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Tech companies to cash in on repatriation windfall

Tax reform fuels tech innovation, investment

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Now that tax reform legislation has officially left the building, technology companies, like many businesses, have moved beyond celebrating new key tax provisions contained in the Tax Cuts and Jobs Act aimed at growing the economy and are looking ahead to the long-term implications of new tax policy.

At the top of the agenda for tech companies with international interests is the repatriation provision, a one-time tax on unrepatriated earnings of Controlled Foreign Corporations (CFC) which calls for a 15.5% tax on cash and cash equivalents and an 8% tax on non-cash assets.

Big tech companies have been accumulating an overwhelming majority of their cash overseas, and now a big chunk of that may very likely be returning home thanks to new tax reform legislation. By some estimates, $1 trillion may be coming back into the United States from the top 16 corporate tech giants. Apple, which has 94 percent of its total cash of $269 billion outside the U.S., announced it would bring back the vast majority of the cash it held abroad and make a one-time tax payment of $38 billion on its repatriated cash.

Tech companies with most overseas cash

Joel Waterfield, national tax leader with Grant Thornton’s Technology Industry Practice, explained “Over the last 10 years, conventional wisdom has been to migrate your IP offshore and take advantage of the low tax regimes of foreign countries to maximize your profits and delay paying U.S. rates. That paradigm has shifted a bit with the onset of tax reform. ”

A boon for buybacksThe big tech multinationals participating in the great on-shoring will likely lighten their bond load and use the money to boost their stock prices. Think buybacks and dividends. “The Apples and Oracles of the world made a tremendous amount of revenue overseas. They’re going to be bringing those profits back,” said Waterfield. “The impact may be greatest for investors in those companies since the stock buybacks should drive up their stock price.”

Steven Perkins“The largest tech companies have the opportunity to invest a tremendous amount of money in R&D to enhance their products and increase their impact on the business market”

Steven R. Perkins,
National Managing Director,
Technology Industry Practice
Indeed, according to a recent study by Bloomberg Intelligence, the tax overhaul could lead to buybacks jumping by more than 70 percent on an annualized basis to $875 billion. The analysis was based on the growth in completed repurchases in 2004-2005, when a tax repatriation holiday was in place.

Steven Perkins, national managing director for Grant Thornton’s Technology Industry Practice, noted that repatriation will likely result in big companies getting bigger. “Not surprisingly, the largest tech companies will extend their lead by investing portions of their tremendous repatriated dollars into product development, M&A and market expansion,” he said.

Investing in innovation Another benefit of a repatriation windfall is increased investment in innovation either by acquiring new technologies or moving into new markets. “The real lifeblood of technology companies is new product innovation,” Perkins suggested. “Look for an increase in investment dollars to expand development and production operations and acquire new engineering talent to build new products.”

He added, “The largest technology companies will have the most repatriated dollars to invest in research, product development and acquisitions. The scale is staggering for technology companies. They have the opportunity to invest a tremendous amount of money in R&D to enhance their products and increase their impact on the business market.”

However, while the tech giants will likely reap the benefits of R&E investments, those which are not so flush with cash might be less inclined. One of the drawbacks of many of the provisions of the tax reform law is that its benefits are short lived. R&E costs incurred or paid after December 31, 2021 will be required to be capitalized and amortized over five years, “Does this mean there will be a waterfall of R&D leading up to 2021 that will suddenly be turned off like water at a faucet? Not necessarily but companies less willing to pay taxes will need to consider the delayed tax benefit of engaging in R&E post-2021,” Waterfield noted.

Evaluating your operating structure
Technology companies, large and small, will be charged with evaluating their operating structure to determine if it is optimal given the new tax rules about internationally-earned revenue. While tax considerations are key, there may be other key reasons driving decisions for tech companies such as where they locate their operations and where they acquire or build their IP.

top tech taxes

Perkins explained, “For example, they may buy IP in a particular market because it’s been developed and tailored to unique specifications of that market or they may acquire engineering and development talent in a certain location because it’s expensive and difficult to find domestically.”

The very nature of the technology industry and the products it produces are virtual. Networks, hardware and software are all offered as a service which increasingly makes the development and distribution of products readily transferable. “As such, the largest growth markets for big technology companies may continue to lie outside the U.S. and there will continue to be consideration of a whole variety of structures on an ongoing basis,” Perkins said.

Because products can move freely on an international basis to customers and product development can be shared in multiple locations, tech companies will need to carefully consider their international structure given the new tax policy.

Grant Thornton’s Waterfield acknowledged that “A very carefully thought out international tax structure that was working perfectly for companies on December 19, 2017 is now out of date. Often, these companies have invested a lot of money setting up international tax structures to be as efficient as possible. Now, you will likely see at least some of those repatriation dollars spent to realign those tax structures which are no longer as efficient given the new tax law.”

He added, “One of the key questions becomes ‘How do you optimize your international operations for the new law?”

Making way for more M&AOne element of a tech company’s business strategy that might be further impacted by newly enacted tax reform is its approach to mergers and acquisitions. In addition to product development, new monies derived from repatriation may be targeted for acquisitions of emerging technologies or emerging technology companies.

“What many technology companies have done over the last half a dozen years is establish venture funds and incubators within their own corporate development shops,” Grant Thornton’s Perkins said. “There’s now going to be a significant amount of money available for that channel which will fuel development.”

Joel Waterfield“A very carefully thought out international tax structure that was working perfectly for companies on December 19, 2017 is now out of date.”

Joel Waterfield, National Tax Leader,
Technology Industry Practice
Moreover, there will likely be less need to go out to the market to borrow money to run M&A operations as that money is now available thanks to repatriated funds.

Waterfield suggested “There could indeed be an uptick in acquisitions which could drive up the price of an acquisition. If it’s known there are a bunch of buyers out there with a relatively new pool of money from which to draw upon, the seller might be motivated to push for better terms.”

Now that long-awaited tax reform is a reality, the work is just beginning for tech companies, particularly those with large international operations, to rethink the long-term implications for their business strategy and operations. What are the U.S. implications of the changes in your structure for tax efficiency? Should you invest in the development of additional products or service lines, stock buybacks or acquisitions? What non-tax considerations should you evaluate when determining the best location for your operations?

These are just a few issues multinational tech companies will need to address when evaluating the impact of repatriation and other key tax reform changes. Ready your company now for the upswing.

Not sure where to start? Grant Thornton can help. Reach out to our professionals below.

Contacts:
Steven R. Perkins
National Managing Director
Technology Industry Practice
T +1 703 637 2830

Joel Waterfield
National Tax Leader
Technology Industry Practice
T +1 703 847 7595