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PostedApple, $82 Billion of Cash, and Tax Policy
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Phil Hodgen
Attorney, Principal
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Via Glenn Reynolds I was pointed to a TUAW article that referenced a SeekingAlpha article about Apple, its mythical mountain of cash, and the Law of Unintended Consequences. (That, by the way, is a demonstration of the fabulosity of the interwebs. Hyperlinks and attributions back to the source. The internet is just one person talking to another.)Back to tax policy and unintended consequences. This stuff is right up my alley because this type of tax planning is What We Do here at the Hodgen Law Group Tax Ranch & Rocket Factory.Put this blog post under the heading of "Unintended Consequences of International Tax Policy."Apple Inc. has a reported $82 billion of cash. That sounds like Apple could buy anything, do anything. It could even spend that money in the United States and (God forbid) create jobs for people.The author of the Seeking Alpha blog post has read Apple's financial statements and points out the obvious. A large chunk of that cash -- $54 billion, to be precise -- is sitting outside the United States and will not return to the United States.Here's why. Blame Congress for this.
How Multinational Corporations Pay Income Tax
The default tax treatment for U.S. taxpayers -- corporations included -- is "All of your income, earned worldwide, is taxed in the year you earn it." Whether Apple sells an iPhone in China or in Chicago, the profit it earns will be subjected to U.S. income tax in the year that iPhone was sold.For U.S. corporations doing business outside the United States, however, we can alter the default tax treatment. If the U.S. corporation configures its business operations correctly, a dollar of profit earned outside the United States will only be taxed by the United States when that dollar of profit is brought back to the United States. Earn a dollar of profit abroad and don't bring it home? No U.S. income tax. Earn a dollar of profit abroad and bring it home? U.S. income tax.Call this a "deferral strategy." The U.S. corporation is not exempt from U.S. income tax on its foreign profits. It is just postponing the day that it has to pay tax on those foreign profits to the Internal Revenue Service.A corporation that follows the deferral strategy ends up with two buckets of income -- the U.S. domestic income, which is fully subject to tax, and the foreign income, on which U.S. income tax is deferred until the corporation chooses to bring the income back to the mothership in the United States.That's the picture that Seeking Alpha points out for Apple Inc. It has two buckets of cash:- $28 billion of cash it generated from selling stuff in the United States, on which U.S. income tax has presumably been paid; and
- $54 billion of cash it generated from selling stuff outside the United States, on which foreign income tax has (probably) been paid but U.S. income tax has not (yet) been paid.
Why Tax Deferral is Good
Why would U.S. corporations do such a thing? The short answer is to blurt out the words "present value" and your nimble brain can connect the dots.The better way to explain this is with an example.Pretend that Apple has a subsidiary corporation in China. They sell iPhones in China and generate $1,000,000 of profit.- Scenario Number 1. If they bring the $1,000,000 back to the United States, that $1,000,000 of income on Apple's income tax return will be taxed (let's pretend) at 35%, leaving Apple with $650,000 in after-tax cash. Apple now has $650,000 in the bank. It is going to use that money to build more iPhones to sell. Pretend that each iPhone costs $130 to build--that is Apple's cost to manufacture an iPhone. (I'm making up numbers here, folks. They're all fakey-fake for the purpose of this example.) That means Apple can build 5,000 iPhones to sell using the profits it generated from the first batch of iPhones it sold.
- Scenario Number 2. If Apple Inc. leaves the money outside the United States, the IRS does not take 35%. That means Apple has $1,000,000 in the bank to use to build more iPhones to sell. At $130/unit for cost of manufacture, Apple can build (Phil runs to his calculator . . . let's see . . . $1,000,000 divided by $130 = . . . ) 7,692 iPhones.