by Repatriation of profit is the ability of a firm to send foreign‐earned profits or financial assets back to the firm’s home country in hard currency such as USD, EUR and others, after meeting the host nation’s tax obligations.
Proponents of profit repatriation argue that it encourages foreign direct investments (FDIs). Opponents argue that profit repatriation boosts another country’s economy. Accordingly, different countries impose different restrictions for profit repatriation.
Repatriation in a larger context refers to anything or anyone that returns to its country of origin, which can include foreign nationals, refugees, or deportees.
In the corporate world, repatriation usually refers to the conversion of offshore capital back to the currency of the country in which a corporation is based.
In the global economy, many corporations based in the United States generate earnings abroad. However, today many companies choose not to repatriate their offshore earnings in order to avoid corporate taxes charged on repatriated funds.
Individuals might also repatriate funds. For example, Americans returning from a visit to Japan typically repatriate their currency, converting any remaining yen into U.S. dollars. The number of dollars they receive when they exchange their remaining yen will depend on the exchange rate between the two currencies at the time of the repatriation.
Risks Associated with Repatriation
When companies operate in more than one country, they generally accept the local currency of the economy that they transact business. For example, though Apple is a U.S. based corporation, an Apple store in France will accept euros as payment for product sales since the euro is the currency that French consumers transact in and get paid from their employers.
When a company earns income in foreign currencies, the earnings are subject to foreign exchange risk, meaning they could potentially lose or gain in value based on fluctuations in the value of either currency.
If Apple earned 1,000,000 euros in France from product sales, at an exchange rate of 1.15 dollars per euro, the earnings would equal $1,150,000 or (1,000,000 euros * 1.15). However, if the next quarter, Apple earned 1,000,000 euros, but the exchange fell to 1.10 dollars per euro, the earnings would equal $1,100,000 or (1,100,000 euros * 1.10).
In other words, Apple would have lost $50,000 in earnings based on the exchange rate decline despite having the same amount in sales in euros for both quarters. The volatility or fluctuations in the exchange rate is called foreign exchange risk, which companies are exposed to when they do business internationally. As a result, the volatility in exchange rates can impact a company’s earnings.
