
Apple's Cash Dilemma - uptown
http://www.aboveavalon.com/notes/2015/6/13/apples-cash-dilemma
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paulsutter
It's not a dilemma at all, it's a simple trade off. Either pay the tax to
repatriate or pay interest on debt. If the former becomes more attractive than
the latter, they'll do it. They can borrow at extremely low rates today so it
boosts their earnings to borrow.

I was hoping for a little more information on the reason Apple's foreign
subsidiaries can't buy Apple stock without repatriation of funds (and whether
or not this would require Apple shares to be tradeable on a foreign exchange),
or what it would take for Apple to reincorporate where the money is as a way
to eliminate the need to repatriate at all.

EDIT: For everyone who thinks Apple is somehow in the wrong for this, your
energy would better be directed at getting the tax laws changed. Apple's board
and management have a fiduciary responsibility to pay only the tax they
actually owe.

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dba7dba
_your energy would better be directed at getting the tax laws changed_

How? Who among us can outspend lobbyists from the corporations?

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clarky07
He's suggesting the lobbyists are in the right in this case, and the tax rates
for repatriation should be lowered to something more reasonable. Then
companies would be paying more tax than they are currently giving the govt
getting more revenue, as well as bringing more money into the U.S. for
investment in local economies. Everyone wins if they lower taxes. At the
current rates, it's simply irresponsible to bring the money back instead of
leaving it where it is.

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lbarrett
I'm confused why "Pay the US tax" is not being seriously considered. I guess
no one would even hope that a corporation would do the sensible and legal
thing when there are loopholes to be abused.

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MBCook
Is it really that surprising? Let's make a highly simplified analogy with easy
numbers.

You have two bank accounts, only in this example they're different currencies.
One in Pesos, one in Francs. Let's make things easy and pretend that 1 Peso is
worth 1 Franc.

Your customers pay in the currency they have. Lots of people pay in you Pesos,
but some pay you in Francs. So after a while you have 100 P but only 20 F.

Now most of your bills have to be paid in F. You have some you can pay in P
but the money comes in fast enough that will never run dry. Unfortunately the
F account may not be so steady between paychecks and you may overdraft. If
that happens people with pitchforks will come after you. You need to do
something to make sure that you always have enough in the F account.

So there are two obvious options. You can move some of your Pesos over to
Francs, but there is a BIG FEE for transferring to that account. You'd like to
move 80 Pesos over, but after the fee you only get 40 P in your account. So
instead of 100 P and 20 F (for 120 units, since it's a 1:1 exchange) you have
20 P and 60 F (for only 80 units). You can still pay all your bills, but you
just lost 1/3 of your money and now your spouse is mad at you.

Or you could do something else. You could take out a loan in Francs when your
balance gets low so you can pay your bills until more F come in. Banks are
happy to lend you F because you have a nice house and plenty of P and they
have a lot of money to lend right now. You have to pay interest, but that's
like 5 F so it's not a big deal. Do things this way and in the end you have
100 P + 15 F (a total of 115 units of value) so you've only lost about 4% of
your total net worth and you were still able to pay your bills on time.

Did that help? After reading it back over I get the feeling I just spent 10+
minutes but it's not going to clear things up for people.

~~~
thanksgiving
> You could take out a loan in Francs when your balance gets low so you can
> pay your bills until more F come in.

Sorry if this is obvious but just want to clarify this for myself: Do you plan
to pay back the entirety of the loan, with interest with the account in French
Francs? If not, aren't you just delaying the inevitable? If yes, is there any
reason to keep the peso account locked up (for lack of a better term) in
liquid assets? Perhaps you'd be better served by taking risks with that money?

~~~
phillmv
>Do you plan to pay back the entirety of the loan, with interest with the
account in French Francs?

Of course. You earn more than enough Francs to cover your expenses; it's just
cheaper to borrow money right now than to convert from Pesos.

> If yes, is there any reason to keep the peso account locked up (for lack of
> a better term) in liquid assets? Perhaps you'd be better served by taking
> risks with that money?

The problem is precisely that: there's no good place to put that much money.
Apple literally can't think of enough things to put all that money to use.
Interest inflation rates are pretty low, so keeping it in TBills or whatever
isn't really hurting them.

That at least, is my understanding.

