How Much Do Expatriate Earnings and Repatriation Taxes Matter to Shareholders? (Digest Summary)

The lack of disclosure of earnings from foreign operations by US companies and the potential tax cost of repatriating these earnings seems to have no effect on a company’s market value. Perhaps investors and financial officers see little value in reporting such items because of the low likelihood of legislative action on a repatriation tax.

There is often an absence of disclosure of relevant foreign operations and earnings by US corporations. Despite this deficiency, there is no evidence that insufficient reporting of offshore cash, expatriate earnings, and the hypothetical net tax cost on the full repatriation of foreign earnings has any effect on a company’s market value. Rather, companies with overseas operations seek to maximize shareholder value through legitimate tax avoidance with the option to repatriate cash in a tax-efficient manner at a more convenient time.

In an attempt to address this phenomenon, legislators in the United States have considered the merits of lowering corporate tax rates to be more competitive. They have also considered a harsher measure in the form of a “deemed repatriation tax” on all expatriate earnings irrespective of a company’s intent to invest offshore indefinitely. This potential tax has caused analysts to consider the potential consequences for company valuations of such deferred tax liabilities that are currently not disclosed.

Regulators, policy analysts, financial analysts, and students of accounting will find the author’s discussion and conclusions an interesting and relevant take on one of the more opaque areas of corporate finance.

The author evaluates financial statement data on 772 US-domiciled multinational corporations from 2010 to 2014. The data are parsed by industry, the extent of expatriate earnings, tax rate, and tax rate differentials between US and foreign jurisdictions. Companies that report expatriate earnings reveal it in a note in the income tax section in their financial statements. The author makes an adjustment when expatriate earnings are not reported in financial statements.

Companies that are best equipped to lower their effective tax rate by using foreign subsidiaries and rate differentials exhibit the most flexibility in locating profitable assets in low tax rate jurisdictions.

The availability of public data on the size and frequency of repatriations is limited because of inconsistency in company disclosures. An IRS study and nonpublic reports made to the US Bureau of Economic Analysis report disclosed annual asset repatriations of around 1% of total company assets from 1999 to 2004. For the 2010–14 reporting period, 10-K filing disclosures of US multinationals put this number at around 6%.

The author regresses the dependent variable, percentage change in a company’s stock price, against a series of independent variables relating to expatriate earnings taken from data in companies’ tax notes and the management discussion and analysis sections. The coefficients on the independent variables are generally statistically insignificant. Expatriate earnings and hypothetical net tax cost disclosure barely move stock prices for the companies examined.

A company’s financial statements may encompass disclosures that range from hidden gems to ticking time bombs. To the extent that companies do disclose earnings and hypothetical amounts of tax on repatriated amounts from their overseas subsidiaries, there seems to be no evidence that such information affects their market value. Relevant disclosures often fail to keep pace with the economic reality of foreign operations. The legislative winds could blow less favorably in the future, and companies should take heed.