When is a Dollar Not Worth a Dollar? The 'Trapped' Cash Controversy

During 2013 the concept of "trapped cash" garnered heightened attention as reports of Dell, Apple and other firms holding massive cash levels outside the US surfaced. So called "trapped cash" refers to cash and liquid investments held by subsidiaries located outside the United States. Firms with overseas subsidiaries located in jurisdictions where the tax rate is lower than the rates in the US can reduce taxes by attributing profits to foreign locales. But bringing the cash back to the US subjects the funds to the US corporate tax rate, less credit for foreign income taxes paid. The House Ways and Means Committee held hearings in June 2013 to examine corporate profit shifting by multinationals. This followed hearings held by The Senate Permanent Subcommittee on Investigations in May 2013 which focused on tax strategies at Apple and earlier hearings in September 2012 which focused on Microsoft and Hewlett Packard. Some have accused global firms of acting to avoid taxes leading to perhaps several billions of dollars of lost tax revenues. Others note that the real culprit is a US tax code with the highest corporate tax rates in the developed world. As the debate has raged, the Internal Revenue Service has sought to prohibit strategies related to intangible assets that the IRS claims firms have exploited to repatriate profits without tax implications. While the topic impacts all firms with liquid investments held outside of the US, this issue has been particularly important recently in the technology sector since over the past few years tech firms have amassed high cash levels from overseas operations as earnings strengthened and shrinking growth rates provided fewer investment opportunities.Here we use the technology sector as a case study to: examine the magnitude of the issue, consider firm options for "trapped" cash and assess the valuation investors should place on trapped cash.