Nearly $1 Trillion in Off Shore Profits Is in US Banks

The continued public outcry about U.S. companies keeping profits overseas in order to avoid U.S. taxes has obscured an interesting fact about much of that money. In fact, about half of the “overseas” cash that businesses are declining to repatriate is already in the U.S. – it’s just not taxable.

Companies with foreign subsidiaries that hold assets earned overseas need bank accounts to hold that money and to use it in transaction, and for many international businesses, the location of choice for corporate accounts is in major U.S. money center banks – like J.P. Morgan Chase, or Citibank. That’s because many see U.S. banks as the safest in the world – some even believe that U.S. banks are so big and important that the U.S. government would never allow them to fail.

If a subsidiary of a U.S. corporation based in, say, Bermuda, were to open an account at Citibank and deposit the profits of business done overseas, that money would be in the United States, for all intents and purposes. Regulators funded by U.S. tax dollars oversee the bank holding the money. Its buildings and computers are protected by the U.S. legal system, and its contracts enforced by U.S. courts – both also paid for by tax dollars.

According to a report compiled in 2011 by the Senate Permanent Subcommittee Committee on Investigation, a survey of 27 U.S. multinationals found some $538 billion in profits that had technically not been repatriated. Of those, the report found, “nearly half (46%) of the funds that the surveyed corporations identified as offshore and for which U.S. taxes had been deferred, were actually in the United States at U.S. financial institutions.” If you do the math, of the $2.1 trillion stashed in offshore accounts, roughly $1 trillion is parked here, in the U.S.

According to Bert Ely, a banking consultant based in Alexandria, VA, even the funds not held overseas still benefit companies when they do business with U.S. banks.

“Sometimes those profits are here indirectly,” said Ely. “Companies accumulate these profits, and then borrow against them in high tax jurisdictions. A company may have the cash it needs, but it is leveraged in part against profits that have not yet been fully taxed.”

Claims that profits overseas for tax purposes are completely outside the U.S. economy may not be precisely true, points out William G. Gale, of the Brookings Institution.

“The money could literally be in the United States right now in some bank account in New York and could be lent out by the banks and funding investments in the U.S. economy right now,” he said. “The money doesn’t literally have to be off shore. It just has to be legally repatriated to the country if the company wants to pay it out in dividends or use it for [stock] buy backs.”

Except, asks Ely, “Is the loan demand there? The banks are highly liquid. I think that’s the issue; and it’s not just in the U.S. but in other countries as well is that loan demand has been weak coming out of the recession. It’s not as if banks have lacked the funds to lend. They have plenty of funds. I don’t think the economy has gained because untaxed profits are sitting in those banks.”

Regardless, said Gale, considering the volume of profits that have not been repatriated, even the businesses benefiting from it are having problems.

“There’s so much money out there right now that I think it’s fair to say it’s creating management headaches,” he said. “Companies have to figure out – they have to attest that they are permanently reinvesting the earnings overseas in order not to have to pay taxes on it until they repatriate it. It’s hard for them to find productive things to do with all that money overseas.”

Some are suggesting that growing aggravation over how to deal with companies’ overseas profits might help drive an overhaul of the U.S. tax code, which hasn’t been rewritten in nearly 30 years.

Gale is skeptical that there will be corporate tax reform this year, but thinks one factor that might encourage compromise by the business community is “the enormous amount of money that is parked off shore right now that companies ‘can’t bring back’ unless they pay a tax on it.”