The End to Apple’s Cash Dilemma
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1. There's no reason to believe that's going to happen anytime in the near to distant future. They are in the midst of a super upgrade cycle which figures to result in record profits again when they report in January and that growth is likely to continue for the foreseeable future.
2. Pulling the cash from overseas doesn't make sense simply because they can issue bonds at a far lower rate, practically zero, than what they would pay in repatriation. I'm not so sure if the repatriation rate were lowered permanently that they would even bring much back at all. If it were a one-time benefit, then sure. If/when they need cash they can hold their nose and pay the tax rate, but I would argue that the market has already priced the supposed tax penalty into the share price. To put it another way, if they were granted a one-time repatriation rate far below what they would be forced to pay currently, you would see the share price jump because that is effectively adding billions of cash to their balance sheet from the federal government's.
3. Going back to the first point, if sales did slump they would probably need the cash anyway with or without the bond issuances. Hoarding enormous piles of cash to avoid taxes is a luxury of the few extraordinarily profitable international companies of the world, not those that have diminishing sales.
Apple will likely still issue debt because they can take on a lot more leverage given their cash flow and interest payments will still be deductible up to 30% of EBITDA or EBIT (depending on whether the House or Senate wins out on that) so it will still lower their cost of capital.
This does give them more flexibility on financing decisions and it will increase GAAP profit because Apple has been conservative and has been booking deferred taxes until now.
Actually thinking about it, this way of taxing is pretty much the same in every country in the world.
So equating the two is not really correct.
Not really. Much of the money "kept offshore" is invested in the US[1]. Apple's money, in particular, is managed by their subsidiary in Reno called Braeburn Capital. It just happens to be owned by a Caribbean subsidiary.
[1] https://www.hsgac.senate.gov/subcommittees/investigations/me...
CA Corporafe income tax, 9%.
Federal corporate income tax, 35%.
State personal income tax, 0-12%.
Federal dividend taxes 15-20%.
Now the proper thing would be for that money to be taxed in Europe, and the EU commission has been working on that to get Ireland in line, but right now you are essentially asking for the biggest company in the world to pay a 0% tax rate on their overseas profit.
Of course Europeans like this argument, but is it really correct for those profits to be taxed in Europe? Did substantial value creation occur there? I'd argue not really, and at any rate Apple will have generated substantial sales, import/export, income tax revenues etc for those foreign countries in which they do operate. The IP that lead to these profits is however clearly mainly created in the USA.
I'm not stupid enough to pretend I have a good answer for this hugely complex problem, but it's clear that arguing that "the proper thing would be for that money to be taxed in Europe" is a gross over-simplification. When we talk about the EU we are talking about 28 separate sovereign States, each with their own separate tax collection laws and organisations. The body whose work that lead to those profits is for the most part 5000 miles away.
From a purely practical point of view, Apple will only be able to sell their goods in the EU and pay no taxes on the profits for as long as they can keep finding another Ireland. And those seem to be in short supply in the future.
To the west in California. In China, Foxconn makes very little profit (ie. adds little value) for each iPhone they manufacture.
> I think we can spend years discussing where that value is created.
If you consider what would happen if Apple's EU sales operations were a separate company, it becomes clear which company would make the bulk of the profit (ie. which company produces the most value).
> From a purely practical point of view, Apple will only be able to sell their goods in the EU and pay no taxes on the profits for as long as they can keep finding another Ireland.
Why couldn't Apple just spin off its EU operations as an entirely separate company? Apple US would have a very strong bargaining position when selling iPhones - it could charge Apple EU a wholesale price which was very close to the retail price. Apple EU would therefore make very little profit and pay very little tax to EU authorities.
It's possible for america to be popular for other reasons, but for the taxation of international revenues to be a negative factor.
Tax is assessed on income, not revenue. It's an important distinction. Apple had 52.6 billion in revenue, and 10.7 billion in income.
Moral issues aside, do they have to bring it back to US? I dont see what's wrong with it sitting there doing nothing.
Are there no other way to invest the $250B cash generating 2% yearly interest? i.e Additional $5B / year? ( Isn't that is what subsidiaries are doing ? )
Why is it every call to maximize only shareholders value? Could they not provide more value in their product or product line up with those additional Interest from Cash? Investing into better after sales services particular in South East Asia Region?
