SEC ends review of Apple taxes, overseas cash

Posted:
in AAPL Investors edited January 2014
Four months after raising questions about Apple's foreign earnings and taxes, the U.S. Securities and Exchange Commission has ended its investigation without plans to take any further action.

Just the fax


In June, the SEC initiated its examination of Apple's Form 10-K filing from September 2012 just shortly after the U.S. Senate's Permanent Subcommittee on Investigations had called the company's chief executive Tim Cook to testify about Apple's payment of taxes.

America's intense government scrutiny of one of its most successful companies relates to the fact that Apple maintains vast overseas holdings that it will not repatriate into the U.S. because American tax laws would claim over a third of it.

According to the LA Times, Congress drafted a report claiming that Apple was believed to have set up "a sophisticated series of international subsidiaries and tax strategies to cut its U.S. federal tax bill by $74 billion between 2009 and 2012."

However, Apple's earnings have increasingly shifted from the U.S. to international markets, where its business is conducted from countries that have lower tax rates. The company's international operations accounted for 61 percent of its revenue last year, and increased to two-thirds of its revenue in the first calendar quarter of 2013.

Apple's cash is in Ireland, not the Cayman Islands

The SEC initially asked for more information about Apple's holdings on June 13. Apple responded, stating that "substantially all of the Company?s $40.4 billion in undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. (as of September 29, 2012) was generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%."

In other words, Apple's international earnings are held and taxed in Ireland, and the company plans to sit on them until they can be reinvested into its international operations.

Cook had earlier told the U.S. Congress, "We pay all the taxes we owe." The company estimates that it will pay $7 billion in federal U.S. taxes this year.

Cook's testimony also outlined that Apple does not use "tax gimmicks," specifically noting that it does not:
  • Move its intellectual property into offshore tax havens and use it to sell products back into the U.S. in order to avoid U.S. tax.
  • Use revolving loans from foreign subsidiaries to fund its domestic operations.
  • Hold money on a Caribbean island
  • Have a bank account in the Cayman Islands.

In 2012, "Apple paid $6B in federal corporate income taxes: 1/40th of all corporate income taxes collected by the US" http://t.co/riFzTFlmGM

? Daniel Eran Dilger (@DanielEran)

Investors blindly jonesing for a hit

A variety of shareholders have been intently interested in collecting a cut of Apple's cash earnings, with many complaining that the company's cash is currently earning only very conservative returns. However, were Apple to simply distribute its cash holdings to shareholders, over a third would vanish during repatriation from U.S. taxation.

Recipients would also be taxed on those dividends as investment income, resulting in an even greater net loss of value in the form of taxation. There would also be nothing left to hold up Apple's stock price, which the market has valued at very close to nothing above its actual cash pile.

Wall Street remains baffled by Apple's business model of making products people want, rather than following Samsung or Amazon in selling large volumes at much lower (or zero) profits, a game plan many investors seem to consider more sustainable over the long term.

SEC: tell investors of Irish tax risks

In July, the SEC's primary response to Apple was that it should clarify that its "foreign" holdings were specifically Irish holdings.

"Your responses state that your Irish subsidiaries generated substantially all of your $40.4 billion in undistributed international earnings, creating a tax benefit of approximately $5.9 billion in 2012," the SEC wrote. "Thus, it appears that you should specifically reference the potential risks associated with any changes in Irish tax laws."

Apple responded, saying it would add references to Ireland and the potential for tax law changes in that country to have an impact on its operations. The company also clarified that its U.S. earnings were enough to fund its planned expenses, which would include capital investments in its Apple Campus 2 project, various U.S. Data Centers now under construction and retail expansions.

The company is also funding massive stock buybacks and large dividend payments to shareholders using debt, essentially borrowing against the value of its cash to benefit shareholders without squandering its resources on voluntary tax payments it does not have a legal obligation to pay.

The majority of Apple's domestic sales generate state sales taxes, are handled by retail employees who generate income and other payroll taxes, and have created one of America's healthiest and most prosperous new industries: mobile app development. App Store revenue is taxed domestically, both in end user sales and in the billions in income Apple pays out to its Mac and iOS developers.

At the beginning of September, the SEC noted that it had completed its review and had no plans to take further action related to Apple's income and tax matters.
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Comments

  • Reply 1 of 47
    gtrgtr Posts: 3,231member

    What an excellent waste of tax dollars THAT was.

  • Reply 2 of 47
    jragostajragosta Posts: 10,473member
    And this will get somewhere between 1/10 and 1/20 as much coverage in the media as all the earlier reports that Apple was being investigated for for tax evasion.
  • Reply 3 of 47
    Quote:

    Originally Posted by GTR View Post

     

    What an excellent waste of tax dollars THAT was.


