James Zhan, Director of the UN Conference on Trade and Development (UNCTAD)'s Investment and Enterprise Division, addresses a press conference on the issue of the UNCTAD Global Investment Trends Monitor in Geneva, Switzerland, on Feb. 5, 2018. (Xinhua/Xu Jinquan)
The recently-passed U.S. tax cuts law will significantly affect global foreign direct investment (FDI) patterns, the UN Conference on Trade and Development (UNCTAD) said Monday.
The Tax Cuts and Jobs Act will impact multinational enterprises and foreign affiliates, accounting for almost 50 percent of global FDI stock, according to a special issue of the UNCTAD Global Investment Trends Monitor.
"The experience from the last tax break on the repatriation of capital in 2005 would indicate that multinationals could bring back almost two trillion U.S. dollars, leading to sharp reductions in global FDI stocks," said James Zhan, director of UNCTAD's investment division.
The U.S. government adopted the tax reform bill in December.
The changes to the corporate tax regime will significantly affect both investment in the United States and the investment positions of U.S. firms abroad, said UNCTAD.
U.S. MULTINATIONALS REACT
Almost half of global investment stock is either located in the United States or owned by U.S. multinationals.
The most significant change to the tax regime for multinationals is the shift from a worldwide system (taxing worldwide income) to a territorial system (taxing only income earned at home).
Under the old regime, tax liabilities on foreign income became payable only upon repatriation of funds to the United States.
As a result, U.S. multinationals kept their earnings outside the United States, says UNCTAD.
Measures in the tax reform include a one-off tax on accumulated foreign earnings, freeing the funds to be repatriated.
Retained earnings overseas of U.S. multinationals amount to an estimated 3.2 trillion U.S. dollars.
The 2005 Homeland Investment Act, the last tax break on funds repatriation, led firms to bring back to the United States two thirds of their foreign retained earnings.
Funds available for repatriation are currently seven times larger than in 2005.
Five high-tech companies alone (Apple, Microsoft, Cisco, Alphabet and Oracle) together hold more than 530 billion U.S. dollars in cash overseas -- one quarter of the total amount of liquid assets that are estimated to be available for repatriation.
INVESTMENT IN DEVELOPING COUNTRIES
About one quarter of U.S. outward stock of FDI is located in developing countries.
However, it is likely that a large part of the stock located in developing countries is invested in productive assets and therefore not easily repatriated.
"The impact on investment in the developing world remains to be seen. However, developing countries need real investments in productive assets, not cash parked overseas," said UNCTAD Secretary-General Mukhisa Kituyi.
The outcomes will also depend on reactions in other countries.