Apple's bond offering will allow it to avoid $9.2B in US taxes

Posted:
in AAPL Investors edited January 2014
By issuing bonds to finance its stock buyback, Apple will avoid paying $9.2 billion in taxes to the U.S. government, making its decision to take on debt a "no-brainer."

Despite having nearly $150 billion in cash and investments, Apple decided that taking on debt would be the best way to fund its $100 billion capital return program. That's because most of Apple's cash is held overseas, and returning it to the U.S. to buy back shares and issue a dividend would require repatriation taxes to be applied.

Apple


Apple's borrowing strategy will instead allow the iPhone maker to save the $9.2 billion it would otherwise be required to pay in taxes according to figures compiled by Moody's Investment Services and reported by Bloomberg. The estimates led Gerald Granovsky, senior vice president at Moody's, to refer to Apple's strategy as a "no-brainer."

Currently, about $100 billion of Apple's $145 billion is held overseas.

Apple announced last week that it plans to spend $100 billion in cash by the end of calendar year 2015 on its capital return program. Part of it will involve a 15 percent increase in dividend payouts, but the bulk of the money will go toward a share repurchase program, said to be the largest one in history.

But with Apple's $145 billion in cash, some were surprised that the Cupertino, Calif., company opted to borrow. This week, it sold $17 billion in debt in Apple's first bond offering since 1996. It was a dollar amount record for a U.S. corporate offering.

For its part, Apple has noted that it paid $6 billion in federal corporate income taxes in fiscal 2012. Spokesman Steve Dowling noted that Apple is one of the largest, if not the largest, corporate income taxpayers in the country.

Apple Chief Financial Officer Peter Oppenheimer also laid out some of the benefits to his company in tapping the U.S. debt markets. Speaking during Apple's quarterly earnings conference call last week, he said incorporating debt into the capital structure would offer access to attractively priced capital, would reduce Apple's overall cost of capital, and would be an efficient use of the company's balance sheet.

"We will maintain sufficient domestic liquidity to grow the business and execute capital expenditures and acquisitions," Oppenheimer said. "The program announced today will result in returning an average of $30 billion annually to shareholders."
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Comments

  • Reply 1 of 105
    jollypauljollypaul Posts: 328member


    Alternative phrasing: "Apple avoids stupid move that would cost an extra $9.2 billion."

  • Reply 2 of 105
    red_kolared_kola Posts: 24member


    Tax avoidance reported as "a good thing". No wonder your deficits will never be reduced...

  • Reply 3 of 105
    igrivigriv Posts: 1,177member


    Ain't the US financial system grand!  Apple is not allowed to repatriate its cash, instead it:


     


    1. Still collects 1% a year on its offshore cash.


     


    2. Pays 2% on its debt.


     


    3. Pays underwriting fees to the investment banks.


     


    4. But wait, there is more! 2 and 3 are tax deductible items, resulting in a transfer of wealth from the tax payer to said investment banks (which, I am guessing, are holding most of the bonds also).

  • Reply 4 of 105
    dysamoriadysamoria Posts: 3,430member
    red_kola wrote: »
    Tax avoidance reported as "a good thing". No wonder your deficits will never be reduced...

    This is why the USA is in debt and the economy is in the toilet. The whole system is insane. This is the "self regulating" economy. Bunch of BS. Why exactly should I love my country for being obsessed with self-destructive, antisocial, sociopathic, greedy stupidity?
  • Reply 5 of 105
    tbelltbell Posts: 3,146member

    Quote:

    Originally Posted by igriv View Post


    Ain't the US financial system grand!  Apple is not allowed to repatriate its cash


     



    It is allowed. It just doesn't want to pay the tax. 

  • Reply 6 of 105
    techguy911techguy911 Posts: 269member

    Quote:

    Originally Posted by red_kola View Post


    Tax avoidance reported as "a good thing". No wonder your deficits will never be reduced...



    Every individual and business works to minimize their tax burden based on the tax laws of that year.  There is nothing wrong with making decisions that help with saving on taxes, unless it's breaking the law or hiding money that should be taxed.


     


    Now the fact that companies hire lobbyists ensure tax laws have loopholes and special tax breaks is dishonest.  The people need to demand tax laws that are fair to all companies, small and large and don't leave room for unfair tax savings.

