Written By: Darren Morris – Corporate Finance
Cupertino-headquartered Apple Inc. has accumulated cash reserves in excess of $200 billion, but most of this money is stashed outside the US, safe from the country’s tax authorities. Bringing the cash back would subject it to a tax rate of about 40 percent, a rate that Apple is unwilling to bear. The company has repeatedly announced that it will not repatriate the money until the US changes its corporate tax laws and reduces the amount that Apple needs to pay. In an interview with The Washington Post, Apple’s CEO, Tim Cook, said that the company will not bring the money to the US unless “there’s a fair rate”.
Meanwhile, the company has become the biggest bond issuer in the world, raising $80 billion in the last four years. The money has been used to buy back $116 billion in shares over the last five years. In the first quarter of 2016 alone, Apple’s buyback of shares was more than double that of any other S&P 500 Index company.
Where does Apple keep its money?
Apple books almost two-thirds of its profits in Ireland, a country with a tax rate of just 12.5 percent. Ireland is a corporate-tax haven and is part of the US tax-treaty network. Apple uses the country’s permissive transfer-pricing policies to shift its profits to Ireland and save massive amounts of tax in the process.
In a recent interview with Bloomberg, Nobel economist Joseph Stiglitz termed Apple’s profit reporting in Ireland a “fraud”. Attributing two-thirds of the company’s profits to a country that contributes just a small fraction of the company’s revenues is certainly a tax-planning measure that cannot be easily explained away. By no stretch of the imagination can Apple claim that the profits arise in Ireland and hence are taxed there. Apple officials point out that what they are doing is perfectly legal. But there could be trouble around the corner. The European Commission, which is the European Union’s executive arm, is currently investigating whether Ireland has violated the bloc’s state-aid rules by helping Apple.
Apple doesn’t seem to be in a hurry to spend its cash.
Any company would love to have the problems that Apple faces. Its iPhones, iPads, Macs and Apple Watches continue to generate large cash surpluses. The gross margin of 40 percent that Apple enjoys is practically unheard of in the hardware business. Any firm that sits on such a big pile of cash would be tempted to use it to finance the purchase of other companies. But Apple has stayed away from putting its money into mega-acquisitions.
Its largest buyout was its 2014 purchase of Beats Electronics for $3 billion. The company makes the popular Beats headphones, speakers and software. By all reports, acquiring Beats was a sound decision, and it has added to Apple’s bottom line. Some analysts hold the view that Apple should buy out Tesla Motors. It is an open secret that Apple has a car project codenamed Titan. Although the company has never confirmed this, it has purchased several web addresses related to cars, including apple.car and apple.auto.
But Apple has chosen not to take the risk of putting a large sum into buying out another company. This decision could be based on it not being able to find a suitable target. The reluctance to go in for a big acquisition could also be the result of the company’s reluctance to borrow funds to finance its purchase.
Cash-rich yet cash-hungry.
Apple is in the anomalous position of sitting on hundreds of billions of dollars in cash while it continues to be one of the largest borrowers in the market. Its debt, which was non-existent in 2012, has mushroomed over the years.
In August, Apple has raised $7 billion in bonds, of which $2 billion was issued at 3.85 percent with a maturity of 30 years.
How will Apple resolve this problem?
With $215 billion of Apple’s total cash of $232 billion currently held outside the US, the company will probably continue to refuse to bring the money back unless tax rates are lowered. When this could happen is anybody’s guess. But the company cannot postpone finding a solution to this issue forever. In the meantime, Apple is likely to remain one of the largest bond issuers as it continues to raise funds to finance its share-buyback program and its dividends.