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Under fire for its tax planning, Apple fought back last month. The iPhone maker boasted that its worldwide effective tax rate was “higher than average for US multinationals”, at 24.6 per cent. 

The median effective rate in the S&P 500 is 27.8 per cent. But some high-paying companies might not be considered “multinational”. The real problem is Apple’s effective rate is swollen by a $36bn provision to take account of possible future taxes owed when offshore cash is repatriated to the US. As Apple has made abundantly clear, however, the cash was never going to be brought home at the prevailing 35 per cent income tax rate.

With the biggest overseas cash hoard, Apple lobbied for a special deal. The proposed Republican tax reform delivers it, with a cut-price repatriation rate of about 14 per cent. When Apple brings back the cash, the profits of the most profitable company in the world will receive an extra boost: the $36bn tax provision was (unsurprisingly) way too high and Apple will record a big accounting gain as a result.

If Apple’s sanctimony over its “higher than average” rate is galling, the company does deserve credit for making a provision in the first place. Other technology companies with huge offshore earnings, such as Alphabet, have not acknowledged that any foreign earnings are due to come home or estimated or provisioned for the hit. Nonetheless, they too will bring back cash and report big accounting charges when they do. 

Moreover, the real benefit to Apple could have been much bigger. The repatriation rate is high compared with previous drafts of the tax reform. And Apple cannot immediately repatriate its entire $252bn pile of foreign cash. It is fighting a European Commission decision that it owes an additional $17bn in Ireland; that amount is stuck in escrow.

Most analysts think the rest will be brought back and most of it used on share buybacks. If Apple repatriated all its foreign earnings today, it would be looking at a bill of $78bn — the $36bn provision and $42bn which the company says is the unprovisioned amount. Thanks to the tax cut, it might pay less than $30bn on the lot once foreign tax credits are included. If the reform gets over its final hurdle in Congress, it will be high time to recalculate that effective rate — and find a new spin to put on it.

The Lex team is interested in hearing more from readers. Please tell us what you think in the comments section below. What to make of Apple’s likely tax boost?

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