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Author: rev2217 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 156914  
Subject: Re: Repatriation tax Date: 3/4/2013 7:06 PM
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esxokm,

I was interested in an opinion or two, and perhaps an explantion, on the issue of the repatriation tax. I am not certain I fully understand it and its effects on shareholder value.

I believe MSFT was at one time mentioned in the discussion of this issue. But this goes beyond MSFT and many large companies in the S&P 500.

If I understand the issue -- and I am not an expert on tax science -- companies do not want to bring money generated overseas back to the U.S. to pay dividends because they have to pay a tax on top of the tax they paid locally on foreign shores. But, if MSFT, for sake of simplicity, earned $1 billion in profit overseas, when it is reported in the 10K, does that $1 billion get added in to the amount that stays on foreign shores, or is the after-tax number reported? In other words, does MSFT get an earnings benefit by not realizing repatriated profit?


I'm not going to pretend to understand how a "repatriation tax" works or what its consequences will be.

My other question is, what do shareholders think of this? If MSFT makes $1 billion overseas, and it could bring back, say, $600 million to pay in dividends based on after-tax numbers, wouldn't shareholders want the company to pay the tax and get their money? I don't currently own MSFT, but I, like probably everyone here, owns an S&P mutual fund, and I would like all companies to maximize their dividend payments. I wanted to hear an explanation as to how MSFT's shares could be hurt by paying this kind of tax. Thank you for reading.

Unfortunately, the answer to this question is not so simple.

Actually, one of the innovations of the so-called "Bush" tax cuts was to tax dividends at the same rate as long term capital gains. Before this change took effect, many companies, including Microsoft, had adopted policies of systematically buying back their shares on the open market, diminishing the number of shares that remained outstanding and thus increasing the fraction of the company represented by each outstanding share, rather than paying dividends. This obviously caused the price of the remaining shares to escalate, whereupon the company would split the shares and investors who wanted income could sell the shares gained in the split to realize the income as long term capital gains rather than as dividends taxed as ordinary income.

Now, what is the impact of the introduction of a "repatriation tax" into this equation? The incentive to buy back shares rather than paying dividends might be even stronger, especially if -- and that word "if" is very important here -- the company can buy back its shares on foreign markets without repatriating assets that would become subject to taxation if repatriated. But even if the company must repatriate assets in order to buy back its own shares, the expiration of the favorable tax treatment for dividends has brought back the incentive for companies to buy back shares their own shares rather than paying dividends. The only question is how quickly companies will respond to the change in the tax code.

Norm.
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