here is well-established tradition of large, uber-profitable corporations using creative means to lower their tax liability. Again and again, the business world has seen multinational corporate juggernauts expend great energy to dodge the taxman and preserve as much of their cash reserves as possible. And not only has this trend failed to slow down, in some ways it has increased in its momentum: in the last several years, we’ve seen massive deals between leading multinational corporations and various countries which have resolved extremely large tax liability disputes. Back in 2015, for example, the Dutch government was ordered by the European Commission to recover approximately $34 million in back taxes from Starbucks. Another corporate giant, Google, has had its fair share of dealings with European tax authorities as well. There’s no reason to suspect that this type of thing will change in the future; no matter what they may state publicly, in private, every company seeks to keep as much of its hard-earned profits as possible. One interesting development in the business world along these lines is Apple’s recent plan to make a large repatriation payment to the federal government. Apple’s repatriation tax is definitely a fascinating development in the corporate tax world.
For a long time, Apple has stashed huge amounts of cash off of its domestic books in order to avoid the heavy corporate tax rate which was in place prior to the Tax Cuts & Jobs Act. Now, with the repatriation tax provision added to the new tax code revisions, Apple has decided that it’s prudent to move its offshore cash back to the U.S. and pay taxes at the favorable tax rate granted by this provision. If we look deeper, however, we’ll see that there’s more to Apple’s repatriation tax story. Let’s examine this case in more detail and then give a critical view of what’s taken place.
Detailed Picture of the Case
The Tax Cuts & Jobs Act reduced the federal corporate tax rate down to 21%, a dramatic decrease from the previous 35% rate. The new revisions included a special provision whereby corporations will face a rate of 15.5% of cash holdings and a rate of 8% on nonliquid assets when they make a one-time repatriation of offshore funds. In response to this revision, Apple has chosen to repatriate the majority of its $252 billion held outside the United States. It was in this climate that Apple’s repatriation tax was born. The company anticipates that, due to the tax law changes, it will be making a repatriation tax payment to the federal government amounting to roughly $38 billion. This one-time payment will be among the largest sums generated by the new tax code revisions.
Apple has stated publicly that the payment will be part of a larger plan to invest in the American economy and create thousands of new jobs for domestic workers. Over the course of the next 5 years, Apple states that it plans to invest approximately $350 billion in the American economy; however, this total includes the $38 billion repatriation tax payment. Apple expects to create 20,000 new jobs and also build a new domestic campus for its employees. President Trump has already spoken directly to Apple’s repatriation tax payment and has cited it as evidence of the efficacy of his recent tax code revisions. As always, however, we have to look beneath the surface to get a sense of the entire issue.
As referenced above, Apple has stated that it plans to have an impact equal to approximately $350 billion on the American economy over the upcoming 5 year period. But, at Apple’s current yearly pace of U.S. spending, the company was already on track to spend approximately $275 billion during those next 5 years. Accordingly, when you consider that the $350 billion already included $38 billion for Apple’s repatriation tax payment, Apple only appears to be committing around $37 billion of additional funds to the U.S. economy during this time period. When this is further broken down on an annual basis, the contribution appears to be even more modest.
What’s more, the tax code revisions would have required Apple to make a payment on its offshore funds regardless of whether it chose to take advantage of the repatriation provision, so Apple’s repatriation tax decision appears a bit less philanthropic when viewed in this light. Further, Apple had apparently already set aside roughly $36.4 billion in anticipation of eventually paying tax on its foreign income, and this almost covers the entire tax bill scheduled to be paid to Uncle Sam. So, ff Apple actually does come through on its stated promise of investing in the American economy, we can certainly applaud those positive outcomes, but we should also be cautious before believing that Apple’s repatriation tax actions represent the height of selfless altruism.
The Impact of Apple’s Repatriation Tax
Regardless of its motives, Apple’s repatriation tax payment is definitely a fascinating development in the corporate tax world. For Apple, it appears to be something of a windfall: the company avoids the higher corporate tax rates which were formerly in place, and it also improves its reputation in the U.S. through its announced increase in investment in the American economy. Of course, if we look deeper, we can see that the situation is a bit more complicated. What’s very clear, however, is that Apple’s plan will be a net positive for the company. At Mackay, Caswell & Callahan, P.C., we try to stay on top of what’s happening in the world of business and tax. They’re both always changing, and our top New York tax attorneys work hard to stay up-to-date with everything we need to know. Don’t hesitate to reach out to us today if you need assistance with a tax issue!