Apple could provide iPhone as a Services, much like iPhone upgrade program in the US but worldwide. Combining iPhone + Apple Care + iCloud Backup as basic, and with top up like Apple Music and future Apple TV. Making Apple being the actual creditor themselves, that needs lots of cash.
As a matter of facts I have long wanted Apple to be a Virtual Mobile Carrier. There are lots of people in the world without Credit Card or dont want themselves associate with credit cards, which is different to US. And prefer to have Mobile Billing, a monthly payment. These people also failed to get iCloud backup, which is increasing dangerous as we put more important things in our phone. Apple could finally offer Visual Voicemail, and free iCloud Backup over LTE during off peak hours like 1AM to 5AM, iPhone, Apple Music, Carrier Services, All under one monthly fees.
There are lots of thing to help and improve, invest to bring more value and future returns, dividends is ok, but share buy back to me seems dump. This is speaking from a long time $AAPL investor.
I don't understand business. If I owed $15,000 and had $30,000 in the bank, I'd pay off my debt. Why is this different?
(I am not an accountant so fully prepared to be told I am well wrong.)
In my naive back-of-the-envelope calculations, it would have to hold this debt in a non-tax-effective way for more than a decade to be worse off with this debt versus repatriation. An in the meantime it can use the interest it pays in the USA to offset it's US tax bill for income earned in the USA making this effectively a lot longer.
The long-term average for the S&P500 is 12.11%… not to mention the fact that Apple can probably make better use of its money by investing in itself, rather than passively on the stock market.
All round, no matter your actual moral and ethical opinions on the matter, this is the smartest financial decision Apple can make (and they probably spend tens of millions a year on advice, legals and research to prove this).
And as much as Apple goes on about them being a California company… they're mostly a multi-national with much of their money being earned and spent outside of the USA.
But it also doesn't need to be guaranteed - companies are fine accepting some risk. So you could just buy Apple stock.
Mortgages are secured debt. If the debtor fails to pay back the debt, the house can be seized and sold to cover the debt. That makes it pretty low risk, but there is still some risk because house prices sometimes drop precipitously, so it might not always cover the whole loan.
Apple's debts are secured by cash sitting in a bank account. There is literally next to no risk of default. They will get an even better interest rate than someone very creditworthy will get on a mortgage.
Great example of why I maintain that price != value. The former is an objective metric while the latter is probably subjective to a problem, context, application, etc..
Um, Facebook buying WhatsApp and Instagram or Google buying YouTube wasn't a disastrous strategy.
It's to the point where being acquired is the kiss of death for most start-ups. Sure, you get your exit, but your product is toast.
Apple has a very particular culture and it's difficult for other companies to integrate into that. Google was more accommodating, like with Nest, but even then they realized they had to restructure and make Alphabet for it to actually work.
Sure, Google bought YouTube, but they also bought Boston Dynamics and fumbled it.
Ah well, at least Apple shareholders get a few more dollars.
Having the political will to collect that money is the first step to correcting the political problem you refer to.
It’s like a mob unhappy with their winter meals seeing a large grain store that a prosperous farmer has stored up to plant next years harvest with, and saying “Let’s eat that until we are full!”.
Yea but you’ll be starving next winter.
And if you believe that, I have a bridge you might be interested in buying.
Maybe everyone assumes that the market has already factored it all in so they don't bother buying so it isn't factored in because the increased demand never arose. Maybe I'm just out of sync, and as other people start to notice this they'll start buying and it'll turn back around and then the market will have factored these things in because lots of people assume it hasn't.
Most recently (13 months ago - this isn't a regular thing), a British pasty retail outfit named Greggs. The news said things were looking good, I could see their stores were busy, I bought some shares, they're up about 40% in 13 months (which is unusually good, I freely admit, and I certainly didn't expect that). That's really all I do, and it seems to work out (and it really is rare when I do; typically, I just dump all my pennies into index funds - easily 80% of my pennies are in index funds). I think some of the big name successful investors do something similar, but obviously on a much grander and more informed scale. Plus the British house-builders. Every time the UK government announces another plan to help young people get fifty year mortgages, it's time to buy some more of them! They will crash eventually, I'm sure :(
I think that way about my index funds too. But then it's impossible to know the reason for the price rise. Maybe it's because of millions of other guys like me who read the same articles, came to the same conclusion as me, and put their money in too.
