Apple And The Overseas Tax Showdown

| About: Apple Inc. (AAPL)

Apple's (AAPL) cash hoard is roaring, especially overseas. According to a recent report, Apple has $74 billion in overseas cash, up from $64 billion just 7 months ago and $35 billion in 2010. And Apple is not the only one. Other companies are continuing to build large piles of cash overseas. Microsoft (MSFT) has $50 billion, Cisco (CSCO) $42.3 billion, Oracle (ORCL) $25.1 billion, and Qualcomm (QCOM) $16.5 billion.

These hoards represent a showdown between the large multinational corporations and the government over taxes. US tax law requires that earnings of domestic corporations to be taxed domestically, even if those earnings are earned outside the US. Currently, the law "allows them to defer taxes on their profits from international operations until they bring the cash back to the U.S." writes Justin Fox in a in his analysis of tax implications of overseas corporate cash hoards.

Apple is pushing for a change in policy. In a recent earnings conference call, Apple CFO Peter Oppenheimer states:

Repatriating the cash from offshore would result in significant tax consequences under current U.S. law. We have expressed our views with Congress and the administration. We think that the current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate the substantial amount of foreign cash that they have. And that's our view, and we've expressed it.

Opponents of an overseas income tax holiday argue that it would deepen the government deficit without providing any economic benefits. According to a congressional subcommittee report, the 2004-2005 Bush repatriation tax holiday "cost the Treasury at least $3.3 billion in revenue over ten years," and furthermore "produced no appreciable increase in U.S. jobs or domestic investment, and led to U.S. corporations directing more funds offshore."

But don't expect Apple to give up any time soon. With this being an election year, it could pay for Apple to wait for a change in policy. Although it's been criticized for the low returns on its cash position, the possibility of avoiding a heavy tax bill may end up providing a strong effective return. If Apple were to pay the highest tax rate of 35% on its $74 billion, it would pay $25.9 billion in taxes. If it were to invest the remaining $48.1 billion at a rate of 10%, it would take almost 5 years to recover the tax bill. The potential boon and relative safety of their position may mean waiting is the best investment option. And that could hold for true years, if necessary.

If there is a repatriation tax holiday the implication for shareholders could be bigger dividends and more share buybacks. The company has already announced the commencement of a dividend to begin in the September quarter of this year and authorization of a $10 billion share repurchase program over the next three years. According to Oppenheimer the dividend and share buyback program will be paid for with domestic cash: "we anticipate utilizing approximately $45 billion of domestic cash in the first 3 years of our program." Though no plans have been specified on what Apple would do with repatriated cash, it would greatly increase the funds available to the company to increase both dividends and share repurchases, if it choose to do so.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.