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Apple to US: Your Tax Law Sucks

The US government has boxed itself into a corner over billions of dollars held in foreign accounts by {complink 379|Apple Inc.} 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:

  1. Keep foreign profits foreign.
  2. 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.

  3. Pay dividends.
  4. 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.

  5. Buy back shares.
  6. 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.

23 comments on “Apple to US: Your Tax Law Sucks

  1. Barbara Jorgensen
    March 19, 2012

    Apple is right–many US tax laws do suck. But the worst are the loopholes that allow companies such as Apple to stash so much money offshore. True, it is legal and probably not even immoral. Companies have an obligation to their shareholders to dividends and stock buybacks are probably the right thing to do. But there's got to be a halfway point where companies don't get penalized for being successful and they don't object to paying their fair share.

  2. bolaji ojo
    March 19, 2012

    Barbara, Some corporate laws are probably not perfect but I don't see this as one of them. The origin of the law was to allow these companies to be able to use the profit from foreign operations to fund investment and acquisitions. At the time these laws were introduced, not many US companies generated the majority of their sales overseas. That has changed especially for major technology firms.

    Apple now gets more than 50% of its sales from outside the United States, which means more of future cash flow will be overseas. During today's conference call, Apple executives made it clear they won't repatriate such funds. As at the end of the last quarter it was $64 billion. The company cannot use this to pay dividends without first repatriating the money to the U.S. So, this funds won't be paid out to shareholders. Who exactly is Apple protecting?

     

  3. syedzunair
    March 19, 2012

    @Barbara: I agree with you on the half way approach. Companies and the US Government should come to terms that are more viable. As companies will most likely object paying a lot of tax on revenues that were generated in foreign countries as they are already going through some form of taxation in the host countries too. 

  4. Himanshugupta
    March 19, 2012

    Bolaji, you are right that not much is going to change in the near future. Companies can help government at ransom but politics is not just about capatilism. i donot understand why a companies would want to bring money back (except to keep shareholders happy) especially when they are more global now and have more opportunity to expand in the growth markets.

  5. Nemos
    March 19, 2012

    “they believe the tax payments would be excessive” Why I have the feeling that the Companies are more powerful than the Governments in our days?

  6. _hm
    March 19, 2012

    Apple should be more transparent to US Government. They should tell them what they want from Governement to bring that money back.

     

  7. Daniel
    March 20, 2012

    I think in certain countries like US, companies are liable to pay tax for the profits they had earned outside the country also. Since they had already paid tax for this money at source, where ever this company has presence, it's like a dual taxation. I mean ending up paying tax in both revenue generated country and parent country (Registered Corporate office).

    In such cases certain countries had made some tax exemptions like, either they have to pay a nominal tax or park this money in parent country for reinvestments. I think US tax department can also think in a similar direction.

  8. FLYINGSCOT
    March 20, 2012

    If you think US tax is bad try paying tax in Europe!  I wonder where the Apple hoards are stashed?  Apple has so much cash it can act like an old boring company (paying divs) AND like a startup (investing tons into R&D).

  9. bolaji ojo
    March 20, 2012

    Nemos, I couldn't help feeling the government is helpless and these tech companies are using a blackmail tactic. Their position is simply that the money will stay overseas unless the government changed its tax law — and the government can't do anything about it! Your conclusion that the companies are more powerful in this situation than the government is certainly correct but if Congress decides it's in national interest for the money to be repatriated then the companies won't stand a chance — unless their lobbyists grease some palms in Congress and get it to do nothing as usual.

  10. bolaji ojo
    March 20, 2012

    Jacob, The tech companies and others are playing under the rules set by the government. They were aware of the jeopardy of double-taxation, which is why they are keeping the money offshore. The problem, though, is that in the case of companies like Apple, they are making so much money outside the US and can't use the money other than what Congress has approved. So, it's going to be left outside the country until someone blinks.

