US companies have a presence throughout the world and benefit from exposure to many economies, including emerging markets. This advantage has led to world prominence and been a major factor in earnings growth over the years. This diverse and ever expanding source of earnings has made many US companies profitable as we suffer through this recession.
Companies often delay repatriating their earnings from foreign sources and because of this avoid income tax on the funds. Taxes are an expense and expenses reduce profits. The Obama administration needs funds to pay for the massive stimulus programs and this week proposed to tax all foreign earnings of US companies. The hope is that this will add to tax revenues and discourage shifting jobs and factories overseas.
In the end this will result in lower earnings for the US multinational companies. Below is a breakdown of the dollar amount of earnings companies in the major economic sectors report from overseas. This tax proposal is not insignificant and could impact earnings by as much as 15%. Healthcare and technology companies would be hit particularly hard.
The timing of this tax is critical as earnings are depressed by slow global growth. An added tax of any amount would further reduce earnings and could dampen stock price performance. Uncertainty is also increasing for healthcare companies as reform initiatives take center stage. Stage tuned!