  • Reply 7 of 105
    igrivigriv Posts: 1,177member

    Quote:

    Originally Posted by TBell View Post


    It is allowed. It just doesn't want to pay the tax. 



     


    In the same way as it is allowed for me to go 200mph on I95, if I am willing to pay a massive fine.

  • Reply 8 of 105
    jccjcc Posts: 333member
    This is dumb. Steve Jobs is rolling over in his grave. Unless they feel that they can repatriate that cash at a lower tax rate later, they have not only NOT save $9.4 bil but they've also just wasted hundreds of millions that they have to pay in servicing the debt.

    For what? So they can please bottom feeding, scum sucking hedge funds? I wish Steve were alive to tell these bone heads where to stick their damn dividend. This cash is the lifeblood of the company and they're draining it. WTF is Cook thinking?
  • Reply 9 of 105
    flaneurflaneur Posts: 4,526member
    igriv wrote: »
    In the same way as it is allowed for me to go 200mph on I95, if I am willing to pay a massive fine.

    Do us a favor and don't take the stupid route on this. You are polluting the thread and you know better. Others don't.
  • Reply 10 of 105
    igrivigriv Posts: 1,177member

    Quote:

    Originally Posted by JCC View Post



    This is dumb. Steve Jobs is rolling over in his grave. Unless they feel that they can repatriate that cash at a lower tax rate later, they have not only NOT save $9.4 bil but they've also just wasted hundreds of millions that they have to pay in servicing the debt.



    For what? So they can please bottom feeding, scum sucking hedge funds? I wish Steve were alive to tell these bone heads where to stick their damn dividend. This cash is the lifeblood of the company and they're draining it. WTF is Cook thinking?


     


    They have plenty of cash, so they have no "lifeblood" problems. However, their way of returning cash to shareholders is dumb -- the Einhorn proposal would have been far more efficient. Their way benefits investment banks who underwrote the offering, and who have bought most of the debt. It HAS, apparently also benefitted the shareholders -- the stock is up 15% since the thing was announced, but again, the Einhorn proposal would have done the same (actually more) without the additional overhead.

  • Reply 11 of 105
    igrivigriv Posts: 1,177member

    Quote:

    Originally Posted by Flaneur View Post





    Do us a favor and don't take the stupid route on this. You are polluting the thread and you know better. Others don't.


     


    Why don't you do us a favor and explain what the heck you are talking about? A $9.2B hit can only be described as punitive.

  • Reply 12 of 105
    charlitunacharlituna Posts: 7,217member
    red_kola wrote: »
    Tax avoidance reported as "a good thing". No wonder your deficits will never be reduced...

    You forget a detail. Much of the money held overseas was earned from sales overseas and appropriately taxed by the area in question. So being taxed to bring it back to the US would be double dipping which isn't really fair, especially when they want Apple and similar companies to pay the same rates as if they earned the money here. That's why companies are resisting. Reduce the rate and they will consider (depending on how much of a reduction it is). But the US government won't so instead of say 5% on the money they are getting nothing.
  • Reply 13 of 105
    jungmarkjungmark Posts: 6,926member
    igriv wrote: »
    In the same way as it is allowed for me to go 200mph on I95, if I am willing to pay a massive fine.

    Speeding is illegal. Keeping $$$ offshore isn't.
    dysamoria wrote: »
    This is why the USA is in debt and the economy is in the toilet. The whole system is insane. This is the "self regulating" economy. Bunch of BS. Why exactly should I love my country for being obsessed with self-destructive, antisocial, sociopathic, greedy stupidity?

    So I guess you don't take any deductions or tax credits when you did your taxes.
  • Reply 14 of 105
    charlitunacharlituna Posts: 7,217member
    jcc wrote: »
    This is dumb. Steve Jobs is rolling over in his grave. Unless they feel that they can repatriate that cash at a lower tax rate later, they have not only NOT save $9.4 bil but they've also just wasted hundreds of millions that they have to pay in servicing the debt.

    Doubtful, Jobs was the big man when the game of keeping the money overseas in the first place.

    And I think your math might be a tad off. I'm sure they considered the issue of bringing home that much cash and paying taxes on it versus all the costs of the loan.
  • Reply 15 of 105
    igrivigriv Posts: 1,177member

    Quote:

    Originally Posted by jungmark View Post





    Speeding is illegal. Keeping $$$ offshore isn't.

