May 18, 2011 / 10:03 PM / 6 years ago

US offshore accounting may leave investors in dark

* Much offshore cash not disclosed, analysts say

* SEC steps up questions about overseas cash

By Dena Aubin

NEW YORK, May 18 (Reuters) - U.S. regulators want some companies to tell investors how much of their cash they hold in other countries to clarify how much money a company has when it needs it.

Accounting rules give companies an incentive to keep money abroad if they earn it in other countries. But investors may not know that if the company repatriates the money, it may have to pay a big tax bill.

"To the extent that that cash is outside the United States, it might not be readily available," said Credit Suisse analyst David Zion. "A company might not be as liquid as it initially appears."

The question has become more relevant lately. U.S. businesses have $1.9 trillion on their books, according to the Federal Reserve, spurring questions about why it is not being spent on hiring or stock dividends.

For some companies, one reason may be that money is effectively trapped overseas because of the tax penalty for bringing it home.

Overseas profits can make it appear that a company's cash flow is booming, when in reality a rational manager would not tap the offshore cash, said Jack Ciesielski, publisher of The Analyst's Accounting Observer.

The opacity around a company's cash holdings arises because of complex accounting rules and slightly different tax rules.

For the Internal Revenue Service's purposes, companies usually do not have to pay U.S. taxes on earnings generated overseas until they come home. When that money does come back, companies get a credit for foreign taxes they paid overseas.

Since many companies do not disclose how much of their cash is overseas, is unknown how much of the nearly $2 trillion in cash on U.S. companies' books is stashed abroad.

SEC ASKS QUESTIONS

Under the generally accepted accounting principles used to report results to investors, tax expense must usually be recognized on this profit as soon as it is earned.

There's an exception to this rule, though: if management intends never to bring the cash back to the parent company, it does not have to record a tax expense.

Most companies choose to use this exception because it makes their profit higher than it would be otherwise. But that means the offshore money must stay offshore.

"You get lock-in -- the funds remain abroad even if the company would have been better off bringing them home," said Daniel Shaviro, a tax professor at New York University law School.

The Securities and Exchange Commission has been homing in on overseas earnings.

Since the beginning of 2009, the agency has sent comment letters to 39 companies on the subject of permanently invested foreign earnings, up from four companies during the previous three years, according to an analysis by Audit Analytics.

In some cases, regulators asked companies to disclose how much of their cash is overseas, or explain why they did not divulge the tax liability that has been deferred.

Credit Suisse's Zion said he could find only 54 companies in the S&P 500 that disclosed how much of their cash was offshore.

The amounts are huge at some companies, especially in the technology and health care businesses. Nearly 90 percent of Oracle Corp's ORCL.O $18.5 billion cash pile was outside the United States as of its latest annual report, while almost 87 percent of Amgen Inc's (AMGN.O) $17.4 billion was offshore.

BIG BUSINESS SEEKING TAX BREAK

Investors who know where to look can find information about untaxed foreign earnings. But even that is reported just once a year in annual reports, and is buried in footnotes, Ciesielski said.

Accounting rules should explicitly require more information on overseas income and cash balances, and that information should be reported quarterly, so investors can understand more about their nature, Ciesielski said.

Even better would be to scrap the accounting rule that allows companies to ignore deferred taxes on overseas earnings, he said.

In reality, many companies eventually want or need to bring the earnings home and petition lawmakers for a tax holiday, as they are doing now, he said.

Lawmakers in Congress last week introduced legislation that would allow a temporary tax break on overseas earnings brought back to the United States, though the measure faces an uphill climb. For details click on [ID:nN11273407].

The corporate lobbying group Win America, which includes such major companies as Google Inc (GOOG.O), Pfizer (PFE.N) and Microsoft (MSFT.O), backs the legislation. (Editing by Dan Wilchins and Robert MacMillan)

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