Apple’s record-setting performance during the fourth quarter of 2014 earned the company a net profit of $18 billion. While some of this money was returned to investors through Apple’s aggressive share buyback program, some of it was also added to the company’s impressive cash pile. How impressive? According the Wall Street Journal, the total value of Apple’s cash and marketable securities now stands at $178 billion. However, Apple’s cash hoard might not be as impressive today if it wasn’t for tax law loopholes that allow corporations to defer paying U.S. taxes on earnings that are kept overseas.
According to the Tax Foundation — a non-partisan research think tank – the U.S. currently has the third highest general top marginal corporate income tax rate in the world at 39.1%. For this reason, Apple – like many other U.S. corporations — has opted to keep the bulk of its cash hoard overseas and out of the reach of America’s tax collectors.
Although Apple did not disclose what portion of its cash was held overseas in its latest quarterly report, the company previously revealed that $132.2 billion of the $150.6 billion cash hoard that it had at the end of the 2014 March quarter was held offshore, according to an earnings call transcript provided by Seeking Alpha. Assuming that Apple has maintained the same percentage (88%) of its total cash reserves overseas, this would mean that around $156 billion of its current $178 billion in cash is now offshore. While Apple is not the only company to keep significant cash reserves in foreign countries in order to avoid paying U.S. corporate taxes, the size of the iPhone maker’s cash pile has attracted scrutiny from lawmakers.
In May 2013, Apple CEO Tim Cook testified before Congress as part of a Senate investigation into the tax practices of U.S. companies that shift profits overseas. While Apple was not found to have broken any laws, the Senate determined that the company’s overseas tax strategies had allowed it to avoid U.S. income taxes on $74 billion in profit made between 2009 and 2012. That number has likely skyrocketed in the last two years, considering the company’s record profits and its historical tendency to save its cash as a bulwark against future downturns in the fickle tech industry. In the meantime, Apple has been pushing the government to change its corporate tax laws before it will repatriate this cash.
When Cook testified at the Senate hearing in 2013, he urged the legislators to lower the corporate tax rate to encourage U.S. companies to repatriate their overseas cash. Cook told the Senate that he would like to see this corporate tax rate lowered to “a single-digit number.”
Similarly, according to a transcript of the company’s 2014 fiscal second quarter earnings call provided by Seeking Alpha, Apple CFO Luca Maestri noted, “We continue to advocate for comprehensive corporate tax reform and streamlining the tax code which we believe would be of great benefit to the U.S. economy.”
Now it appears that corporate tax reforms may finally be in the works, although not all of the proposed changes may be the types of reforms that Apple was hoping for. In order to help pay for infrastructure projects and fill an upcoming shortfall in the Highway Trust Fund, Senators Rand Paul and Barbara Boxer are proposing an “Invest in Transportation Act” that would impose a 6.5% tax rate on repatriated foreign earnings. Companies would have up to five years to complete the transfer of any money earned in 2015 or earlier.
“The bipartisan repatriation proposal is a win-win for our economy and our country,” Boxer told The Hill. “First, it will bring back hundreds of billions of dollars in foreign earnings that are sitting offshore, which can be invested here in America to create jobs. Second, the taxes paid on those earnings will be used to extend the Highway Trust Fund, which supports millions of jobs nationwide.”
While companies like Apple that have billions of dollars overseas may appreciate the fairly low tax rate proposed by Paul and Boxer, at least one other lawmaker noted that the proposal wasn’t sustainable in the long term. “Tax holiday proposals designed to pay for the transportation bill sound great until you look at the details,” Sen. Orrin Hatch told The Hill.
Hatch pointed out that the Joint Committee on Taxation (JCT) has already concluded that a temporary tax holiday would actually lose money for the government in the long run. Apple has previously lobbied for a similar tax holiday as part of a coalition of companies that included Google, Oracle, and Cisco, as noted by The Hill. Although corporations are stockpiling earnings overseas, the government will theoretically get the full tax amount when the cash is eventually brought into the U.S.
Meanwhile, President Obama has proposed another type of corporate tax reform in his fiscal 2016 budget. The president wants U.S. companies to pay a one-time 14% tax on all offshore earnings and a 19% tax on all future foreign earnings, reports Reuters. This would help eliminate the overseas tax avoidance loophole.
“This transition tax would mean that companies have to pay U.S. tax right now on the $2 trillion they already have overseas, rather than being able to delay paying any U.S. tax indefinitely,” said an unnamed White House official cited by Reuters. “Unlike a voluntary repatriation holiday, which the president opposes and which would lose revenue, the president’s proposed transition tax is a one-time, mandatory tax on previously untaxed foreign earnings, regardless of whether the earnings are repatriated.” Like Paul and Boxer’s proposal, the president’s proposal would use the new tax revenue to extend the Highway Trust Fund.
Obama’s proposal is unlikely to be welcomed by companies with large offshore cash hoards like Apple, since it would require that companies immediately pay U.S. corporate taxes whether or not the cash is repatriated. In any case, it is quite possible that neither of these proposals will earn final approval from Congress. However, with approximately $2 trillion at stake, it may not be long before lawmakers pass new tax laws that will either entice or compel Apple and other corporations to bring these overseas cash reserves back to the U.S.
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