Withholding tax against the rate spread, worked on one subsidiary, and why waiting rarely avoids the tax.
Repatriating trapped cash is worth the withholding tax when the interest the group saves on the money that arrives, less the interest the cash was earning where it sat, repays the tax within the horizon that matters. On an illustrative 30,000,000 held by a subsidiary, a 10 per cent withholding tax costs 3,000,000, and 27,000,000 used to repay a revolver at 6.50 per cent instead of earning 3.00 per cent locally gains 855,000 a year: a payback of 3.51 years. Above a local deposit rate of 5.85 per cent it never pays on interest alone.
Worked in full in Treasury Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Cash is trapped when it sits in an entity that cannot move it to the rest of the group without cost or permission: dividend withholding tax, exchange controls, minimum capital rules, a joint venture partner's consent, or a lender's restriction on upstream payments. It counts in reported cash and in most net debt definitions, and it does not pay the group's suppliers. Separating it from what the treasurer can actually use is the subject of how much of a company's cash is actually available.
Where the only barrier is a tax, it is a priced barrier, and the decision is arithmetic.
| Input | Value |
|---|---|
| Cash in the subsidiary, surplus to its own needs | 30,000,000 |
| Dividend withholding tax | 10% |
| Group's marginal borrowing cost, revolver drawn | 6.50% |
| Deposit rate earned by the subsidiary | 3.00% |
| Horizon for the decision | 5 years |
Interest is taken before corporate tax on both sides. Where the two jurisdictions tax interest at similar rates, that scales both legs together and leaves the comparison in the same direction; the withholding tax, assumed here to be neither deductible nor creditable against tax at the parent, is the asymmetric term. Where a credit or a treaty rate applies, use the net rate that is actually lost.
Step 1, the cost. 30,000,000 × 10% = 3,000,000 withheld. 27,000,000 arrives.
Step 2, the annual benefit. The 27,000,000 repays revolver drawings, saving 27,000,000 × 6.50% = 1,755,000 a year. The subsidiary stops earning 30,000,000 × 3.00% = 900,000. Net: 855,000 a year.
Step 3, payback and break-even.
Payback = cash × WHT / (cash × (1 − WHT) × group rate − cash × local rate)
= 3,000,000 / 855,000 = 3.51 years
Break-even local rate = (1 − WHT) × group rate = 0.90 × 6.50% = 5.85%
Excel: =Cash*WHT/(Cash*(1-WHT)*GroupRate-Cash*LocalRate)
Within the five-year horizon the decision pays as long as the local deposit rate stays below 3.85 per cent: at that rate the annual benefit is exactly one fifth of the tax.
| Local deposit rate | WHT 5% | WHT 10% | WHT 15% |
|---|---|---|---|
| 2.0% | 1.2 | 2.6 | 4.3 |
| 3.0% | 1.6 | 3.5 | 5.9 |
| 4.5% | 3.0 | 7.4 | 14.6 |
| 6.0% | 28.6 | never | never |
The break-even local rate falls as the tax rises: 6.17 per cent at 5 per cent withholding, 5.85 at 10, 5.53 at 15. In a high-rate country the cash may well earn more where it is, and leaving it there is the right answer on interest. The decision then turns on liquidity, not yield: whether the group needs the money to clear its own minimum without the revolver, a test worked in does an undrawn revolver count as liquidity.
The two measures the board watches move in opposite directions. Reported cash falls by 30,000,000 and debt by 27,000,000, so net debt rises by the 3,000,000 of tax: on a leverage covenant measured on reported cash, repatriation makes the ratio slightly worse. Available liquidity, the cash the parent can actually pay suppliers with plus undrawn facilities, rises by 27,000,000, because revolver capacity that was drawn is now free. A treasurer who reports only net debt will see a cost; one who reports headroom will see the point of the exercise. Show both lines when the decision goes to the board, with the covenant and the policy minimum beside them.
The payback treats the 3,000,000 as a cost the group could avoid by waiting. Usually it cannot. If the cash will come home eventually, as most surplus cash does, the tax is paid either way, on a larger amount, and the real question is when.
| Timing | Calculation | Value at year 5 |
|---|---|---|
| Repatriate now, repay the revolver | 27,000,000 × 1.0655 | 36,992,340 |
| Hold locally, repatriate in year five | 30,000,000 × 1.035 × 0.90 | 31,300,400 |
| Advantage of repatriating now | 5,691,940 |
Waiting does not avoid the tax: it grows it to 3,477,822. Only cash that will genuinely never leave the subsidiary, reinvested in its own business, escapes the withholding, and that cash was never available to the group in the first place. Even against that case, repatriating now is ahead by 2,214,118 after five years on these rates, because the 6.50 per cent the group saves compounds faster than the 3.00 per cent the deposit earns.
Price the tax against the rate spread: 3,000,000 against 855,000 a year here, a payback of 3.51 years, and no payback at all above a local rate of 5.85 per cent. Then ask whether the cash would come home eventually anyway, because if it would, the tax is a timing cost and earlier is usually cheaper. The trapped balances and the slice worth paying are worked on one company in the free workbooks for this book.
Cash that a group reports but cannot move to where it is needed without cost or permission, because of withholding tax, exchange controls, capital rules or a partner's consent. In the worked case 30,000,000 sits in a subsidiary and only 27,000,000 would arrive after a 10 per cent dividend withholding tax.
When the local deposit rate is above the group's borrowing cost times one minus the withholding rate. With group borrowing at 6.50 per cent and 10 per cent withholding, that break-even is 5.85 per cent; above it the cash earns more where it sits, unless the group needs the liquidity.
Only if the cash never comes home. Holding 30,000,000 locally at 3.00 per cent for five years and then repatriating it pays 3,477,822 of tax instead of 3,000,000, and leaves the group 5,691,940 worse off than repatriating now and repaying debt at 6.50 per cent.
This article is one calculation from Treasury Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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