May 1, 2018 / 11:04 AM / in a year

Analysis: Tax repatriation may explain drop in Irish T-bond holdings

LONDON (Reuters) - A sudden drop in the stock of U.S. Treasury debt held in Ireland has fuelled speculation that U.S. multinationals may be shifting some of their gigantic cash piles back to the United States in response to changes in how foreign earnings are taxed.

After rising s-fold since 2012, Irish-based holdings of U.S. Treasuries fell by $13.5 billion in February, according to data from the U.S. Treasury International Capital, or TIC —their biggest ever monthly drop.

“While one data point doesn’t make a trend, this is the biggest monthly decline in Ireland’s Treasury holdings since the data became available, and coincided with the hotly discussed U.S. corporate repatriation theme,” Bank of America Merrill Lynch analyst Carol Zhang told clients.

Ireland is the third-biggest overseas home to holdings of U.S. Treasury securities — a whopping $314 billion of paper that is almost on par with the country’s annual economic output.

That is partly because Dublin is a major centre for international fund management and custody businesses, but also reflects Ireland’s hosting of the European hubs of U.S. technology and pharmaceutical companies.

Apple, Google, Microsoft and Pfizer all have long-established Irish operations and large amounts of cash to bank outside the United States.

At least one — Pfizer — bases some of its treasury management operations in Ireland and LinkedIn profiles show staff employed there in “fixed income management”.

These subsidiaries are not required to publish separate accounts, and so it is unclear how much of their cash might be held in Ireland.

The TIC release for February, the latest month for which data is available, meanwhile tracks only the registered location of U.S. government securities held overseas, not who owns them.

There is no evidence in the data to show which companies might be returning cash to the United States or indeed whether the drop is down to repatriation.

But with U.S. bond yields hitting four-year highs recently, analysts see some signs of selling. ING debt strategist Padraic Garvey said the TIC figures indicated “liquidation of dollar-denominated products ... the data is pointing in the logical direction”.

Ireland’s central bank said it could not comment on official U.S. data. It said its own analysis showed the Irish financial sector’s holdings of Treasuries had been stable in 2017, with no 2018 data yet available.


Could the fall be a one-off?

A senior banker at a custodian firm told Reuters he had not heard of any bond portfolio-management mandates being pulled recently. He speculated that the drop was a one-off event caused by changes to a single company’s balance sheet.

The $13.5 billion figure is almost the same as the amount iPhone maker Apple needs to repay to the Irish exchequer — 13 billion euros — after the European Commission ruled the firm had received unfair tax incentives from Dublin.

Apple and Ireland are both appealing the ruling but Dublin has set up an escrow account for the cash and in early March chose Bank of New York Mellon to administer it.

Apple declined to comment.

Filings with the U.S. Securities and Exchange Commission show Apple held almost $60 billion of U.S. government debt at the end of 2017. Google held $37 billion and Microsoft held nearly $120 billion of government and agency debt. The filings do not show where the Treasuries are held.


But if U.S., not European, tax payments drove February’s data change, Treasury holdings in Ireland as well as other offshore locations are likely to fall further.

“If the decline was truly a reflection of offshore cash repatriation, Ireland’s Treasury holdings should continue to decline,” said BAML’s Zhang, who estimates the seven top U.S. firms hold more than $200 billion in Treasuries.

By some estimates, U.S. multinationals hold over $3 trillion worth of worldwide profits offshore, in cash as well as various securities, the consequence of arrangements allowing them to “defer” paying U.S. tax unless they repatriated the money.

But under changes unveiled late last year, U.S. companies will be taxed on profits accumulated abroad, whether or not the money is repatriated. A lower tax rate of 15.5 percent and the opportunity to pay it over eight years offer a clear incentive to bring cash home.

Credit analysts surveyed by J.P. Morgan Asset Management in March predicted the top 10 U.S. tech and pharma firms would repatriate at least $300 billion — a third of the cash they hold overseas — to take advantage of the tax cut.

“If you are a U.S. corporate, you have a window now to do something and a lot of them, if not all, are doing something,” said Bob Michele, head of global fixed income at JPM AM.

“They may not bring it all back this month or this year but they have started to bring some of it back.”

Analysing filings from the first quarter earnings reported by U.S. companies with big offshore cash balances, JPM AM noted a cumulative fall of almost $20 billion in these balances since 2017’s last quarter.

The figures do not include Apple, with a total overseas stash of $285 billion, which posts its results on Tuesday.

Reporting by Sujata Rao and Ritvik Carvalho; additional reporting by Dhara Ranasinghe and Saikat Chatterjee in London; Padraic Halpin in Dublin and Stephen Nellis in New York; Editing by Catherine Evans

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