Apple's Cash Dilemma

http://www.aboveavalon.com/notes/2015/6/13/apples-cash-dilemma

by uptown • 11 years ago

35 69 11 years ago

lbarrett• 11 years ago

I'm confused why "Pay the US tax" is not being seriously considered. I guess no one would even hope that a corporation would do the sensible and legal thing when there are loopholes to be abused.

BinaryIdiot2• 11 years ago

Well, it is a publicly traded company that has to do what's best for its bottom line so I can't fault a company too much for working the system to their advantage. They sell far more product (or maybe it's just iPhones? not sure) foreign so it makes sense they would have a ton of foreign money.

But yeah I was surprised it wasn't all in the United States. Perhaps I'm just naive.

aaronbrethorst• 11 years ago

    Well, it is a publicly traded company that has
    to do what's best for its bottom line

Meanwhile, here's Tim Cook on the subject:

    “When we work on making our devices accessible
    by the blind, I don’t consider the bloody ROI,”
    Cook said, adding that the same sentiment
    applied to environmental and health and safety
    issues.

http://www.theguardian.com/environment/2014/mar/03/tim-cook-...

uptown2• 11 years ago

While it's an option, it's just not anywhere close to being a smart option for any CFO. The margins between interest rates on the debt they can issue and the tax rate on repatriating cash earned overseas is huge.

seanmcdirmid4• 11 years ago

Why? If Apple did this strictly, there would be a shareholder lawsuit definitely, but also Apple's non-US competitors would have a HUGE advantage since they aren't burdened by US-centric US tax laws...to the point that Apple couldn't really compete.

If everyone plays by the same rules, great! But that isn't the case, because not every company is American.

pbreit3• 11 years ago

Apple couldn't really compete

That's a laugher. All of this financial chicanery neither impacts Apple's ability to compete nor drives its share price.

clarky075• 11 years ago

There's very little reason to. unless they were just desperate to use the cash why pay more taxes than they need to? The money wasn't made in America, they don't have a great claim to it (many countries don't have this tax we are talking about).

In the past, we've had tax holidays were they made it a bit cheaper, seems sensible to wait and hope it happens again.

Alternately, they could buy companies overseas. It's obviously going to be hard to invest that much money, but if they can find interesting options it'd be a much better use of the money than paying a really high tax.

ams6110• 11 years ago

So do YOU pay taxes you don't have to? Most people with a mortgage can deduct interest payments from their income. You don't have to do it, but why wouldn't you?

jimminy• 11 years ago

The assets have already been taxed by the foreign governments. And largely generated through operations abroad. The US has a tenuous claim to those assets, only because the corporations primary offices are in the US.

If they wanted to bring $100B back, they would pay up to $35B (the use repatriation fee - minus the foreign taxes). So they really only managed to bring back ~$65B, that was created largely overseas, just for moving an asset across international borders. That is a sensible thing, to just toss away the valuation of Uber, to bring money into the US?

Legally fine, but it is not sensible.

1123581321• 11 years ago

It will be legal if Apple is given a tax holiday.

Realize that Apple could theoretically spin these foreign cash-holding subsidiaries off into independent entities that will never pay any taxes to the United States. Apple has no moral or legal obligation to bring the money home other than the duty to shareholders to realize returns - and that same duty is the one that has them avoiding paying more tax than necessary.

Also, consider that in the case of a tax holiday, Apple will pay an optimum amount of tax (i.e. the maximum amount Congress believes it can charge while still bringing foreign cash home), and then repurchase programs will increase share prices, which will lead to sales of stock which will incur capital gains taxes from domestic shareholders. So, the United States treasury will be receiving more than just the repatriation tax. If Apple repatriated cash at a higher tax rate, they would repurchase fewer shares, leading to a lower price and fewer domestic sales of stock.

MBCook• 11 years ago

Is it really that surprising? Let's make a highly simplified analogy with easy numbers.

You have two bank accounts, only in this example they're different currencies. One in Pesos, one in Francs. Let's make things easy and pretend that 1 Peso is worth 1 Franc.

