Apple’s Case for Tax Reform

The Treasury now gets little from the company’s $256 billion cash hoard.

 
 

 
PHOTO: ASSOCIATED PRESS

Apple reported last week that it has amassed $256 billion in cash on its balance sheet with more than 90% parked overseas—that is, outside the grasp of U.S. tax authorities. While our friends on the left howl about corporate tax avoidance, Apple offers a case study for tax reform.

Apple’s cash hoard is five times greater than the market value of General Motors and exceeds the combined foreign-currency reserves of the U.K. and Canada. In the last three months of 2016, the iPhone developer accumulated cash at an approximate rate of $3.6 million per hour, and on Monday its market capitalization briefly exceeded $800 billion.

Sales of the iPhone make up about two-thirds of Apple’s revenue, and a substantial share of its income is earned overseas. Apple pays corporate taxes on foreign income in the country where it’s earned but is penalized if it brings cash home. 

Last year the European Commission accused Apple with routing income tied to intellectual property through Irish-based subsidiaries to reduce its tax bill in the European Union. CEO Tim Cook disputed that it is illegally avoiding taxation, noting that Apple pays taxes to the U.S. Treasury when it repatriates overseas profits. Fair enough, though the company legally defers paying U.S. corporate taxes by keeping cash overseas.

As Mr. Cook explained to the Washington Post last August, “when we bring [cash] back, we will pay 35 percent federal tax and then a weighted average across the states that we’re in, which is about 5 percent, so think of it as 40 percent. We’ve said at 40 percent, we’re not going to bring it back until there’s a fair rate. There’s no debate about it.” Hence its $256 billion in cash reserves.

The U.S. has the highest statutory corporate tax rate (39% including the average state rate) in the developed world. Other countries including Canada (to 26% from 43% in 2000) and the U.K. (to 20% from 30% since 2008) have been reducing theirs to become more competitive. Ireland boasts a corporate rate of 12.5% and a mere 6.25% for profits from research and development. France’s newly elected President Emmanuel Macron has proposed cutting his country’s to 25% from 33.3%.

Even the average effective U.S. corporate rate—29% after deductions and credits—is higher than most countries’ statutory rates. Canada’s effective rate is 16.2%, and the U.K.’s is 10.1%. Mr. Cook has estimated that Apple’s effective rate in the U.S. is more than 30%. Adding injury to insult, the U.S. taxes companies on their world-wide profits. Most countries maintain territorial systems in which companies pay taxes only where the income is earned.

By some estimates, corporations have $2.5 trillion sitting overseas. The sum has swelled in recent years as corporate profits have grown. Some corporations like Burger King (Canada) and Medtronic (Ireland) have sought to avoid this tax penalty by inverting—i.e., merging with a foreign business and relocating their headquarters to a lower-tax jurisdiction.

Other companies are borrowing billions to fund shareholder dividends and buybacks. Given today’s low interest rates, it may be cheaper to borrow than bring cash back from overseas. Interest payments are also tax deductible. According to the Journal, Apple has borrowed $88 billion to fund shareholder payouts since 2012. Last week Apple announced that it will increase its dividend by 10.5% and return $300 billion to shareholders through March 2019. This may be a bet on Congress passing a tax reform that makes it more attractive to repatriate cash held overseas. 

The key point is that any tax reform worth the political capital needs to encourage U.S. companies to move foreign income back home. President Trump has floated a one-time tax hit of 10% on previously earned overseas income that is repatriated, with a territorial tax system and a 15% rate on future income. House Republicans prefer 8.75% and 20%, but either is a big improvement on the status quo. Businesses might use that returning capital to lift investment, boost wages, or return cash to shareholders that could be reinvested.

The Treasury would also benefit from a better corporate tax code. According to the Tax Foundation, Canada’s corporate tax revenues as a share of GDP increased after its rate fell in 2000. Canada’s corporate tax revenues have averaged 3.3% of GDP since 2000 compared to 2.9% from 1988 to 2000 (when the rate was 43%) and 2.3% currently in the U.S.

Republicans and Mr. Trump will need to sell the American people on the benefits of corporate tax reform. They could do worse that cite Apple as Exhibit A.

Appeared in the May. 09, 2017, print edition.

https://www.wsj.com/articles/apples-case-for-tax-reform-1494287322

 
 

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