     

    If the report shows Apple is not illegally or immorally avoiding paying US taxes (say different from Mitt Romney), then this is important information. Apple is not a tax dodger. 

  • Reply 4 of 47
    jungmarkjungmark Posts: 6,643member
    There's money wasted. Thanks, government.
  • Reply 5 of 47
    froodfrood Posts: 771member
    Quote:

    Originally Posted by waldobushman View Post

     

     

    If the report shows Apple is not illegally or immorally avoiding paying US taxes (say different from Mitt Romney), then this is important information. Apple is not a tax dodger.


     

     

    Apple was never under investigation for tax evasion, nor were the other major corporations that were part of the investigation.  This site rarely points it out since it prefers Apple fans feel like Apple is being attacked so they'll get emotional about it.    Other corporations included as part of this same investigation?  Yep.  Google, Microsoft, Hewlett Packard all testified and received quite a bit of press coverage as well.  If all you read is this site, then you'd probably have the impression it was all about Apple.

     

    All were found to be doing more or less the same thing to various degrees- but you bundled two words together that are very distinctly separate...

     

    "Apple is not illegally or immorally avoiding paying US taxes..."

     

    None of the companies were threatened with what they were doing as being illegal.  Congress sure put on a show of trying to make them feel like they were dirty and immoral.  Microsoft's 'MIR' (Microsoft Ireland Research) subsidiary was found to reduce their US taxes by about 40%.  Morals schmorals.  It is a corporation's duty to generate as much value for shareholders as they *legally* can- and offshoring is currently perfectly legal.  If Apple and Google and Microsoft execs weren't offshoring they could face legal action from their activist investors (well, technically Google is immune from investors, since only Larry, Sergey, and Eric have 'super-voting' shares).

     

    The real goal of the hearings was to figure out the nuances of how they were doing it legally so congress can try to close the loopholes.  While Apples 150 bil is the biggest single lump of dough (and therefore draws the most attention) the total assets held offshore by all US corporations is estimated around 1.6 trillion.... so its a problem worth congress spending a few dollars to try and fix at least some of it.

  • Reply 6 of 47
    zebrazebra Posts: 33member
    Congress already knows the fix but it is contrary to present political leanings. That is to reduce corporate income taxes bringing them in line with competitor nations.

    If this were done, then the government would actually increase it's tax base by encouraging companies to keep their primary assets in the US.
  • Reply 7 of 47
    WTF is the SEC doing with tax-related issues!? Isn't it for the IRS to worry about, even assuming it mattered in the first place?
  • Reply 8 of 47
    frood wrote: »
     Other corporations included as part of this same investigation?  Yep.  Google, Microsoft, Hewlett Packard all testified and received quite a bit of press coverage as well.

    Really? Schmidt was asked to testify? Ballmer was? Whitman was?

    Care to provide a cite? I'll wait.
  • Reply 9 of 47
    jungmarkjungmark Posts: 6,643member
    WTF is the SEC doing with tax-related issues!? Isn't it for the IRS to worry about, even assuming it mattered in the first place?

    SEC deals with financial reporting with public companies. If it believes there's a discrepancy, it will investigate.
  • Reply 10 of 47
    plovellplovell Posts: 795member
    "It is a corporation's duty to generate as much value for shareholders ..."

    That is only one of several. And I'm not of the opinion that it necessarily is the most important.
  • Reply 11 of 47
    Sec should go care about the anal ists always bullshitted to short Apple instead .
  • Reply 12 of 47
    plovellplovell Posts: 795member
    dup
  • Reply 13 of 47
    Quote:
    Originally Posted by Frood View Post

     

    Apple was never under investigation for tax evasion, nor were the other major corporations that were part of the investigation.  This site rarely points it out since it prefers Apple fans feel like Apple is being attacked so they'll get emotional about it.    Other corporations included as part of this same investigation?  Yep.  Google, Microsoft, Hewlett Packard all testified and received quite a bit of press coverage as well.  If all you read is this site, then you'd probably have the impression it was all about Apple.

     

    All were found to be doing more or less the same thing to various degrees- but you bundled two words together that are very distinctly separate.




    First off, Frood, this is AppleInsider, not Silicon Valley Insider, so your cynical grousing about the focus on Apple makes you look ridiculous. 



    Secondly, Microsoft doesn’t just sell to its overseas customers through a subsidiary in Ireland as Apple does. It funnels its US retail sales (such as when you buy a Windows retail box at Best Buy) through Microsoft Operations Puerto Rico, which is “owned” by a holding company in Bermuda, which is owned by a Microsoft subsidiary operating out of Ireland. 

