Apple avoids paying $50 billion in US taxes

Konstantin Sheiko
February 8, 2018

Apple has unveiled its plans on Wednesday to bring back the vast majority of the $252 billion in cash that it held abroad, announcing it would make a sizeable investment in the United States. Apple has been deferring paying taxes on its foreign earnings, preferring to hoard its money overseas, However, the new tax code that President Trump signed into law last month has prompted Apple to re-think its strategy. New provision allows for a one-time repatriation of corporate cash held abroad at a lower tax rate than what would have been paid under the previous tax plan. 

In a situation that benefits both parties involved, President Trump and other Republicans can now point at Apple’s action as one of their domestic policy successes because of their legislative initiatives. Apple has already declared it would put some of the money it brought back toward the creation of 20,000 new jobs and a new domestic campus, while the $38 billion tax payment will surely be among the biggest payouts from the tax bill. President Trump has announced, “I promised that my policies would allow companies like Apple to bring massive amounts of money back to the United States,” Mr. Trump tweeted on Wednesday. “Great to see Apple follow through as a result of TAX CUTS.” Timothy D. Cook, Apple’s chief executive, issued a statement saying, “We have a deep sense of responsibility to give back to our country and the people who help make our success possible.”  

It is obvious that previously punitive 35 percent federal corporate tax rate forced Apple, among other multinational giants, to keep a total of roughly $3 trillion in global profits off their domestic books. Under the new Trump tax law, companies that make a one-time repatriation of cash will be taxed at a rate of 15.5 percent on cash holdings and 8 percent on non-liquid assets. That is lower than the new 21 percent corporate rate. Besides, under the new tax code, Apple would also have been taxed whether it brought the money back or not.  

Apple’s announcement, wrapped as a major investment in the United States, is in reality a massive financial windfall. It follows years of criticism that the company did not do enough for the American economy, making most of its products in China and stashing its profits abroad. During the 2016 presidential campaign, Apple was a frequent target of the future President Trump, who promised he would force the company to start making iPhones and Macs in the United States. While that is unlikely to happen at all, Apple has since gone on a charm offensive to demonstrate its value to the American economy.  

In its PR campaign, the company is accentuating the number of jobs created by the so-called app economy, an ecosystem of software and services that run on the iPhone and other Apple products. Last year, Apple promised to create $1 billion fund to invest in advanced manufacturing in the United States. Now Apple says it increases the size of that fund to $5 billion, noting that it is also backing projects from manufacturers in Kentucky and Texas. Not only that, Apple has also pledged to open a new 20,000 strong domestic campus in a location where it currently has no operations. Apple currently has about 84,000 employees in the United States, so 20,000 new jobs would be a 24 percent increase. The company added that it would invest more than $30 billion in capital expenditures, or spending on parts and the equipment required to produce them, over the next five years in the United States. Apple spent $14.9 billion in capital expenditures in the last fiscal year. However, it did not specify how much of that sum has it spent in the United States.  

Apple had preferred to borrow money in the past in order to fund its stock buybacks and dividends, instead of using its cash back from abroad. Bringing the cash home creates new opportunities for the company, including acquisitions and higher dividends for shareholders. Over the last five years, Apple has returned $233 billion in cash to shareholders through buybacks and dividends. Paying $38 billion in taxes now is unlikely to strain Apple’s budget because the company had already earmarked $36.4 billion in anticipation that it would eventually have to pay taxes on its foreign earnings. Apple employees might see some benefits as well - according to inside un-identified sources, Apple was increasing investment in its employees by rewarding them with bonuses of $2,500 in restricted stock units. Apple joins other companies, such as AT&T, that have issued employee bonuses since the tax law was signed.