SEC Staff Focus on Offshore Cash Holdings

The following post comes to us from Brian V. Breheny, partner at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden memorandum by Mr. Breheny, Andrew J. Brady, and Derek B. Swanson.

As reported recently in the press, the SEC staff has, with greater regularity, been issuing comments to companies seeking disclosure of the extent of offshore cash holdings and the impact of such offshore holdings on the company’s liquidity position.  In general, the staff appears to be concerned about the U.S. federal income tax consequences of repatriation of offshore holdings, especially where it appears those holdings serve as a key source of liquidity for the company on a consolidated basis.

Consistent with the SEC’s recent interpretive guidance on the presentation of liquidity and capital resources disclosures in Management’s Discussion and Analysis, the staff appears to be focusing its attention on companies that have significant offshore cash (and cash equivalents) holdings to enhance disclosures in respect of those cash holdings.  In particular, the staff has asked companies to, among other things:

  • consider providing enhanced disclosure of the amount of cash and investments held by foreign subsidiaries that would be subject to the potential tax impact associated with the repatriation of undistributed earnings on foreign subsidiaries;
  • describe (to the extent material) any significant amounts of cash and cash equivalents that may not be available for general corporate use because such amounts are held by foreign subsidiaries where the company considers earnings to be indefinitely invested; and
  • disclose whether or not the company would need to accrue and pay taxes if offshore cash holdings were repatriated, and whether or not the company intends to repatriate those funds.

While in some instances companies have agreed to provide the requested disclosure without any objection, other companies successfully have foreclosed further staff comments by responding that they do not expect restrictions or taxes on repatriation of cash held outside of the United States to have a material effect on the companies’ overall liquidity, financial condition or results of operations.

When responding to similar comments from the SEC staff, companies should consider the impact of any restrictions on repatriation of offshore cash holdings on the company’s overall liquidity position and be prepared to provide that disclosure in future SEC filings (to the extent not already disclosed); otherwise, the company should be prepared to include, in future filings, enhanced disclosure of the extent of offshore cash holdings and the potential impact on the company’s liquidity position.

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