Your customers pay in the currency they have. Lots of people pay in you Pesos, but some pay you in Francs. So after a while you have 100 P but only 20 F.

Now most of your bills have to be paid in F. You have some you can pay in P but the money comes in fast enough that will never run dry. Unfortunately the F account may not be so steady between paychecks and you may overdraft. If that happens people with pitchforks will come after you. You need to do something to make sure that you always have enough in the F account.

So there are two obvious options. You can move some of your Pesos over to Francs, but there is a BIG FEE for transferring to that account. You'd like to move 80 Pesos over, but after the fee you only get 40 P in your account. So instead of 100 P and 20 F (for 120 units, since it's a 1:1 exchange) you have 20 P and 60 F (for only 80 units). You can still pay all your bills, but you just lost 1/3 of your money and now your spouse is mad at you.

Or you could do something else. You could take out a loan in Francs when your balance gets low so you can pay your bills until more F come in. Banks are happy to lend you F because you have a nice house and plenty of P and they have a lot of money to lend right now. You have to pay interest, but that's like 5 F so it's not a big deal. Do things this way and in the end you have 100 P + 15 F (a total of 115 units of value) so you've only lost about 4% of your total net worth and you were still able to pay your bills on time.

Did that help? After reading it back over I get the feeling I just spent 10+ minutes but it's not going to clear things up for people.

epa• 11 years ago

Great analogy

yeukhon• 11 years ago

It does clear up a lot. I never really understood the whole economic thing while as undergraduate. A lot of companies have this issue, so they would hire offshore workers not only because offshore tend to be cheaper but also because they just don't want to move the money back to US due to taxation.

Here is a maybe a stupid idea, what if they just keep investing in a new company in the US with their offshore money, and then Apple buy the company for $1? what about buying lands? Can they keep more foreign money with lower tax rate that way?

thanksgiving• 11 years ago

You could take out a loan in Francs when your balance gets low so you can pay your bills until more F come in.

Sorry if this is obvious but just want to clarify this for myself: Do you plan to pay back the entirety of the loan, with interest with the account in French Francs? If not, aren't you just delaying the inevitable? If yes, is there any reason to keep the peso account locked up (for lack of a better term) in liquid assets? Perhaps you'd be better served by taking risks with that money?

DonHopkins• 11 years ago

So they pay interest to the banks, so they can buy the government, instead of paying tax to the government, so they can buy jobs and bridges and health care.

BinaryIdiot2• 11 years ago

Thanks for the post! It makes complete sense but I never realized a large majority of their cash holding is outside of the United States. Though I'm not entire surprised I didn't realize this; every week someone is talking about huge company X or huge company Y that Apple could easily buy in the U.S. but in reality they really couldn't unless they wanted to take a big tax hit.

I'm curious what they'll end up doing with all of that foreign cash. Are the options outlined in this article realistic / the best or only choices? Are there other possibilities?

seanmcdirmid4• 11 years ago

Foreign R&D centers are the most obvious approach. If you make say, lots of money in China, open up an R&D center there as an investment; as a side effect it also makes the host country happier as you are giving jobs to locals (not just making money, but helping to develop the economy!). This has adverse side effect of shifting R&D from the country of origin, but it can also be expansive (do more vs. taking jobs from the US and putting them in China).

People talk about foreign cash as if it somehow belongs back in America. But if you are Chinese, you definitely wouldn't see it that way (Apple makes more money selling iPhones in China, why does that money need to go the US? Ridiculous!).

midnightclubbed• 11 years ago

To take that one step further why aren't Apple putting that money into building its own overseas manufacturing facilities and reducing its reliance on 3rd parties?

Building and running factories in China with the money it is making from Chinese consumers seems a more prudent choice than paying a chunk of US taxes so it can do share buy-backs?

tdicola• 11 years ago

Who wants to bet as a part of TPP (now that it's fast-tracked) there will be plenty of tax holidays or even tax reductions for moving foreign cash back into the US?

paulsutter• 11 years ago

It's not a dilemma at all, it's a simple trade off. Either pay the tax to repatriate or pay interest on debt. If the former becomes more attractive than the latter, they'll do it. They can borrow at extremely low rates today so it boosts their earnings to borrow.

