A sudden drop in the stock of US Treasury debt held in Ireland has fuelled speculation that US multinationals may be shifting some of their gigantic cash piles back to the United States in response to changes in how foreign earnings are taxed.
After rising six-fold since 2012, Irish-based holdings of US Treasuries fell by $13.5 billion (€11.2 billion) in February, according to data from the US Treasury International Capital, or TIC – their biggest ever monthly drop.
"While one data point doesn't make a trend, this is the biggest monthly decline in Ireland's Treasury holdings since the data became available, and coincided with the hotly discussed U.S. corporate repatriation theme," Bank of America Merrill Lynch analyst Carol Zhang told clients.
Ireland is the third-biggest overseas home to holdings of US Treasury securities – a whopping $314 billion (€260 billion) of paper that is almost on par with the state’s annual economic output.
Fund management hub
That is partly because Dublin is a major centre for international fund management and custody businesses, but also reflects Ireland’s hosting of the European hubs of US technology and pharmaceutical companies.
Apple, Google, Microsoft and Pfizer all have long-established Irish operations and large amounts of cash to bank outside the United States.
At least one - Pfizer - bases some of its treasury management operations in the Republic and Linkedin profiles show staff employed there in "fixed income management".
These subsidiaries are not required to publish separate accounts, and so it is unclear how much of their cash might be held in the Republic.
The TIC release for February, the latest month for which data is available, meanwhile tracks only the registered location of US government securities held overseas, not who owns them.
There is no evidence in the data to show which companies might be returning cash to the United States or indeed whether the drop is down to repatriation.
But with US bond yields hitting four-year highs recently, analysts see some signs of selling. ING debt strategist Padraic Garvey said the TIC figures indicated "liquidation of dollar-denominated products ... the data is pointing in the logical direction".
Ireland’s central bank said it could not comment on official US data. It said its own analysis showed the Irish financial sector’s holdings of Treasuries had been stable in 2017, with no 2018 data yet available.
Could the fall be a one-off? A senior banker at a custodian firm said he had not heard of any bond portfolio-management mandates being pulled recently. He speculated that the drop was a one-off event caused by changes to a single company’s balance sheet.
Apple tax claim
The $13.5 billion figure is almost the same as the amount iPhone maker Apple needs to repay to the Irish exchequer - €13 billion - after the European Commission ruled the firm had received unfair tax incentives from Dublin.
Apple and Ireland are both appealing the ruling but Dublin has set up an escrow account for the cash and in early March chose Bank of New York Mellon to administer it.
Apple declined to comment.
Filings with the US Securities and Exchange Commission show Apple held almost $60 billion of US government debt at the end of 2017. Google held $37 billion and Microsoft held nearly $120 billion of government and agency debt. The filings do not show where the Treasuries are held.
But if US, not European, tax payments drove February’s data change, Treasury holdings in the Republic as well as other offshore locations are likely to fall further.
“If the decline was truly a reflection of offshore cash repatriation, Ireland’s Treasury holdings should continue to decline,” said BAML’s Zhang, who estimates the seven top US firms hold more than $200 billion in Treasuries.
$3 trillion offshore
By some estimates, US multinationals hold over $3 trillion worth of worldwide profits offshore, in cash as well as various securities, the consequence of arrangements allowing them to “defer” paying U.S. tax unless they repatriated the money.
But under changes unveiled late last year, US companies will be taxed on profits accumulated abroad, whether or not the money is repatriated. A lower tax rate of 15.5 per cent and the opportunity to pay it over eight years offer a clear incentive to bring cash back to the US. - Bloomberg