     

    47% of Microsoft’s US retail profits go to Puerto Rico and escape US taxes. This is extremely sketchy, and nothing like Apple.

     

    Additionally, Microsoft “licenses” its software developed in the US to its Irish subsidiary for distribution, but never pays any taxes on the value of that software. So it’s earning vast revenues globally on free exports. In 2011, Microsoft paid an effective tax rate of 13.4%, while Apple paid 24%. That’s a pretty big difference, particularly given that Apple’s profit margins are around 35% while Microsoft’s are north of 80%.

     

    You know so little about the subject it’s surprising that you felt the need to weigh in on these things. 

  • Reply 14 of 47
    gatorguygatorguy Posts: 19,985member
    jragosta wrote: »
    And this will get somewhere between 1/10 and 1/20 as much coverage in the media as all the earlier reports that Apple was being investigated for for tax evasion.
    Well the media must have done a lousy job reporting Apple's tax evasion investigation in the first place. I never heard about it but glad that at least it's over with now. :\
  • Reply 15 of 47
    gtrgtr Posts: 3,231member
    Quote:
    Originally Posted by Gatorguy View Post



    Well the media must have done a lousy job reporting Apple's tax evasion investigation in the first place. I never heard about it but glad that at least it's over with now. image

     

    Stop being deliberately stupid.

  • Reply 16 of 47
    gatorguygatorguy Posts: 19,985member
    edit
  • Reply 17 of 47
    froodfrood Posts: 771member
    Quote:

    Originally Posted by anantksundaram View Post





    Really? Schmidt was asked to testify? Ballmer was? Whitman was?



    Care to provide a cite? I'll wait.

     

     

    The companies were all requested to testify.  None of the CEO's was required to testify and sent delegates- which is the norm.  Tim Cook *volunteered* to go testify- he was not subpoenaed.  Brilliant move on his part.  He got in some great sound bites and made it appear 'about Apple'

  • Reply 18 of 47
    jragostajragosta Posts: 10,473member
    gatorguy wrote: »
    Well the media must have done a lousy job reporting Apple's tax evasion investigation in the first place. I never heard about it but glad that at least it's over with now. :\

    You're either lying or intentionally blind. That story made headlines on every major news outlet.

    Well, I guess it's also possible that you were in a coma for 3 months and someone else was posting to AI using your name. :smokey:
  • Reply 19 of 47
    froodfrood Posts: 771member
    Quote:

    Originally Posted by Corrections View Post

     



    First off, Frood, this is AppleInsider, not Silicon Valley Insider, so your cynical grousing about the focus on Apple makes you look ridiculous. 

     


     

    Thank you for agreeing with me.  You are implying that were this Silicon Valley insider it would represent a view more based on reality, but since 'this is AppleInsider' you focus on Apple.  That was exactly my point.  But when people actually believe the impression you paint that its all about congress attacking Apple, I believe they are wrong.  I don't mind looking ridiculous =)

     

    Quote:

    Originally Posted by Corrections View Post

     







    Secondly, Microsoft doesn’t just sell to its overseas customers through a subsidiary in Ireland as Apple does. It funnels its US retail sales (such as when you buy a Windows retail box at Best Buy) through Microsoft Operations Puerto Rico, which is “owned” by a holding company in Bermuda, which is owned by a Microsoft subsidiary operating out of Ireland.

     

    47% of Microsoft’s US retail profits go to Puerto Rico and escape US taxes. This is extremely sketchy, and nothing like Apple.

     

    Additionally, Microsoft “licenses” its software developed in the US to its Irish subsidiary for distribution, but never pays any taxes on the value of that software. So it’s earning vast revenues globally on free exports. In 2011, Microsoft paid an effective tax rate of 13.4%, while Apple paid 24%. That’s a pretty big difference, particularly given that Apple’s profit margins are around 35% while Microsoft’s are north of 80%.

     

    You know so little about the subject it’s surprising that you felt the need to weigh in on these things.


     

    While I don't doubt that you are a corporate tax law expert and highly qualified to 'weigh in' I don't believe anyone on this site who posts on most topics is one.  I do agree with you that Microsoft's tax avoidance strategy is completely sleazy and quite a bit different than Apple's equally sleazy tax avoidance strategies.  I do not fault either company for their practices.

     

    If you'd like to read up on how Apples sleaziness is different than Microsofts here are a few links from experts more qualified than I (and possibly even you):

     

    http://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoid-taxes/

    http://www.foxbusiness.com/government/2013/05/21/apples-irish-tax-strategy-explained/

  • Reply 20 of 47
    jd_in_sbjd_in_sb Posts: 1,483member
    Nice to see that the thousands of people who claimed Apple is breaking the law are now completely and officially wrong
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