The odds of that happening by chance are <50% but still quite high, about 6-7% depending on exactly how you reckon it. So one person in 15 will get this result purely by chance.
There are studies that show that very few (like <<1%) professional money managers can beat the market consistently. You may well be one of those rare people, in which case you could make billions on Wall Street. But until you amass a much longer track record than you have, the odds are much higher that you are just one of the lucky ones. There are a lot more lucky people out there than most people realize.
> it has nothing to do with my point
which was:
> A professional manager has to make a lot of decisions and still has to invest money even if they don't have any insightful ideas.
Implying that Eli's talents could not be deployed on Wall Street because he could not operate under the constraints on which professional money managers have to operate. But that's not true.
Professionals do have a much harder job of it. As Simon says, they can't sit on their hands for 18 months like I do. I expect if they parked most of the money in an index fund, their customers would start asking why they're paying managed fund rates for an index fund.
Might as well go on the record here, and come back in a year to see how I did. I'm considering UK pizza chains and the like; as the UK gets poorer, and people have less money to spend, the money that used to go on eating out drifts downwards into takeaway pizza and the like. All the signs are that the people of the UK are going to have less money and be faced with higher prices, so I'll look for a pizza chain or similar to invest in.
The monkey is giving even weight to each option rather than weighting according to risk. The monkey is picking a riskier portfolio than an index fund, and in compensation for accepting greater downside risk will have greater average returns.
Markets are subtle like that =)
Of course, the monkey is likely to attribute the difference to skill rather than risk...
In your scenario, if the index fund is properly designed to capture the risk of the "market" as you have defined it, a monkey has equal chance of performing better or worse than the index fund and the average monkey (or an average of a large enough set of monkeys) will perform with the index fund. Certainly, though, if your index fund is not designed to be reflective of the market, but of some subset, then it will carry different risk, but not necessarily less risk. However, a monkey randomly picking stocks from a pool will not, on average, outperform the average return of that pool of stocks.
I used to assume that if I read it in the news, it was all priced in and there was no point in me buying, but I noticed that often, it wasn't. Maybe I just got lucky and I miss the news reports on the companies that subsequently crash.
For example if you were closely following video game enthusiast press you may have found out a lot about Nintendo's mobile game plans much sooner than more typical investors which may only read newspapers such as the Financial Times and WSJ, which devote limited column inches to the activities of video game companies.
$884B market cap. $150B in free cash (which you can effectively take off the top of the market cap).
So an adjusted market cap of $734B.
A net income after tax (yes, they still pay tax) of $48B.
So an adjusted P/E of 15.3x.
Some other P/Es of popular tech companies:
Facebook: 33.14x Google: 35.03x Salesforce: 12,992x Amazon: 293.84 Intuit: 41.36 Twitter: Can't have a P/E if you don't make money.
The kept the cash offshore with the belief that they would eventually be able to bring it back without paying taxes. They started a multi-year political lobbying campaign to change the tax system. And it worked. If our political system was not up for sale they would have eventually had to bring the cash home and pay their damn taxes.
https://www.bloomberg.com/graphics/2016-apple-profits/
Offshore has to do with ownership, not custody, currency, and obviously not control.
Edit: Reno
I'm not a securities expert, but depending on how options contracts are worded, a stock buyback might increase the value of options awarded to executives, whereas a dividend is more or less a net negative.
Investors like consistent (and increasing!) dividends, a one time windfall from overseas cash coming back won't let you raise the dividend forever. They could do a one time special dividend, but that's still less efficient than a buyback from management's perspective.
Dividends are taxable and you can't choose when to pay that tax, capital gains are only taxed when you sell which lets investors put off having to pay tax. The idea being buying back shares and retiring them will make the remaining shares more valuable.
You mentioned it might make options more valuable... Well that's a feature not a bug, at least if you're the one getting the options (which the people who decide what to do certainly are!). All the more reason for a buyback.
