Only a handful of companies are so far taking advantage of a year-long US tax holiday on repatriated foreign earnings because proposed guidelines limit using the funds to directly benefit shareholders, experts said. Those showing early interest in bringing back these billions have been concentrated in the pharmaceuticals sector, where companies are opting to use the cash on their hefty research and development needs.
Healthcare group Johnson & Johnson said this week it was bringing back $11 billion while Bristol-Myers Squibb Co announced it was bringing back $9 billion this year. Rival Schering-Plough Corp said it is bringing back $9.4 billion.
Outside of pharmaceuticals and possibly technology - another sector with significant R&D needs - companies are not expected to repatriate as much as initially expected because the cash is unlikely to generate worthy returns, even with a lower tax rate, experts said.
"I don't think there will be a mass movement of money, and I don't think it will have a very big impact on shareholders," said Austan Goolsbee, an economics professor at the University of Chicago's Graduate School of Business.
America's biggest 500 companies have over half a trillion dollars of past foreign earnings - lying in bank accounts outside the country or invested in foreign assets - that are not subject to US corporate income taxes until they are repatriated to the United States.
But companies can now call on those earnings by paying only 5.25 percent taxes rather than the usual 35 percent rate, under the American Jobs Creation Act signed into law last October. This opportunity is valid for a year.
According to Interal Revenue Service guidelines issued earlier this month, the money cannot be used to buy back shares or to pay dividends. It has to be invested in new projects that will create new jobs, or used to repay debt or finance day-to-day operations.
But experts note a loophole that might help some companies get around this, as the guidelines say companies are not required to trace or segregate the repatriated funds.
"Companies simply must demonstrate that an amount equal to the amount of repatriated funds is invested under the domestic reinvestment plan," the IRS said in its guidelines.
This means if companies use the repatriated cash to take care of debt or domestic expenses, then some of the freed-up home earnings could be used to pay dividends and share buybacks.