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Apple will see as much as $47bn slashed from its expected tax liability if Republicans push through their current tax plan, making it the biggest beneficiary of the legislation now working its way through Congress.
The massive scale of the tax cut, based on calculations by tax experts and the Financial Times, has come into focus in recent days as the Senate and House bills have converged over their treatment of the estimated $1.3tn of cash American companies hold offshore. The details of the tax legislation have yet to be finalised.
The potential windfall for the world’s most valuable company stems from the reduced tax rate that would be applied to foreign earnings that it currently holds outside the US.
Like many US companies, Apple has opted to leave the bulk of its overseas earnings abroad rather than pay the 35 per cent corporate tax rate that would apply if the money were brought home under the current regime.
The Republican proposals call for taxing that money at rates of no more than 14.5 per cent, whether or not it is returned home.
Apple has $252bn in foreign cash and investments, about a fifth of the total overseas holdings for all US companies, according to rating agency Moody’s. Apple’s total dwarfs the $132bn held by Microsoft, the US company with the second biggest foreign cash pile.
It estimates that it would have to pay $78.6bn in taxes if it brought the money back under the current regime. However, with Apple choosing to defer the tax indefinitely, that bill is unlikely ever to come due in full.
Under the Senate version of the tax bill, Apple would immediately have to pay an estimated $31.4bn on its past overseas earnings, according to Richard Harvey, a tax professor at Villanova University who has testified before the Senate on Apple’s tax affairs. That number would drop to $29.3bn if the company were to lose its fight with the European Commission over a €13bn claim of back taxes in Ireland.
Apple is more realistic than other companies. I think they are trying to be conservative
The difference between the two numbers is at least $47bn, a figure that exceeds the annual profits of any other US company.
Unlike most other US multinationals, Apple has already taken billions of dollars of charges in past years to reflect its potential taxes. It has set aside $36.4bn for those bills — more than the tax charge it is now likely to face — and would likely record the difference as a one-off profit.
“Apple is more realistic than other companies,” said John Robinson, professor of accounting at Texas A&M University. “I think they are trying to be conservative.”
Apple has previously indicated in its accounts that it plans to bring back only half its foreign cash hoard. However, executives have made little secret of their hope of repatriating much more, probably for use in stock buybacks.
“Obviously, we would be looking to bring the cash back, and that would give us additional flexibility around our capital return activities,” Luca Maestri, Apple’s chief financial officer, said earlier this year.
The special overseas earnings rate of about 14 per cent in the current tax bills represents a huge discount to the standard corporate tax rate, but it is higher than the 10 per cent that President Donald Trump first proposed. At that rate, Apple’s US tax bill would have been $12.5bn lower still.
In addition to the one-off windfall, the Republican tax bills would exclude future foreign profits from US taxes, handing a significant benefit to US multinationals.
“Overall, companies like Apple will be happy with it. They are a getting a territorial system and a lower rate. It’s a good deal,” Prof Harvey said.
How the FT calculated Apple’s tax windfall
The size of the windfall that Apple stands to reap from the proposed tax “holiday” on past foreign earnings depends on a number of factors. We have used the rates from the latest tax bills, a detailed analysis of Apple’s accounts, as well as a number of estimates.
How much does Apple have in overseas earnings?
Apple had $252.3bn in cash and marketable investments outside the US at the end of September. It also has an unspecified amount of foreign earnings that have been reinvested in its business. Professor Richard Harvey, a tax expert at Villanova University law school, estimates Apple’s total foreign earnings at $300bn including $50bn of reinvested earnings, based on past disclosures from the company.
Under the proposals, what tax rate would apply to foreign earnings that haven’t been returned to the US?
The rates in the Senate bill currently stand at 14.49 per cent for earnings held in liquid form, and 7.49 per cent for earnings that have been reinvested. The House bill calls for 14 per cent and 7 per cent. We have used the slightly higher Senate rates.
Can Apple take deductions for the foreign taxes it has paid?
Under the draft legislation, companies receive a foreign tax credit for part of the taxes they have already paid outside the US. Prof Harvey estimates that Apple has paid an average of 7.5 per cent on its foreign earnings. But it will not get the full credit. Instead it would receive a credit equal to 41 per cent of what it has paid because the special 14.49 per cent tax rate on overseas earnings is 41 per cent of the current corporate tax rate of 35 per cent.
What about the €13bn in back taxes that the EU says Apple owes in Ireland?
Apple has disputed this bill, although it is setting money aside to pay up. If Apple is liable for the Irish back taxes, the US tax would be $29.3bn.
How much of the overseas cash pile will actually be brought back to the US?
Apple has said that $123.6bn of its foreign earnings are not held “indefinitely” outside the US, signalling an intention to repatriate the money eventually. But its executives have also made clear that a lower US tax rate would result in the company bringing back substantially more cash. Most Wall Street analysts also assume that Apple — like other US companies — would bring back almost all of its foreign profits once it had paid taxes on them.
How much would it save?
Apple is unusual because it tells investors how much tax it would have to pay if it brought its foreign cash back to the US under current laws. It has set up a $36.4bn deferred tax liability, to cover expected taxes on the $123.6bn not held offshore “indefinitely”. It also says it would have to pay another $42.2bn if it brought the rest back — a total of $78.6bn. The $49bn savings represents the difference between that bill and the lower of the two estimates. However, Apple showed every intention of keeping much of its cash offshore indefinitely, making it unlikely it would ever have paid the full bill under the current system.
Why might Apple end up booking a profit from tax reform?
That is because it set aside $36.4bn in prior years to reflect extra US taxes it eventually expected to pay when it brought back much of the money. If the actual bill is between $29.3bn and $31.4bn it would reclaim the unused part of the tax provision, resulting in $5bn-$7.1bn in profit. Most other US multinationals have not set up similar tax provisions.
This post originally appeared on Financial Times