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Falling offshore T-bond holdings highlight U.S. cash repatriation

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By Reuters
Falling offshore T-bond holdings highlight U.S. cash repatriation
FILE PHOTO: U.S. Dollar banknotes are seen in this photo illustration taken February 12, 2018. REUTERS/Jose Luis Gonzalez/Illustration   -   Copyright  Jose Luis Gonzalez(Reuters)

By Ritvik Carvalho and Sujata Rao

LONDON (Reuters) – Dollars are going home. In low-tax jurisdictions from Ireland to the Bahamas, the stock of Treasury bond holdings is down $22 billion (£17.32 billion) this year in a sign U.S. companies are repatriating cash held offshore after changes to how foreign earnings are taxed.

Over the years, U.S. multinationals have accumulated an estimated $3 trillion (£2.36 trillion) in worldwide profits offshore, held in cash as well as securities including U.S. Treasuries. This is the result of a rule under the previous tax regime allowing them to defer paying tax on offshore profits as long as the money was not repatriated to the United States.

But a powerful incentive to repatriate these earnings has come from changes which eliminated the “deferral” rule but reduced the rates at which company profits accumulated abroad are taxed — to 15.5 percent for cash holdings and 8 percent for more illiquid investments.

Both rates are far below the 35 percent rate that would have been charged on repatriated foreign profits before the law was passed, and below a new 21 percent corporate income tax rate.

As a result, $300 billion was repatriated in the first quarter of 2018, U.S. balance of payments data indicates.

(GRQAPHIC: U.S. companies repatriated about $300 billion in first-quarter 2018 –

Analysis of data from U.S. Treasury International Capital, or TIC, shows Treasury bond holdings are dwindling in 10 locations that are well known either as low-tax jurisdictions, overseas bases of U.S. firms, or simply home to significant fund management or custody business.

Ireland, which hosts the European hubs of U.S. technology and pharmaceutical companies, saw a $28 billion drop between January and June, latest TIC data released Aug. 15 shows. Irish Treasuries holdings, which once almost matched the country’s annual economic output, have fallen by a tenth this year to $299.6 billion (£235.9 billion).

But Switzerland, Bermuda, the Bahamas and the Netherlands also witnessed sharp falls in Treasuries holdings, which are down between $300 million $300 million and $14.6 billion (£11.49 billion) since January. An exception among these types of jurisdictions is the Cayman Islands, which saw a $26 billion increase in holdings of Treasuries over the same period.

(GRAPHIC: Treasury holdings fall in low-tax jurisdictions –

“Obviously this is being driven by the tax situation. Repatriation is happening in lumps and the major drivers are the tech companies,” said Salman Ahmed, chief investment strategist at Lombard Odier.

“It’s a fixed income-to-equity play, the money is coming out of Treasuries and going into buybacks.”

There is no evidence in the data to show which companies might be returning cash or indeed whether the drop is down to repatriation. But filings with the U.S. Securities and Exchange Commission show Treasuries holdings at Apple, Google and Microsoft are now $202 billion (£159 billion), versus almost $220 billion (£173.2 billion) at the end of 2017.

(GRAPHIC: Tech companies’ Treasury holdings dip in 2018 –

Apple alone bought back $23.5 billion (£18.5 billion) of its stock in the March quarter and added $100 billion to its target for future purchases.

If repatriation is indeed the driver, the drops in offshore holdings should continue.

“We are sure these are all private (Treasuries) holdings as Ireland as a country doesn’t have much in FX reserves,” Bank of America Merrill Lynch analyst Carol Zhang said.

“(U.S. tech firms) did mention in (analyst conference) calls they have plans to repatriate. But it may not happen all at once.”

(Reporting by Ritvik Carvalho and Sujata Rao; Editing by Catherine Evans)