U.S. business investment abroad falls in 2018 due to corporate tax cut provisions

In the midst of the Trump administration’s ongoing trade war with China and efforts to ratify the U.S-Mexico-Canada trade pact, American business investment abroad fell by $62.3 billion to $5.95 trillion at the end of 2018 largely due to the treatment of exiled earnings in the 2017 corporate tax cut legislation, according to the Bureau of Economic Analysis (BEA).

The new BEA data relates to “foreign direct investment,” or FDI, which is defined as direct or indirect ownership or control by one foreign person or entity, of 10% or more of the voting shares of an incorporated U.S. business or an equivalent stake in an unincorporated enterprise. The FDI decrease in 2018, compared to $6.01 trillion in 2017, was due to the repatriation of accumulated prior earnings by U.S. multinationals from their foreign affiliate.

BEA data shows that the 2015 shortfall reflected a $75.8 billion decrease in the position in Latin America and other Western Hemisphere nations, primarily in Bermuda. By industry, holding company affiliates owned by U.S. manufacturers accounted for most of the decrease.

On the other hand, foreign direct investment into the U.S. jumped by $319.1 billion to $4.34 trillion at the end of 2018 from $4.03 trillion at the end of 2017. The increase mainly reflected a $226.1 billion increase in the position from Europe, primarily the Netherlands and Ireland. By industry, affiliates in manufacturing, retail trade, and real estate accounted for the largest increases.

Under the $1.9 trillion 2017 Tax Cuts and Jobs Act, a one-time deemed repatriation tax was imposed on foreign earnings accumulated after 1986 until the end of a company’s most recent fiscal year.  Under this provision, accumulated foreign earnings are deemed repatriated at a tax rate is 15.5% on cash earnings and 8% percent on earnings held in illiquid assets.

According to the BEA, the effects of the Tax Cut and Jobs Act on U.S. investment abroad generally eliminated taxes on dividends, or repatriated earnings, to U.S. multinationals from their foreign affiliates. Dividends of $776.5 billion in 2018 exceeded earnings for the year, which led to negative reinvestment of earnings, decreasing the investment position for the first time since 1982.

By country, nearly half of the dividends in 2018 were repatriated from affiliates in Bermuda and the Netherlands at $232 billion and $138.8 billion, respectively. Ireland was the third largest source of dividends, but its value is suppressed due to confidentiality requirements. By industry, U.S. multinationals in chemical manufacturing and computers and electronic products manufacturing repatriated the most in 2018 at $209.1 billion and $195.9 billion, respectively.

Globally, U.S. multinational conglomerates invested in nearly every country, but five countries accounted for more than half of the total position at the end of 2018. The U.S. direct investment abroad position remained the largest in the Netherlands at $883.2 billion, followed by the United Kingdom ($757.8 billion), Luxembourg ($713.8 billion), Ireland ($442.2 billion), and Canada ($401.9 billion).

By industry of the directly-owned foreign affiliate, investment was highly concentrated in holding companies, which accounted for nearly half of the overall position in 2018. Most holding company affiliates, which are owned by U.S. parents from a variety of industries, own other foreign affiliates that operate in a variety of industries.

By industry of the U.S. parent, investment by multinationals in the manufacturing sector accounted for 54% percent of the position, followed by companies in finance and insurance at 12.1%. Overall, U.S. MNEs earned income of $531 billion in 2018 on their cumulative investment abroad, a 12.8% increase from 2017.

By country of the foreign parent, five countries accounted for more than half of the total position at the end of 2018. The United Kingdom remained the top investing country with a position of $560.9 billion. Canada, at $511.2 billion, moved up one position from 2017 to be the second largest investing country, followed by Japan in the third spot at ($484.4 billion). The Netherlands ($479 billion) and Luxembourg ($356 billion) switched places as the fourth and fifth largest investing countries at the end of 2018.

Foreign direct investment in the U.S. was concentrated mostly in the manufacturing sector, which accounted for 40.8% of the position. There was also sizable investment in finance at 12.1%. Foreign multinationals earned income of $208.1 billion in 2018 on their cumulative investment in the U.S., a 19.7% increase from 2017.

According to the BEA, which is the economic research group housed in the U.S. Department of Commerce, updates to detailed FDI date for 2016 and 2017 was delayed due to the impact of the partial federal government shutdown that started in late December 2018. BEA will update data for those years in 2020 along with more robust statistics from 2018, including statistics on FDI investment in all 50 states.

In its latest data, Washington, D.C.-based Organization for International Investment (OFII), which represents privately-held foreign companies with U.S. operations, said there are 47,000 workers in Arkansas employed by 464 international companies with operations in the Natural State. Nearly 30,000 of those jobs are in  the manufacturing sector.