I was hoping for a little more information on the reason Apple's foreign subsidiaries can't buy Apple stock without repatriation of funds (and whether or not this would require Apple shares to be tradeable on a foreign exchange), or what it would take for Apple to reincorporate where the money is as a way to eliminate the need to repatriate at all.

EDIT: For everyone who thinks Apple is somehow in the wrong for this, your energy would better be directed at getting the tax laws changed. Apple's board and management have a fiduciary responsibility to pay only the tax they actually owe.

rtpg• 11 years ago

Apple's board and management have a fiduciary responsibility to pay only the tax they actually owe.

This does not mean they have responsibilities to build as many legal (last I checked, my iPod was not designed by Apple in Ireland) fictions as possible to lower their tax burden.

Apple's corporate status does _not_ absolve them of the ethics of their decision.

That said, getting the laws changed would be more useful.

dba7dba• 11 years ago

your energy would better be directed at getting the tax laws changed

How? Who among us can outspend lobbyists from the corporations?

clarky075• 11 years ago

He's suggesting the lobbyists are in the right in this case, and the tax rates for repatriation should be lowered to something more reasonable. Then companies would be paying more tax than they are currently giving the govt getting more revenue, as well as bringing more money into the U.S. for investment in local economies. Everyone wins if they lower taxes. At the current rates, it's simply irresponsible to bring the money back instead of leaving it where it is.

WalterBright• 11 years ago

They could use it to open R&D centers in foreign countries.

setpatchaddress• 11 years ago

They do. There's only so much that's productive unless you're funding basic research, which Apple, for better or worse, doesn't do.

pbreit3• 11 years ago

I would have liked to have seen some other options explored: a) decrease share buybacks/dividends, b) bring cash back and pay the tax, c) invest in foreign markets.

nraynaud• 11 years ago

Noob question: what about letting the valuation crash Ann buying back at a discount and then progressively going out of the market ?

uptown2• 11 years ago

So in the end, they'd have intentionally destroyed their company in order to make their share value cheap-enough to buy them all up so they could own all of a company they intentionally destroyed? That doesn't sound very wise.

marcusgarvey• 11 years ago

TBH, I'm more intrigued by the business model behind this site than the story itself. Research content on one 1 subject, membership at $10 a month. Who are its customers? Small traders and investors who can't pay for more costly info? I wonder if revenue is covering the cost of research.

chmaynard• 11 years ago

I'm a small investor in Apple and a (former) member of Above Avalon. I enjoyed reading the free content on this site for a few months, so I decided to try out the paid version. So far I'm not convinced that the paid content is worth the cost. That said, I think Neil does a fine job and I recommend the site to anyone with an interest in Apple as a company.

markbnj• 11 years ago

I'm curious about share buybacks. If a publicly-traded company amasses a pile of cash, isn't that cash owned by the shareholders? If the company uses that cash to purchase its shares, aren't shareholders being paid with their own money?

cissou• 11 years ago

Those who want to sell will just "exchange their stock for cash". Some might want to do so, others might not. The bought back shares are destroyed so the overall stock price rises: nothing is gained, nothing is lost (in value), it's just cash that came out.

pistle• 11 years ago

It's a strategic cash pile that could be used by Apple to further increase shareholder value. If they want it back now, they can raise a shareholder revolt and replace the board. Good luck with that. Such a move would also be expressing a massively pessimistic outlook on AAPL's future. You don't see this so much with 'successful' companies with CEO's that carry mostly good will.

andrewtbham• 11 years ago

share buy backs increase shareholders percentage of ownership. it is the opposite of dilution. it also drives the share price up in the ahort term by increasing demand for shares.

jessriedel• 11 years ago

It's basically equivalent to dividends.

karpodiem4• 11 years ago

Apple benefits from the US court system, US copyright/trademark law (for the most part) being respected worldwide, and a US military which projects a fair amount of hegemony around the world.

So yeah, it's time for Apple to pay for its 35% share in funding the above items.

