The US government has boxed itself into a corner over billions of dollars held in foreign accounts by Apple Inc. (Nasdaq: AAPL) and other American technology companies, which are refusing to repatriate their funds due to tax concerns.
Apple executives said in a conference call today that $64 billion of the company's nearly $100 billion cash hoard is in overseas accounts, and that they have no plans to move the money to the United States, because they believe the tax payments would be excessive. "Current US laws provide a disincentive" to repatriating funds from foreign countries, Apple CFO Peter Oppenheimer said during the call. "Repatriating the cash from overseas would result in considerable tax payment. We have made our views known to the government."
Oppenheimer didn't have to spell it out further. The implications are clear: The US government won't see a penny in tax payment on foreign funds by Apple unless the laws governing the repatriation of such profits become more favorable.
What does Apple plan to do with its funds? My understanding of what the company plans to do boils down to three points:
- Keep foreign profits foreign. Profits generated by Apple will remain overseas for the foreseeable future. (I discuss this further below.) The company won't be touching the tens of billions of dollars it makes in foreign markets unless the US government makes a drastic change to the laws governing fund repatriation. The goal here is to defer tax payments on the funds indefinitely.
- Pay dividends. Apple plans to start paying dividends, starting at $2.65 per share in the quarter starting July 1. Oppenheimer said the company expects to pay about $10 billion in dividends in the first year. It hopes this will help it attract investors who may be interested in the quarterly income.
- Buy back shares. Apple is devoting $10 billion to a share repurchase program starting in fiscal 2013. This program will be spread over three years, and the company expects to spend $4 billion on this in the first year. The goal here is to reduce the dilution that typically results from the issuance of stock options to employees, executives, and directors.
These actions, some of them expected, only partly solve the problem facing Apple. The foreign funds are quickly becoming a gigantic cash mountain that could easily top $100 billion over the next year, according to one of the analysts on the conference call. Apple's CFO insisted that it won't budge from its position, regardless of the size of the funds. Since Apple and other American enterprises can postpone tax payment on funds generated in foreign markets indefinitely until they are repatriated, it's obvious that the government won't see any of this unless the laws are changed.
Technology companies have been asking the US government for years to make its tax laws on foreign funds friendlier. They would like the government to reduce or even eliminate the taxes due on profits generated in foreign countries, in addition to slashing the general corporate tax rates. In 2005, the government gave companies a one-time tax break that resulted in the repatriation of about $312 billion of funds. The businesses had promised to spend most of this money on job-creation programs. Instead, according to the New York Times, "92 percent of that money was returned to shareholders in the form of dividends and stock buybacks."
This is why the government is hesitant to agree to this request, particularly during a time of high unemployment. Will anything be different this time if the government grants another tax break, or will companies simply pay out more dividends? Apple's plan to start paying dividends suggests to me that most of the funds would simply end up in shareholder accounts via special dividends. Either way -- whether it keeps the current laws or grants a one-time break -- the US government isn't going to slash its deficits or pay interest on debts on the back of American corporations.
Apple's position that its foreign cash will stay foreign for now is similar to that of Google, Microsoft, Dell, Cisco, and practically all US companies with substantial foreign cash holdings. And that isn't about to change. Sorry, Uncle Sam.