Apple’s Pie
I’m not sure what it’s like in the US, but here in the UK, tax dodging by the big companies is a hot issue, and the big tech companies are right there in the limelight. The general concept is fairly simple, although the details vary, and it’s usually completely legal. The system is really only open to multinationals, and takes advantage of the fact that countries have different tax rates. What you do is to make sure that the only bits of your empire that make a profit are the ones in low tax countries.
It’s not that difficult to do if you have the resources of a multinational available. For instance, one way to do it (simplifying things) would be to produce the goods in a high tax country and sell them at cost to another part of the company in a low tax country, and when the division in the low tax country sells them on, they accumulate the profit and pay tax at the lower rate. And of course, electrons are even easier to move around than manufactured goods!
Which brings us to the matter of Apple’s new debt sale bond issue, which could reach as much as US16 billion. This is really interesting, because Apple doesn’t have any debt! Quite to the contrary, it has something in the region of US$145 billion swilling around in cash reserves! The problem for Apple is that something like two thirds of that cash is in countries other than the US. Low tax countries. That’s a problem, because if you want to use it to pay shareholders and keep them sweet, you need to bring it into the US.
And therein lies the rub - if they bring the money into the US it will be liable to a 35% repatriation tax!
The solution, for Apple, is to issue bonds that are backed by all that overseas money. A bond is effectively a loan on which the issuer pays interest for a fixed number of years and then repays the amount of the initial loan. So, as long as the interest on the bonds is less than the 35% tax, the deal is well worth it for Apple, if it needs those funds in the US.
And Apple does need those funds, because with disappointing financial results (relatively speaking, but that is what matters to Wall Street) and a substantial drop in stock value, it needs to sweeten things for its shareholders by increasing dividends and instituting a share buy-back program. If there are less shares for a company, then, as a rule, each share is worth more, because it represents a larger share of the company.
But, of course, Apple will have to bring in that money some time - possibly when the bond become repayable, possibly earlier. So what’s the gain? Ah well, now we move into the realm of politics. For the US, there are definite political and economic advantages in having that money move into the country, over and above taking a 35% cut of it. And Apple is only one of a number of US multinationals that have a lot of offshore cash they’d like to bring home.
That’s why there is a lot of talk going round in high places at the moment of a repatriation amnesty. The idea is that for a limited period you allow people to move their assets and profits back into the country at a much lower rate than usual - say 10% tax. Even if it doesn’t happen for another five or even ten years, it will happen sooner or later, and then Apple can move its expatriate cash back in to the US at a much cheaper rate.
And that, my friends, is the reason why a company with US$145 billion in cash is borrowing money!
http://www.theregister.co.uk/2013/04/30/apple_bond_issue/
http://en.wikipedia.org/wiki/Bond_(finance)
Alan Lenton
5 May 2013