CASE ANALYSIS

LUCK OF THE IRISH

At one time, Apple executives explained what they were planning to do with their $98 billion in cash (pay a $2.65 dividend and buy back some of their shares). However, what they were really talking about was not the full $98 billion but the $34 billion the company has here in the United States. The other $64 billion is sitting in overseas subsidiaries and may never find its way back to the United States.

The reason: U.S. tax laws allow companies to defer taxes on their profits from international operations until they bring the cash back into the country. So what do many companies do? Either the cash just sits there in foreign bank accounts or is reinvested in factories and acquisitions overseas. After all, why should a company send its cash back to the United States when it can reinvest this cash overseas without any tax payments? As a result, companies have the incentive to move as much of their earnings overseas to low-tax jurisdictions such as a country like Ireland.

As one expert noted, it cannot be the luck of the Irish that explains the extraordinary and systematic profitability of Irish subsidiaries of U.S. companies. So when investors analyze an annual report and find a company reporting a large cash balance, they may believe that this cash is available for increased dividends or for acquisitions in the United States. But that is not necessarily somuch of the cash may be overseas and may never return. Unfortunately, the problem is getting bigger, not smaller.

Untaxed foreign earnings are now growing at a much faster rate than earnings generated in the United States. For example, in a recent five-year period, the accumulated untaxed foreign earnings have reached over $2 trillion. A majority of these earnings are concentrated in three sectors: health care, technology, and industrials.

What this tells us is that the U.S. taxpayer is presently holding the bag because many of these companies may never be taxed as the cash from these earnings will not be invested in the United States. At a

minimum, investors need more information about foreign earnings, the amount of cash in foreign deposits, and cash generated from foreign operations where untaxed foreign earnings were reported. Capital markets are well served when good information is provided. You would think that cash is cash and the amount is certain, but unfortunately some cash is better than other cash.

Answer the following items:

1. From the case, why do companies retain their cash on foreign banks from overseas operations instead of remitting it to their country?
2. How does Philippine tax law treat the earnings of domestic companies in its international operations? Compare and contrast the Philippine tax law and the US tax law from the given case.
3. In your perspective, why do companies need an excellent internal control system over cash? Cite examples to support your view.