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under the Blueprint (over eight years). The Tax Foundation similarly estimates that a repatriation act could drive spending amounting to $185-200bn in revenues through 2025, which could help fund infrastructure/defense spending. S&P 500 companies could bring back over $1tn - mostly in Tech & Health Care Our FX team has written that US corporates in aggregate (including Financials) hold ~$2tn in cash overseas, and their work suggests that nearly half is concentrated within 20 companies. Similarly, as we discuss below, half of the repatriated cash following the 2004 Homeland Investment Act came from just 15 companies, predominantly in Pharma and Tech. Our own analysis of the S&P 500 (based on filings and estimates from our analysts) suggests that non-Financials in the S&P hold approximately $1.2tn overseas, nearly three-quarters of which is in Tech and Health Care (Chart 4). Chart 4: Estimated overseas cash as a % of mkt. cap by sector for the S&P 500 (excludes Financials and Real Estate) —s Cr 3s 14% 12% 10% 8% 6% 4% 2% 0% Overseas cash as a % of market cap Tech Industrials Materials Staples Cons. Disc. Energy Utilities Telecom © 2 o oO = oS ® a S&P 500 ex. Fins. & Real Estate* Note: Overseas cash based on company disclosures where available, BofAML analyst estimates, and BofAML US Equity & Quant Strategy estimates using overseas sales as a guide where the former two were not available. For some companies, analyst estimates are for total accumulated overseas profits (which may not all bein cash). *S&P ex. Fins. & Real Estate cash is as a % of total S&P 500 market cap Source: Bloomberg, FactSet, BofA Merrill Lynch US Equity & US Quant Strategy, BofA Merrill Lynch Global Research Repatriation in context: a look back at 2004 The last repatriation holiday in the US was the Homeland Investment Act (HIA) of 2004 (part of the American Jobs Creation Act), which allowed for a one-time repatriation of foreign earnings by US multinationals at a reduced effective tax rate of 5.25% (vs. the statutory 35% rate), based on an allowable exemption of 85% of foreign earnings from US taxes (35% x [1-85%] = 5.25%). This deduction could be claimed in the tax year beginning before or after the passage date in Oct. 2004. Approximately $300bn was repatriated, according to the Bureau of Economic Analysis (BEA)’s U.S. International Transactions Accounts Data, vs. an average of S60bn over the prior five years. The IRS estimates’ that 843 US companies took advantage of the act. Despite HIA’s intent; most repatriated cash was spent on buybacks/dividends Despite the U.S. Treasury Department’s guidelines that repatriated earnings should be spent on capital investment, R&D, M&A, and other pro-growth uses such as hiring, this was not ultimately the result: the National Bureau of Economic Research (NBER} estimates? that $0.92 of every $1.00 brought back was used to return cash to shareholders ($0.79 for buybacks and $0.15 for dividends)’, and that repatriation ultimately did not lead to a pick-up in capex, employment or R&D. In fact, a 2011 report by US Senate Permanent Subcommittee on Investigations® found that the top 15 ? Redmiles, Melissa: “The One Time Received Dividend Deduction”, https://www.irs.gov/pub/irs- soi/O8codivdeductbul.pdf 3 Dhammika Dharmapala, C. Fritz Foley, and Kristin J. Forbes: “Watch What | Do, Not What | Say: The Unintended Consequences of the Homeland Investment Act”, NBER Working Paper No. 15023, June 2009, http://www.nber.org/papers/w15023.pdf. 4 The $0.79 for buybacks and $0.15 for dividends does not sum to the $0.92 cash return figure due to the NBER’s calculation methodology. 5 United States Senate Permanent Subcommittee on Investigations: “Repatriating Offshore Funds: 2004 Tax Windfall for Select Multinationals”, Majority Staff Report, October 11, 2011 Bankof America <> Merrill Lynch Equity Strategy Focus Point | 29 January 2017 7 HOUSE_OVERSIGHT_023075