  11. Barbara Jorgensen
    March 20, 2012

    Bolaji: Thanks for the added information on the law. It's clear that more US-based companies are doing more business overseas–in fact, GE's CEO says it is his job as CEO to expand in emerging markets and create value for shareholders. That often runs counter to what the US wants, which is more jobs and revenue in the USA. I do think companies are taking advantage of loopholes, but like the original law itself, there are lots of problems with the tax code. It is interesting that none of the candidates running for office–of both parties–haven't brought this issue up yet. I'd like to hear what Mitt Romney thinks, although I'm sure that information is available somewhere online. I'll take a look.

  12. Himanshugupta
    March 20, 2012

    @Nemos, one of the reason for more power to companies can be the globalization. Bigger companies are not restricted for supply and demand to one region only. This is helping them negotiate their terms and conditions so that government modify/bend the laws to suit their needs. there are ofcourse exceptions like that of China refusing to GOOGLE but general practice is that companies (especially big companies) are getting their way.

  13. JLS
    March 20, 2012

    It seems like the US coporations are in charge and the government is helpless to do anything, which is nonsense.  Instead of makeing laws for a more favorable return of the money they are hiding,  they need to rescind the law to make off shore profits exempt and get taxed on all their profits in the future.  It sounds like they or their lobbiests wrote that law and I'm sure they will fight any change, but if the overall tax rate is lowered to help compensate, it would be a fair compromise. As it is, it is just abuse of the system.

  14. bolaji ojo
    March 20, 2012

    The government, if helpless, incapacitated itself. It created loopholes in the tax system and companies like Apple are exploiting these and making the government look helpless. The government can change this by simply being the government — pass the right laws that respect the wishes of the companies but still take into accoount the needs of the larger society.

  15. Mr. Roques
    March 23, 2012

    Can you please explain how buying back stocks impacts the market? What's the purpose?

    Thanks,

    Jorge

  16. Ashu001
    March 24, 2012

    Mr.Roques,

    The idea behind a Stock Buyback geoes something like this.

    Lets say you have  a Company A with (for simplicity sake)-1000 Stocks in Total.

    Of which a Majority is held by Company Promoters/Owners ,lets say they own 700 stocks.

    The remaining(300) are held by Private Investors including Pension Funds,Hedge Funds,Banks and Small Investors.

    Now lets say the Last Traded price of this Company Stock is $ 100 per share.

    Now when a Company generates Cash(from profits) they can do one of four things with it ,Payback existing Debt,Use it to fund acquisitions,Pay out Dividends to Investors and to fund Stock Buybacks.

    What happens in Stock Buybacks?Company A will use Cash on its Balance Sheet to buy portion of all those Shares which are not held by the Company Promoters/Owners at a price which is above that in the market(so as to make it attractive for existing owners to sell the Stock back to the company).So in this case,they could end up selling at a Sufficent Premium of lets say-$150/share.

    What does the company do with the shares which they have purchased from other investors? They typically tend to retire them.Thereby,reducing the number of Stocks in circulation-What does this do?It increases the value of the shares left in circulation.

    The major reason why a Company like Apple would want to do this is to get rid of Dilution of stocks-Company Senior Execs get Stock options as part of their incentives/compensations which they typically tend to immediately dump on the market for cash every year[Steve Jobs and Larry Ellison were famous for this].

    By Launching Stock Buybacks they limit the Dilution of Stocks.

    Hope this helps

    Regards

    Ashish.

     

  17. Ashu001
    March 24, 2012

    Bolaji,

    You are very accurate here.

    Its about time,America got a Flat tax code with Zero exemptions and Incentives.

    Ashish.

  18. Mr. Roques
    June 22, 2012

    Thank you for your very detailed response. I understood.

    Lets see what happens.

  19. Ashu001
    June 23, 2012

    Jorge,

    You are welcome!

    That's why we are all on this website right?

