies repatriating the biggest totals are axing workers in the U.S. They include HP, which announced July 19 that it would cut its head count by 14,500 in the U.S. and abroad, and Pfizer, which has said it will shutter 20 factories with undisclosed U.S. job losses to lower costs by $4 billion by 2008.
Oddly, the repatriation is also cutting into profits. The reason: Even that measly 5.25% rate means companies must pay higher taxes than they had budgeted when the earnings were tucked away outside the U.S. Pfizer has taken a $1.7 billion charge to cover taxes on its foreign profits in the first half, while Merck & Co. (MRK
) has said it would have to take a one-time charge of $1 billion if it goes ahead with plans to bring home $15 billion.
Altogether, if Corporate America returns the $520 billion that Dickson says it could, the government could collect an extra $27.3 billion in income taxes this year. But next year, the tax rate on overseas earnings snaps back to 35%. Every holiday, after all, must come to an end. By Michael Arndt in Chicago