In the end, Might secures your rights. Freedom against someone subjecting their rule over you and how your domestic businesses are able to operate internationally is paid for with having the biggest guns.

clarky075• 11 years ago

Of course. Totally makes sense that the U.S. is protecting China allowing apple to sell the phones made in China and then sold in China. Oh wait, the U.S. Military isn't protecting China?

Every first world country has court systems, copyright laws, and many of them are more respected than we are. Samsung likely benefits as much as apple does for any of these things and yet they don't pay US taxes on sales in China. They only pay US taxes on sales in the U.S.

karpodiem4• 11 years ago

Except it's the US military that helps decide the final outcome if China one day seizes all US' company assets within China.

You don't need a military until the one day you do.

And come on, you know what I'm talking about with respect to force projection and protection of assets.

delinka4• 11 years ago

Do they not pay tax in the US at all? You make it sound as if they just don't pay tax. As it stands, they've paid tax in any country where they've earned money. That pays for the court systems and IP laws in those countries. Any revenue in the US has been taxed in the US and the funds used similarly by the government.

Now, you want to take money that's already been taxed elsewhere and return it to the US, subjecting it to further tax. Why? As I said, they've already paid taxes here in the good ol' USA.

karpodiem4• 11 years ago

Because having a military that can project force in all those countries you mentioned is expensive; beyond what's paid for by Apple in taxes for revenue generated within the U.S.

alex_young• 11 years ago

First of all this double taxation thing is hogwash. US corporations (and people for that matter) only pay the difference between any foreign tax collected and our own federal tax when they move it to domestic books.

Probably more importantly, the foreign profits are disproportionately gains baised on research and development conducted in the US which the foreign subsidiaries pay no royalty for at all.

If, for instance, 50% of the value of an iPhone sold in China represents the value of the engineering of the device, we have a tax loss which adds up to half of the nearly $200 Billion held as foreign profits by Apple.

Apple should be forced to pay these taxes. This represents a real and tangible loss to the people in the US and an unnecessary subsidy handed to the most valuable public company on earth.

WiseWeasel• 11 years ago

Another option would be to list their stock in a country without this profit double-taxing issue (or less of one), and pay dividends there instead.

riemannzeta2• 11 years ago

It seems like such a no-brainer for IRS policymakers to offer Apple (and companies like it) a tax holiday on foreign cash reserves. Smart for US, smart for them. What countervailing political forces hold that back? Is it simply that the US feels like it shouldn't have to negotiate how much a company like Apple should pay in tax?

ninjaroar• 11 years ago

I don't see how it makes sense at all to offer a tax holiday. If the IRS is going to give Apple a tax holiday, can they give me a tax holiday too?

delinka4• 11 years ago

It makes sense in that it encourages the holders of capital to return that capital to the domestic economy, spending it on employees, R&D, expanding domestic production, etc.

clarky075• 11 years ago

what is 0% of 100 billion? 0

What is 10% of 100 billion? 10 billion.

10 billion is more than 0 dollars, so it makes sense. 0 is what they will get if the keep the rate the same as it is now.

If the IRS is going to give Apple a tax holiday, can they give me a tax holiday too?

That sure would be nice, I wouldn't mind one. That being said, we don't have billions of dollars to offer, and it's unlikely we have money overseas that needs repatriated.

riemannzeta2• 11 years ago

Your question effectively answers my question.

bsder• 11 years ago

It seems like such a no-brainer to simply tax all reserves where the company is headquartered, no? See the problem now?

Let Apple continue to deplete its US reserves until it MUST start repatriating the cash. If they want to be part of the USA, then pay the taxes in the USA.

sunir• 11 years ago

Why can't the foreign subsidiaries buy Apple stock? I am sure that isn't allowed or else they would do it but what is the regulation preventing it?

Alternatively borrow money for the buybacks from their own foreign subsidiaries either at zero percent or very low or at prime and then default?

arikrak• 11 years ago

That's the problem with corporate tax holidays, now companies wait around for another one. Instead the government should permanently reduce the tax rate for overseas corporate profits.

NateDad• 11 years ago

I noticed "give to charity" was no where on the list. Imagine the good $200 billion could do.

Apple's Cash Dilemma

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