Tax reform has been a staple of political rhetoric for as long as I can remember. When campaigning, it seems every politician will highlight unfair or absurd consequences of the current tax system, and promises changes. However, reform has proven to be mostly talk with little action. Can it really be different this time?
While the two parties seem unlikely to agree on personal income tax reform soon, there is growing agreement regarding corporate tax reform. Incoming chairman of the Ways and Means Committee, Paul Ryan, R-WI, spoke in early December of splitting tax reform legislation to tackle corporate tax first. In his year-end press conference, President Obama said, based on his recent conversations with Republican leaders, he thought lawmakers could agree on tax reform.
How will tax reform affect Apple (NASDAQ:AAPL) especially with regard to the over $137 billion in accumulated offshore profits held? Apple is often the first example of offshore profits, because it holds the most of any U.S. company and because Apple's overseas profits are growing the fastest. Tax reform may offer repatriation at lower tax rates or even force the repatriation of the restrained profits. In the case of Apple, many investors see only one use for most of the cash once repatriated - direct return to shareholders.
Possible changes in corporate tax include:
Earlier this month, Representative John Delaney, D-MD, introduced the "The Infrastructure and Global Tax Competitiveness Act." The bill proposes repatriation of tax deferred foreign cash at 8.75% and provides the end of tax deferral. The bill includes a fallback option in the event of no further reform bill, setting tax on foreign profits on a sliding scale from 2 to 12.25% depending on the tax rate in the foreign country.
The overseas profits U.S. corporations hold in tax haven countries has increased steadily for decades and is now over 45% of the total overseas profits. The list of companies with the largest deferred balances covers many of the well-known U.S. blue chip corporations. Based on data from Bloomberg, the following table reports the six highest:
|Company||Offshore Profits (billions)||Market Cap (billions)||Offshore Profits per share|
|General Electric (GE)||$110.||$257.||$10.96|
Apple gets a lot of attention in this list because it has the most foreign assets under tax deferral, and because unlike the others Apple's business operates with very low long-term debt. When the foreign funds repatriated to a company with a higher debt, restrictions can be expected regarding how the funds are spent to maintain the balance sheet and the investment rating. If Apple repatriated its overseas cash, we should expect a direct impact on shareholders. Apple has little corporate debt to pay down and a large cash flow to service it. As the giant in its industry, Apple has little opportunity to spend the money on large acquisitions. Apple would be expected to return a portion of the funds to shareholders in the form of increased share buybacks or dividends.
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Disclosure: The author is long AAPL, MSFT, GE. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.