The recent US tax overhaul could prompt US multinationals to repatriate about US$2 trillion, making a significant impact on global foreign direct investment (FDI), the UN said on Monday.
The forecast from the UN Conference on Trade and Development (UNCTAD) came just more than a month after US President Donald Trump signed into law a sweeping and controversial overhaul of the US tax code, offering dramatic tax cuts for corporations and temporary reductions for individuals.
In its annual report on trends in FDI — a measure of cross-border private-sector investments — the UN agency said that the US tax reform package would have “significant implications for global FDI patterns over the coming years.”
The tax overhaul “will affect the multinationals and their affiliates,” James Zhan, who heads UNCTAD’s investment and enterprise division, told reporters in Geneva, Switzerland.
The affected multinationals account for nearly half of the about US$26 trillion in FDI stock, which measures the total level of global direct investments at a given point, he said.
“The reform [could] lead to the repatriation of almost US$2 trillion of returned earnings,” Zhan said, referring to the amount of easily repatriated FDI cash US multinationals are estimated to be holding abroad.
The tax bill, which slashes the corporate tax rate from 35 to 21 percent, could entice some businesses to return with the promise of higher profits.
It could lead to increased global tax competition, UNCTAD said.
“Over the longer term we may see that the US tax reform will trigger tax reforms worldwide,” Zhan said.
However, according to the UN agency’s analysis, the most significant change in the US tax regime for multinationals is a shift away from a worldwide system, in which income earned around the globe was taxed, but was only payable when funds were repatriated to the US.
Under the new territorial system, where Washington only taxes income earned in the US and is offering multinationals to pay a one-off tax on accumulated foreign income, the companies have much less incentive to hoard their foreign-made income outside the country.
UNCTAD said that the last time the US offered a tax break on the repatriation of funds in 2005, firms brought home two-thirds of their foreign-retained earnings.
“Funds available for repatriation are today seven times larger than in 2005,” UNCTAD added.
The effects of a possible major repatriation of funds remained unclear, the UN agency said.
About one quarter of US FDI stock is in developing countries, but most of that has been invested in productive assets and is therefore not easily available in cash form, UNCTAD said.
Offshore financial centers in places like the Netherlands, Britain, Luxembourg and Bermuda, where US FDI stock is stored in cash, would likely see the biggest drain, it added.
While repatriating that cash would likely have little effect on projects in the short term, “longer term, it would reduce FDI outward stock, which means the investible funds for the future ... is reduced,” Zhan said.
It also remains uncertain how the repatriated funds would be used in the US.
The 2005 tax break has been criticized for creating a windfall for multinationals and their shareholders without leading to significant increases in capital spending or jobs, UNCTAD said.
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