    So I guess you don't take any deductions or tax credits when you did your taxes.


     


    Speeding is very marginally illegal, and speeding regulations are universally ignored, so speeding tickets are essentially a randomly applied tax. The points you get on your license can be easily removed by investing a little bit more money. The system is totally corrupt, but then, so is the whole tax system.

  • Reply 16 of 105
    newbeenewbee Posts: 2,055member
    Don't forget that a large part of that debt is being used to buy back shares that Apple will own and that money will, no doubt, outperform the cost of borrowing and/or the present investment return strategies, plus fewer shares in the marketplace should increase share price. I see this move as a win win move for everyone except the greedy U.S. government who thinks double taxation is, apparently, a good idea.
  • Reply 17 of 105
    jragostajragosta Posts: 10,473member
    igriv wrote: »
    In the same way as it is allowed for me to go 200mph on I95, if I am willing to pay a massive fine.

    That's a pretty stupid comment - even for you.

    There is nothing illegal about leaving the money off shore. There is something illegal about driving 200 mph in I95 (not to mention, of course, that your 1982 Chevy Nova won't go that fast).

    Apple is simply making a business decision that is entirely legal and legitimate. Comparing it to breaking the law is foolish.

    jcc wrote: »
    This is dumb. Steve Jobs is rolling over in his grave. Unless they feel that they can repatriate that cash at a lower tax rate later, they have not only NOT save $9.4 bil but they've also just wasted hundreds of millions that they have to pay in servicing the debt.

    For what? So they can please bottom feeding, scum sucking hedge funds? I wish Steve were alive to tell these bone heads where to stick their damn dividend. This cash is the lifeblood of the company and they're draining it. WTF is Cook thinking?

    That was my original view, but it's far too simplistic. There are a number of reasons why this might make sense:

    1. Apple thinks that they might have a use for the money overseas and will never have to repatriate it (i.e., to fund growth in China). In that case, they do save billions of dollars.

    2. Apple thinks that there might be a reduction in the tax rate at some time in the future (such as the tax holiday that has been bandied about).

    3. If Apple ever has a losing year, they could bring back money tax free by using the losses to offset the repatriation.

    4. Future value of money. Even if they have to bring the money back and pay $9.2 B in taxes in 5 or 10 years, there's still the time value of money - and it's probably worth a few hundred million dollars a year to put that off into the future.

    When you get into tax matters like this, it gets very complicated. Global business is also very complicated. When you combine the two issues, it can really be a mess. My first thought was the same as yours, but after consideration, it doesn't appear to be a bad move.
  • Reply 18 of 105
    igrivigriv Posts: 1,177member

    Quote:

    Originally Posted by charlituna View Post





    You forget a detail. Much of the money held overseas was earned from sales overseas and appropriately taxed by the area in question. So being taxed to bring it back to the US would be double dipping which isn't really fair, especially when they want Apple and similar companies to pay the same rates as if they earned the money here. That's why companies are resisting. Reduce the rate and they will consider (depending on how much of a reduction it is). But the US government won't so instead of say 5% on the money they are getting nothing.


     


    One can make an argument that for a multinational company (like, say, Apple) the money they make overseas can be invested overseas (why can't they have some of their R&D in Ireland, or whatever?) and so they can partially spin off their subsidiaries, so you could buy stock in, say, Apple Europe. I am not sure why they don't do it, it seems like a good way to bypass the double taxation problem.

  • Reply 19 of 105
    jungmarkjungmark Posts: 6,926member
    igriv wrote: »
    Speeding is very marginally illegal, and speeding regulations are universally ignored, so speeding tickets are essentially a randomly applied tax. The points you get on your license can be easily removed by investing a little bit more money. The system is totally corrupt, but then, so is the whole tax system.

    Going 5-10 mph over the speed limit is ignored. Going 200 mph is not. In any case the tax system is messed up.
  • Reply 20 of 105
    al_bundyal_bundy Posts: 1,525member

    Quote:

    Originally Posted by dysamoria View Post





    This is why the USA is in debt and the economy is in the toilet. The whole system is insane. This is the "self regulating" economy. Bunch of BS. Why exactly should I love my country for being obsessed with self-destructive, antisocial, sociopathic, greedy stupidity?


    nope, its actually a good thing


     


    apple selling debt allows organizations with a lot of cash but no place to park it a safe place to invest it

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