The Truth Behind the Tax Holiday and Apple’s Cash Reserves in Overseas
US corporations have more than $2,5 Trillion cash in overseas (Institute on Taxation and Economic Policy (ITEP)) and the cash pile grows roughly 10% annually. Apple revealed that the company has a cash position of $246 billion (Jan 2017), and 94 percent of it ($231 billion) is kept outside of the U.S. But Apple is not only one that has a huge amount of cash in overseas. The company is followed by other firms in the technology and pharmaceutical sectors, i. g.: Microsoft with $113 billion, Cisco with $62 billion, Oracle with $52 billion and Google with $49 billion.
The main reason, why the US companies pile a huge amount of cash in overseas, is the statutory tax rate of 35%. One way to bring the cash to us soil is tax holiday which would allow corporations to avoid paying high tax rates (35%) when they transfer their offshore cash to their domicile. According to Tim Cook, SEO of Apple, the implementation of a tax holiday would be “very good for the country, and good for Apple,”. His comment means that Apple will bring its cash held offshore, in case of tax reduction:
“We provisioned several billion dollars for the U.S. for payment as soon as we can repatriate it, and right now I would forecast that repatriation to occur next year” Tim Cook, Sep. 2016
According to Oxfam, the 50 biggest American corporations can save at least $300billion if they pay 10% tax instead of 35%.
“These companies have deepened their use of tax havens [with 1,751 subsidiaries in tax havens] and increased efforts to build influence to push for even greater tax breaks than they already have. Corporate tax dodgers cheat the US out of approximately $135bn in unpaid tax revenues every year and poor countries out of an estimated $100bn annually.” Ana Arendar, Oxfam’s head of inequality
Trump has promised one time tax rate of 10% to bring the offshore cash to usa. The purpose of Trump’s tax holiday is creating jobs by bringing cash from overseas to invest in usa. But his views how to use the cash don’t necessarily match with the plans of corporate boards and executives. Probably, they will use the cash to buy back their own shares, pay corporate debt or to acquire businesses in us. “I think M.&A. will be fairly high on the list.” Marc-Anthony Hourihan, co-head of mergers and acquisitions in the Americas for the Swiss bank UBS. If the money will be used for M&A then jobs will get lost rather than created.
On Dec 2011, the U.S. Senate Permanent Subcommittee on Investigations with Chairman Carl Levin has released a report with very interesting findings:
“Some multinational corporations say they want to bring foreign funds back to America, but can do it only if they get a special tax break, … They claim their foreign funds are otherwise ‘trapped’ abroad, but new data show that is not true. Many U.S. multinationals have already invested a large portion of their foreign funds right here in the United States, taking full advantage of the safety and security of the U.S. financial system to protect their money while paying no U.S. taxes on those funds to support the U.S. system.” Carl Levin
At the beginning of 2011, the committee send a survey to 27 U.S. multinational corporations which held more than half a trillion dollars in tax-deferred foreign earnings at the end of FY2010 and the survey also found that 46% of those foreign earnings – almost $250 billion – was maintained in U.S. bank accounts or invested in U.S. assets such as U.S. Treasuries, U.S. stocks other than their own, U.S. bonds, or U.S. mutual funds. Nine of the 27 companies, or one-third, including Apple, Cisco, Google, and Microsoft, held between 75 and 100% of their tax-deferred foreign earnings in U.S. assets.
“Not content with that existing tax benefit [Section 956(c)(2) allows U.S. corporations to use foreign funds to make a wide range of U.S. investments without incurring tax liability] , a group of multinational corporations is fueling a major lobbying effort to obtain still another repatriation tax break,” Carl Levin
According to the study, the cash is not trapped in offshore, it is already onshore but the corporations cannot buy own shares or any shares of a related company without paying 35% tax because of the tax code.
And an interesting footnote from the study:
“Some have raised the argument that the tax code’s deferral rules do not permit undistributed accumulated foreign earnings from being utilized on a tax-free basis by U.S. multinational corporations for their own investments, such as building new plants, increasing research and development, or creating new jobs. However, the 2004 repatriation shows, as discussed in the main body of the Report, that there is little evidence that repatriating corporations would use their offshore funds for such purposes anyway. In addition, U.S. corporations currently have substantial amounts of domestic cash that could be used for those purposes, should they wish to make those types of investments.”
Oracle used the tax holiday in 2004 to buy Retek and PeopleSoft. The company eliminated thousands of jobs.
AJCA Tax Holiday in 2004 has prohibited share buy backs with repatriated cash but Thomas J. Brennan, Professor of Law, Northwestern University School of Law, made a study “Where the Money Really Went: A New Understanding of the AJCA Tax Holiday” in 2011 with following conclusion:
“The largest 20 repatriations accounted for 56% of all repatriated dollars. For these top-20 firms, my analysis estimates that $0.72 per repatriated dollar was spent on uses permissible under the AJCA. This included $0.49 for cash acquisitions, $0.10 for net debt reductions, $0.09 for R&D, and $0.03 for capital expenditures. The remaining $0.28 was paid out to shareholders ($0.24 for share repurchases and $0.04 for dividends).”
Avinash Mehrotra, co-head of Goldman Sachs’s M.&A. shareholder advisory group, once said:
“The potential for these reforms, around reduced corporate tax rates and cash repatriation, to put more discretionary cash flow in the hands of companies is significant, …. Boards and management teams will have some interesting choices around acquisitions, longer-term capital investments, debt reduction and return of capital.”
Apple doesn’t use the “offshore” cash for share buybacks because of 35% tax rate but the company issues $billions of bonds with AA rating to buy own shares every year:
“They’ve become very accustomed to coming to market, … While it’s still notable, they still have the AA ratings and there are a lot of investors who want or need to own the bonds for various reasons, it doesn’t have the same level of allure.” Jody Lurie, a credit analyst at Janney Montgomery Scott
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