[1] https://www.fool.com/investing/2017/05/31/are-apples-stock-b...
how can we honestly hold that against these companies?
If these laws were changed to make a flat 20% tax with no deductions, it would be revenue neutral or even slightly positive, but then the companies would all complain about the loss of deductions.
Apple pays nearly 40% in the US combined with state corporate income taxes. On foreign earnings it pays about 10% to foreign governments. Combined it works out to 23%, but when the repatriated earnings are taxed it will shoot up.
https://www.apple.com/newsroom/2017/11/the-facts-about-apple...
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Edit: I'm rate-limited, but in response to below I'll reproduce what I've posted in prior discussions about this:
We’re really better off eliminating the corporate tax altogether. It’s a pretty small portion of tax revenue and the only reason it exists is to be a plank for politicians who want to tax the "greedy corporations." All corporate income is either paid as dividends, paid as salaries, or reinvested. When it is paid as dividends, it is taxed as capital gains. When it is paid as salaries, it is taxed as income. When it is reinvested, it is either lost, or eventually becomes income and capital gains. There is no need to have another layer of taxation that just makes a giant accounting mess and creates all sorts of ridiculous incentives to use tax shelters.
A better solution, of course, would be a tax on the value of goods sold, at the location where the sale occurs, since it's hard to argue that an Apple Store in the US whose customer was standing in front of the register was somehow actually in a Caribbean tax haven.
I shudder to imagine how much you think they should pay.
For comparison, the Republican tax plan currently being debated in Congress is capping at 20% or 21% (depending on which day's negotiations you're looking at). And I personally am paying a rate around 36%.
I wonder what rate you think Apple and other large companies should be paying, and how much the rest of us would have to pay to give them that cut.
The poor oppressed billionaires and even, yes, the mere multi-multi-millionaires, do not have my sympathy. I doubt you're going to change that.
The reason capital gains rates are lower than individual income rates is partial compensation for the effects of inflation. If inflation is 2% per year and your investment increases 20% over 10 years, you lost money but still owe taxes. During high inflationary periods this effect kills the stock market, because taxes make investing becomes a guaranteed loser.
The reason dividend rates are so low is that the money has already been taxed multiple times in its way to the shareholder. Foreign, State and Federal Corporate income taxes. Your 20% dividend rate is just the tail end of about 60% in total taxes, including state income taxes too.
And retirement investment vehicles, smartly managed, start moving out of stocks and into less volatile securities as you reach actual retirement. So if that retiree is still in AAPL post-retirement, there are other issues going on.
And your googling is in accurate. Apple pays 24.6% in taxes.
You might not (probably don’t) agree with everything government does, but government still needs to be funded. Many local governments would really benefit from paid taxes, fwiw.
The societal duty to perform sacrifices in order to receive benefits from a higher power is indeed an ancient idea, though.
We also benefit from investment. So why are we taxing it at such high rates? The real corporate tax rate should be zero to encourage investing in the US. You could raise as much tax revenues by taxing dividends and capital gains at ordinary income rates. Which also would make our tax system more progressive.
First they pay income tax to the foreign government.
Then out of what’s left the pay state corporate income tax.
Then out of what’s left they pay federal income tax, or the special repatriation tax.
Then the dividend what’s left to shareholders who pay state income taxes on it.
Then out of what’s left they pay federal dividend taxes.
A little old retiree in California is lucky if they don’t lose 60% of their share of their Apple profits to taxes.
And as for the Irish arrangement, I think it’s a good demonstration on why having a corporate tax at all is more trouble than it’s worth. It’s better to just get rid of it and make up the shortfall in capital gains and income taxes.
They don't. They pay the highest rate in either jurisdiction, so either the US or the foreign rate. In the US, they get a tax credit for the amount of taxes paid to a foreign tax authority so that they are never double-taxed on their corporate income. Note that every country in the world of significant economic size taxes corporate income.
Dividends are taxed twice, as corporate profits and again when received by the shareholders as dividends, but they should be. Dividend taxes are the price shareholders pay for getting limited liability and all sorts of government protections and incentives.
