Shareholders, Market Might Win Most With Trump’s ‘Repatriation’ Tax

Shareholders and the stock market in general might be the big winners in a “repatriation tax," which is designed to bring more revenue, and jobs, back home to the U.S. from overseas.

The repatriation tax framework, which is part of the tax package moving through Congress, “puts America on a level international playing field and puts an end to the incentives for shipping jobs overseas,” According to the Trump administration.

Here’s how the administration makes its case for the repatriation tax:

“The framework transforms our existing “offshoring” model to an American model. It ends the perverse incentive to keep foreign profits offshore by exempting them when they are repatriated to the United States. It will replace the existing, outdated worldwide tax system with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake). To transition to this new system, the framework treats foreign earnings that have accumulated overseas under the old system as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. Payment of the tax liability will be spread out over several years.”

It’s not the first time Uncle Sam went the repatriation tax route. In 2004, the U.S. Congress approved an overseas “tax holiday” that brought back $312 billion to the U.S. This go around, the repatriation tax is expected to bring in $2.5 trillion in tax relief to U.S. companies, economists said.

Assuming that the repatriation tax goes through – it has already passed the U.S House of Representatives – who will benefit most from the “territorial tax” overhaul? Start with U.S. companies, who should really clean up, financial experts said.

According to a recent Bank of America Merrill Lynch study, U.S. companies will be bringing home their overseas cash from the repatriation tax, and use it to pay down debt, pay out dividends to shareholders, and buy back company stocks – moves that would highly benefit shareholders, as well. The Bank of America report also estimates the repatriation tax relief will boost the Standard & Poor’s 500 index by 3 percent.

“If repatriation is accompanied by an end to interest expense deductions, companies may choose to pay down debt over buybacks,” said Savita Subramanian, head equity strategist at Merrill Lynch, in a recent research note.

"Companies may also return the cash to shareholders by issuing a one-time special dividend: income remains in demand, given that both interest rates and dividend payout ratios remain historically low.

The word is already out on the tax, and corporate America is ready to go.

“When repatriation takes place, you’ll see companies lay out a concise plan to properly allocate the funds,” said David Hryck, a New York City tax lawyer and partner at Reed Smith. “For example, you should see an orderly distribution of capital through share buybacks, dividends, and possibly some debt repayments. You also could see an increase in research and development and mergers and acquisitions as companies put the cash to work.”

Shareholders of related companies would also be in a nice position to potentially see their investments gain in value, Hryck added. “Increases in dividends can help add money to investor's pockets and share buyback plans are a bullish sign for any shareholder,” he said. “The technology sector seems to be in the best position should this all take place.”

The benefits to shareholders shouldn’t be overstated, others point out.

“Remember that a company will do almost anything to increase its share price to benefit shareholders,” said Tom Wheelwright, chief executive officer of ProVision, a CPA firm in Tempe, Ariz., and author of the book Tax-Free Wealth.

“If they use the money to buy back stock, that should increase the price of the stock for everyone who holds shares,” he added. “A stock is priced based on its price-to-earnings ratio, which means that anything increasing the profits, such as a tax reduction, should increase the price. Fewer shares outstanding will also increase the price automatically.”

Shareholders may not be as thrilled if companies use the repatriation tax for internal purposes, Wheelwright said.

“The only action that would not benefit the shareholders,” he said, “would be if they used the money to pay big bonuses to their management, which of course is always a possibility.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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