Half trillion dollars cash offshore as 14 US tech & pharma groups cut foreign tax rate to 10%

The Financial Times says today that 14 US tech & pharma groups, including  Microsoft, Google and Johnson & Johnson, have cut their average tax rate by a quarter over the past eight years as they parked more cash offshore than all other US companies combined. Almost a half trillion dollars in cash is technically held offshore and according to an FT survey, they paid an average overseas tax rate of just 10% last year.

Over the past eight years, overall tax rates fell as their lightly taxed foreign profits grew at nearly three times the pace of their foreign sales.

The FT says that the figures are likely to be viewed by critics as further evidence of profit “shifting” from high-tax to low-tax countries such as Ireland, Singapore and Bermuda. Martin Sullivan of Tax Analysts, a US publisher, said the downward trend was “enormous.”

Wealth distribution among US corporations is becoming ever more concentrated, with the top 1% controlling 36% of the overall cash and short-term investments versus 27% five years ago, Standard & Poor’s Ratings Services said in a report published last Wednesday.

In all, the top 1% increased its cash and short-term investments by 11% year over year, or more than $50bn, during 2013. The five largest cash holders belonged to the technology industry, and a total of seven technology issuers accounted for 57% of the wealthiest 1%. Health care companies placed five companies among the 1% and made up 21% of the total. As expected, the rating distribution was strongly biased toward investment grade, with 15 out of 18 issuers in the ‘A’ rating category or higher, with only one speculative-grade issuer (General Motors) among the richest 1%.

Hoards of the top 20% companies account for 89% of total cash. The rest – four out of five companies – control the remaining 11% of wealth.

“We attribute the growing wealth gap to rising overseas cash balances, which remain unrepatriated due to US tax consequences, and strong credit markets, which have enabled the top 1% to ‘synthetically repatriate’ the cash through cheap debt for shareholder returns,” said Standard & Poor’s credit analyst Andrew Chang.

The report, “2014 Cash Update: Corporate America’s Richest 1% Keep Getting Richer,” notes that despite the higher debt, the credit profiles of the top 1% remain intact, with their net wealth, or net cash positions, even stronger today than they were five years ago. Without a clear path to corporate tax reform, Standard & Poor’s expects the wealth inequality to widen over the near term.

Fortune magazine reports in its current issue that a scholarly study released earlier this year finds that CEOs and other executives are better compensated at corporations with larger cash holdings than the rest of their corporate brethren. That study – from Florida State University and the University of Washington – finds that CEOs and other top executives see their compensation increase at companies with larger cash holdings in a way that is independent of company performance. “An increase of one standard deviation of cash holdings corresponds to an increase of $2.5m in total CEO compensation,” according to the authors of “The Compensation Benefits of Corporate Cash Holdings.”