We provide for limited liability because we think it is beneficial to society in encouraging investment and risk-taking; it is not a sacrifice or expense we expect compensation for.
Australia has probably the best system in the world for dividends. We use a franking credit to offset the tax paid by the corporation so effectively we have no double taxation of dividends.
I've never seen the point to any double taxation and I applaud any government willing to help citizens and business work around double taxation.
That’s sextuple taxed.
Foreign subsidiary gets taxed by, say, Australia at 25%. It pays dividend to US parent, 0% withholding tax. But the US parent gets an "indirect foreign tax credit" for the taxes its subsidiary pays. (The IFTC is only available to corporations, not individuals, partnerships, or non-corporate LLCs.) It's complicated, but the IFTC can include prior-year foreign taxes paid by Australia Sub, and correspondingly the total IFTC sent up to US Parent is proportional to the total amount of foreign earnings remaining in Australia being dividended up. If that's 100%, then USParent gets a full credit of 25% for the Aussie tax paid by the subsidiary. Note that the US Parent will also pay state taxes on the dividend, and will thus get a SALT deduction for those taxes (but not a credit, so not a dollar-for-dollar reduction).
The dividend, paid out to US shareholders, is subject to reduced rates, so it's actually taxes less than normal income. Exact rate depends on your bracket. Recipients will get taxed by their home states as well, but will also get a state tax deduction (at least through 2017...2018 onward depends on the GOP tax bill).
The effective rate of tax on foreign earnings from foreign subsidiary to ultimate shareholder thus becomes roughly 50% or less...cheaper than in every other economically relevant nation (meaning 1st and 2nd world countries) after all taxes and credits and deductions are taken into account. The US has the highest "statutory" tax rates but the lowest effective tax rates in the first world for business income.
Lots of people claim this, but it doesn't appear to be true:
>...The U.S. effective corporate tax rate consistently ranks among the five highest of nations considered. The only nation with a higher ETR in each study is Japan, which not by coincidence is the only developed nation with a higher statutory rate than the U.S. Other major nations found to possess a higher ETR than the U.S. in at least one study include France, Italy, and Germany, but no clear patterns emerge; the U.S. outranks this sample more often than not. Significantly, both Italy and Germany have enacted rate cuts since many of these studies were conducted.
Apple pays 8% income tax to foreign governments. The credit means it still has to pay US taxes on the 92% that’s left. It would be CRAZY to tax money already lost to taxes.
Returning foreign profits would have worked out this way before repatriation.
Apple pays 8% to foreign governments and repatriates 92% that’s left.
Apple pays 9% to state of california. 84% is left.
Apple pays 35% to Federal government, 55% is left.
Apple pays the 55% as dividends to shareholders.
CA middle class taxpayer pays 9% to state of CA. 50% is left.
CA middle class taxpayer pays 20% federal dividend rate, 40% is left.
You understand now why Apple didn’t repatriate?
Taxing investment at 60% is an egregious rate, and it’s bad for society. The best tax rate for investing for society is zero, to encourage investing.
Change the corporate rate to zero, and compensate by taxing dividends at ordinary income rates. Besides encouraging more investment (and raising the same or more tax over time) you restore progressivity to our tax system.
As I see it, dividends are income and should be taxed as such - corporate tax plus capital gains tax should at least equal plain income tax so different means of income are not discriminated. In this light, having profits and dividends taxed separately effectively discounts taxes on reinvested profits.
Remember to commend them for that spot on analysis.
Standing ovation on my end
I'm extremely excited for the territorial system and those implications for US world-citizens.
Dropbox develops its software in the US, markets from the US, does basically everything in the US. Yet for some reason service payments goes to Dropbox Ireland.
It's not representative of reality, and neither is Apple profits not going back to the US headquarters. The work was done in the US, the profit is going to be handed back to the shareholders. The R&D is in the US. The only thing Apple Japan (for example) is doing is reselling Apple US stuff. There's no real reason for the local subsidiary to book the entire profit.
There's a reason people find this problematic. It's because it's a tax game not representative of what's happening in the real world.
So far as I can tell Apple is getting absolutely hammered under the terms of this new tax bill, so I'm not sure this is the case https://www.bloomberg.com/news/articles/2017-11-03/multinati...