    Speaking about Buybacks-Here's what Oracle announced just last week.After they reported increased Profits they are going to use more of the Cash to buyback Shares.

    http://www.bbc.co.uk/news/business-18505729

    The reason Why I don't like Buybacks(as a Tool to return Cash to stock market investors) as against Dividends;which are straightaway paid to an Investors Bank Account in Cash(either Quarterly,Semi-Annually or Annually) is because they are open to tremendous abuse as can be seen even in the case of Oracle and many other Stock Option Scandals we have seen over the last decade or so(in the case of Wall Street stocks specially).

    As part of Executive Compensation;Most Senior Excecutives today are paid in Stock options(basically the option to sell those options for Cash on the Open-market every Year typically around the time of their Annual Results).

    Oracle and even Apple (previously under Steve Jobs) were experts at this.

    They would simply award compensation for Larry Ellison(and other top execs in his inner circle)  in the form of Insane Stock options for millions of shares.Which he would immediately proceed to dump on the Stock market,harming the interests of existing(And especially small investors).

    To reduce the impact of these wholesale dumping of stock by Larry Ellison (otherwise the Value of the stock price would plummet like crazy);the company announces Stock Buybacks periodically.

    Larry Ellison has been doing it for Years now.

    How on earth else do you think he Got the cash to buy an entire  Hawaiian Island for 600 million Dollars this month???

    http://www.latimes.com/business/technology/la-fi-tn-larry-ellison-extravagant-purchases-20120621,0,1848528.story

    As a Retail Investor I personally detest such companies which put the interests of Senior Executives above and beyond that of Common Investors.I Would rather invest in a company like IBM or Coca Cola or McDonalds or J&J or Microsoft or Exxon Mobil or ADP where the Senior Executives are paid primarily in Cash and the Profits are paid out to Investors annually in the form of Stable and Rising Dividends every year.

    As the Single largest  Shareholder in Oracle,Larry Ellison would still make a lot of money(in the form of Dividends) but other shareholders would benefit too.

    Its a more Egalitarian approach to Stockmarkets.Unfortunately in the case of Oracle it will fall on Deaf ears!!!

    Regards

    Ashish.

  20. Mr. Roques
    July 11, 2012

    Again, thank you so much for your very detailed response.

    I can imagine that with companies that have so many shares in the market, that when one of those executives sells its stock options, the price doesn't get affected but how do “smaller” firms go about this?

    I guess they pay them with cash options, but again, stocks are a good way to pay someone without having to really pay them, isn't it?

  21. Ashu001
    July 14, 2012

    Jorge,

    Typically smaller listed firms don't engage in these Shenaigans.

    Why is that?

    The Owners/Promoters hold a significant majority of Shares in the company;so if the Company makes Profits,they just pay everyone a Nice Dividend!

    The way I look at it;its the more fairer and equitable way to Distribute Profits equally to everybody.

    In the rare event where the Company Hires Professional Managers to run the Company ;they tend to pay them Higher than the Market Price(In Salaries) and also to incentivize them offer Long-term Stock Options/Restricted Stock.

    In cases where they are offered Restricted Stock;They can't sell the Stock immediately;rather its contingent to them holding the stock for 3-5 years(typically).

    This is an awesome way to align The Interests of Shareholders with that of Senior Management(& prevent Stock Option abuse like in the case of Oracle and Apple).

    Regards

    Ashish.

     

  22. Mr. Roques
    August 25, 2012

    Thanks for your response. Restricted stocks seems to be the way to go. I believe that stocks are a great way to keep employees attached and concerned with how the company is doing but it also gives room for unethical things to be done.

  23. Ashu001
    August 28, 2012

    Jorge,

    I Agree.

    Restricted Stock prevents abuse of company balance sheets by the Management.

    But because we don't have activist shareholders [like Carl Icahn];nobody forces Management to accept this form of incentives.

    Regards

    Ashish.

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