Tax Reform In 2015 Can Impact Apple

Dec. 21, 2014 4:41 PM ETApple Inc. (AAPL)58 Comments

Summary

  • Corporate tax reform is getting closer, repatriation of foreign profits is a possible outcome.
  • Reform may end the practice of deferment, meaning overseas cash hordes will no longer be part of common corporate practice.
  • Many large U.S. companies will have decisions on how to use funds that are no longer restrained.
  • Investors should consider the impact.

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:

  • The maximum tax rate, which is currently at 35% although most companies pay a fraction of that rate. The U.S. maximum rate is above the rate for most countries. A reduction to 25 or 28% has been discussed. Currently the actual tax paid by corporations averages about 20%, so reduction of the maximum rate is expected in conjunction with some closing of tax loopholes.
  • Revision to the deferral rule, which allows U.S. companies that accrue profits to foreign locations to defer the U.S. tax

This article was written by

A stock market investor since the mid 1980s, I have had my share of investment successes and disappointments. Longer term perspective allows insights into the market psychology which I always find fascinating. The big market players hold many advantages over the small independent investors, so to compete it is necessary to look past the headline data and act on underlying shifts in business or market dynamics. Questioning everything adds to a healthy discussion - you can never be sure under which rock lies the gold nugget.

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.

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