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The US Bureau of Economic Analysis (BEA) has reported that US multinational enterprises (MNEs) repatriated¹ more than four times the amount of foreign affiliate earnings in 2018 than in the years preceding enactment of the Tax Cuts and Jobs Act (TCJA), suggesting that the TCJA's international tax changes affecting repatriated foreign earnings played a significant role.² As a result of the large repatriations, the flow of earnings reinvested abroad reported by the BEA was negative in 2018, which reflects the repatriation of previously accumulated foreign earnings.³

In its March 27, 2019, Q4 2018 data release, the BEA reports that US MNEs repatriated nearly $665 billion of foreign earnings in 2018 compared to $155 billion in 2017. In addition, the repatriation of earnings from foreign affiliates of US MNEs in 2018 exceeded the annual earnings of those foreign affiliates by $142 billion, reflecting the repatriation of accumulated prior earnings of US MNE foreign affiliates.⁴ Significantly, annual repatriation has not exceeded annual earnings since 2005, when the American Jobs Creation Act of 2004's temporary repatriation holiday was in effect.

Figure 1 displays quarterly data on the repatriation and reinvestment of the earnings of foreign affiliates of US MNEs since 2014 and shows significant year-over-year increases in each quarter of 2018. Notably, quarterly repatriation exceeded quarterly earnings in Q1 2018 and Q2 2018, but not in Q3 2018 and Q4 2018. Reinvested earnings, for example, would be negative when current-period repatriation exceeds current-period earnings.

Implications

The treatment of the unrepatriated earnings of US MNEs played a significant role in the debate surrounding the TCJA. Ultimately, the TCJA imposed a one-time deemed repatriation transition tax on post-1986 earnings at 15.5% (cash and cash equivalents) and 8% (non-cash) rates. Advocates of the TCJA suggested this change would encourage US MNEs to bring these unrepatriated earnings back to the United States, funding investments and spurring economic growth. Although further analysis would be required to estimate the growth effects of the repatriation of these earnings, the BEA data suggests the TCJA significantly facilitated the repatriation of formerly unrepatriated foreign earnings.

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ENDNOTES

¹ Repatriated earnings are dividends paid by foreign affiliates of US MNEs to the US parent. They represent a flow of funds into the United States. Those funds can be used for a variety of purposes, including as a source for additional investment in the United States. Repatriated earnings of the foreign affiliates of US MNEs bear no relationship to the flow of foreign direct investment (FDI) into the United States. Inbound FDI represents investments in US businesses made by foreign incorporated or organized multinational businesses.

² The Joint Committee on Taxation estimated that one of those changes, the TCJA's one-time transition tax on accumulated prior earnings, would raise $338.8 billion of revenue for the federal government. See Joint Committee on Taxation, Estimated Budget Effects of the Conference Agreement for H.R.1, The "Tax Cuts and Jobs Act," December 18, 2017 (JCX-67-17).

³ The BEA definition of reinvested earnings of foreign affiliates of US MNEs differs from the permanently reinvested earnings (PRE) concept reported on company financial statements. One difference is that the BEA measure is an annual flow. It is the difference between profits earned and dividends repatriated in each year. In contrast, PRE (as typically discussed) is a stock and refers to cumulative unremitted foreign earnings for which no US income tax expense from repatriation is recognized on a financial statement. The PRE designation applies when facts and circumstances suggest the earnings will be indefinitely invested abroad, and this is a second major difference from the BEA concept, which does not require earnings to be indefinitely invested abroad. It is possible to compute the change in the stock of PRE over the course of a given year, and that would give a flow somewhat analogous to the BEA flow. However, the two flows would not be identical because the BEA measure imposes no requirement for permanence. For example, foreign earnings could be neither PRE nor repatriated if the earnings are abroad, but are not expected to be abroad indefinitely.

⁴ These trends are the reason US outbound FDI was negative in 2018.