How Much Do Expatriate Earnings and Repatriation Taxes Matter to Shareholders?

Abstract

I analyze data from tax footnotes in the annual financial statements of 772 US multinational companies during 2010-2014. What I term ‘expatriate earnings’ are also known as permanently reinvested earnings (PRE) indefinitely reinvested earnings (IRE), undistributed earnings, and unremitted earnings. By any name, companies can avoid paying the US worldwide income tax on the earnings of their foreign subsidiaries insofar as they do not repatriate, with the result that aggregate expatriate earnings grew at around 10% per year over the past two years to reach an estimated $2.5 trillion as of fiscal years ended in 2014. The filings-review staff of the SEC has, since early 2011, asked over 400 companies to provide (in the future) more-complete 10-K disclosure of information related to expatriate earnings.

Accounting standards allow non-recognition of the prospective net tax cost of hypothetical full repatriation of expatriate earnings. Prior research has found that proxies for this mostly unreported data item are value relevant based on regressions to explain levels of market capitalization and on data no more recent than 2004. In contrast, my regressions to explain changes in stock price on 10-K filing dates for fiscal years ended in 2013 and 2014 find that tax-footnote disclosures have no real value relevance. Also, a natural experiment has played out since February 2, 2015 when President Obama released a budget proposal that calls for taxing deemed repatriations of all expatriate earnings. During the ensuing legislative debate, stocks of the half of all US multinationals with higher expatriate earnings have not significantly underperform the stocks of those with lower expatriate earnings.

The stereotypical company said to be most exposed to a deemed-repatriation tax is a large pharmaceutical or technology company, but this is not the full story.Actually, few of the most-exposed companies fit the stereotype.