In our globalised economy, many American companies generate significant revenue abroad. While traditionally, much of this would be held overseas – particularly in tax-efficient jurisdictions – legislation in the past six years has encouraged a noticeable return of profits to US shores. So, if you are an American business repatriating profits to the US, how does it work, and what are the safest ways to do so?
How has offshore profit repatriation changed over the years?
There are two key potential areas to deal with when it comes to repatriating profits, or indeed moving them between any two countries: taxation and the currency markets.
The first of these two has seen a big change in the past years. Historically, large companies in particular, would take advantage of certain jurisdictions’ minimal taxation schemes through various methods. For example, by registering their intellectual property in a low-tax region like Bermuda, they could then charge their entity in a higher-tax region such as the US for using that IP – providing a means to transfer profits to Bermuda.
While the US theoretically taxed its corporations, like its residents, on their worldwide earnings, it was possible to “defer” this tax obligation as long as those profits were held overseas.
However, successive US governments have cracked down on this.
The Tax Cuts and Jobs Act rewrites the rules
The Trump administration introduced the Tax Cuts and Jobs Act (TCJA), which removed the ability to defer taxation. However, rather than taxing at the usual 35% when repatriating profits to the US, the TCJA did introduce an alternative tax rate of 15.5% on cash/liquid assets and 8% on any other kinds of profits. Businesses also have eight years across which to pay the tax, including for pre-TCJA profits.
It also introduced the Global Intangible Low-Taxed Income (GILTI) rules, which made not repatriating profits less attractive still by introducing a minimum tax rate of roughly 10.5% on a certain amount of global income.
In addition to this, the Biden administration’s 2024 budget plan proposes increasing that 10.5% to 21%. While there’s little chance of this passing the Republican-controlled House of Representatives, it’s a sign nonetheless of a continued push for profits to “come home”.
Booking profits overseas in decline
Statistics show that this push has largely been successful. In 2017, just over 30% of the US’s top tech companies’ profits were booked in the US. By 2020, this had jumped to 56% – despite a global pandemic.
Likewise, figures from Compustat, reported by Tax Observatory, show a decline since 2017 in overseas profit booking in all tracked sectors, including information technology, finance and insurance, metals and machinery, pharmaceuticals, chemicals, petroleum and food.
How do businesses manage the currency risk of repatriating offshore profits to the US?
If the tax risks of repatriating profits to the US (and the benefits of not doing so) have been somewhat mitigated, the second of our two key areas is still very much alive and kicking.
If you’re moving offshore profits to the US from a jurisdiction where they’re held in a different currency, then you will have a potentially very large sum of money exposed to the live currency markets.
The risk here is that the value of your profits in dollars is constantly changing – and could lose value at any point, possibly wiping out even more than you would have lost in tax in the first place.
How does this look in practice?
Let’s imagine an American company holding €1,000,000 in Ireland.
On 5th May 2023, those profits would have given you $1,102,500. If you transferred just over two weeks later, you get $1,071,300 – a loss of more than $31,000.
This can happen for an almost unlimited number of reasons and in an almost entirely unpredictable way. For example, on 5th May, another rate hike, accompanied by hawkish comments from ECB’s Lagarde, could be expected to weaken the euro, and while this did happen, it was short-lived and the single currency quickly recovered its ground.
On the other hand, on 26th May, concerns about a government default in the US were not able to weaken the dollar against the euro, the latter of which actually weakened against the dollar on poor economic performance from Germany.
Protecting against the risks of currency volatility
If you are repatriating profits to the US, then, your business will need a hedging strategy.
In case you’re moving a one-off sum of money, such as one that has been held abroad with taxation deferred under previous practices for example, then you may plan this in advance using a forward contract. This means that you’d book the sum you need to transfer in advance across a period of time with today’s exchange rate locked in – so if you plan the transfer for the next quarter, you know now what value that money will equal in US dollars.
Otherwise, you can also take advantage of greater agility with your finances to decide to wait for a higher exchange rate by using a market order. This means you can choose your desired rate and then have the transaction automatically completed as soon as that exchange rate is hit. Of course, this does depend on the markets actually hitting it – as we’ve discussed, there’s no guarantee of rates going up continuously, and indeed they haven’t historically.
Whatever your unique situation is, it’s always recommended that you work with foreign exchange specialists to define the best strategy tailored to your business.
Safely bringing your profits back to the US
As successive administrations on both sides of the political aisle continue to offer both legal carrots and sticks to encourage profits back to American soil, we’re likely going to see the trend of repatriation of significant sums only continue to grow. And with talk of raising taxes – which could become more politically probable if the Democrats retake the House in 2024 – it’s only more important to ensure your capital doesn’t also lose value to the live currency markets.
Alexander is a writer specialising in foreign exchange and finance for companies with cross-border exposure. He’s written on topics including currency risk, international taxation and global employment for seven years. You can find him out hiking, travelling and working from Spain in the sunnier months.