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BinaryIdiot
Thanks for the post! It makes complete sense but I never realized a large
majority of their cash holding is outside of the United States. Though I'm not
entire surprised I didn't realize this; every week someone is talking about
huge company X or huge company Y that Apple could easily buy in the U.S. but
in reality they really couldn't unless they wanted to take a big tax hit.

I'm curious what they'll end up doing with all of that foreign cash. Are the
options outlined in this article realistic / the best or only choices? Are
there other possibilities?

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seanmcdirmid
Foreign R&D centers are the most obvious approach. If you make say, lots of
money in China, open up an R&D center there as an investment; as a side effect
it also makes the host country happier as you are giving jobs to locals (not
just making money, but helping to develop the economy!). This has adverse side
effect of shifting R&D from the country of origin, but it can also be
expansive (do more vs. taking jobs from the US and putting them in China).

People talk about foreign cash as if it somehow belongs back in America. But
if you are Chinese, you definitely wouldn't see it that way (Apple makes more
money selling iPhones in China, why does that money need to go the US?
Ridiculous!).

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midnightclubbed
To take that one step further why aren't Apple putting that money into
building its own overseas manufacturing facilities and reducing its reliance
on 3rd parties?

Building and running factories in China with the money it is making from
Chinese consumers seems a more prudent choice than paying a chunk of US taxes
so it can do share buy-backs?

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toomuchtodo
Why doesn't Apple just buy Foxconn (or a majority stake)?

This is not without precedent in other industries; owning the entire vertical
would be hugely advantageous from a strategic perspective.

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brisance
Because owning plant and equipment and capital assets is very risky;
everything gets obsolete within months and now you're stuck with illiquid
items that you have to amortize.

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toomuchtodo
Compared to capital that's fairly illiquid at the moment? Better to have a
manufacturing base for your next products instead of sitting on capital that's
earning close to 0 returns and that you're probably never going to repatriate
to the US unless an unlikely tax holiday occurs.

~~~
brisance
Disagree. The GT Advanced Technologies debacle is a concrete example. Sure
Apple lost money on that one, but it would have been a bigger hit on their
bottom line had they full invested in their own sapphire plant and tooling. In
the big scheme of things, fighting a lawsuit with an external supplier is a
small price ot pay as compared to missing an iPhone launch window.

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karpodiem
Apple benefits from the US court system, US copyright/trademark law (for the
most part) being respected worldwide, and a US military which projects a fair
amount of hegemony around the world.

So yeah, it's time for Apple to pay for its 35% share in funding the above
items.

In the end, Might secures your rights. Freedom against someone subjecting
their rule over you and how your domestic businesses are able to operate
internationally is paid for with having the biggest guns.

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delinka
Do they not pay tax in the US at all? You make it sound as if they just don't
pay tax. As it stands, they've paid tax in any country where they've earned
money. That pays for the court systems and IP laws in those countries. Any
revenue in the US has been taxed in the US and the funds used similarly by the
government.

Now, you want to take money that's already been taxed elsewhere and return it
to the US, subjecting it to _further_ tax. Why? As I said, they've already
paid taxes here in the good ol' USA.

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alex_young
First of all this double taxation thing is hogwash. US corporations (and
people for that matter) only pay the difference between any foreign tax
collected and our own federal tax when they move it to domestic books.

Probably more importantly, the foreign profits are disproportionately gains
baised on research and development conducted in the US which the foreign
subsidiaries pay no royalty for at all.

If, for instance, 50% of the value of an iPhone sold in China represents the
value of the engineering of the device, we have a tax loss which adds up to
half of the nearly $200 Billion held as foreign profits by Apple.

Apple should be forced to pay these taxes. This represents a real and tangible
loss to the people in the US and an unnecessary subsidy handed to the most
valuable public company on earth.

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delinka
I've known individuals pay the difference between foreign tax and US federal
tax, but I'm not so sure that also applies to corporations. I'll need to
research that.

You really can't start dictating the terms of contract agreements between
domestic and foreign entities with regard to "royalties" or other such
payments. It would adversely affect any other companies as well that are not
subsidiaries. And before you attempt to limit the rules to "subsidiaries"
consider that although "Apple Ireland" is somehow affiliated with "Apple, Inc"
in the US, they are wholly separate companies with a contract to behave in
certain ways. Should Apple Ireland, being a separate company, decide to 'go
rogue' breaking the contract and doing whatever they will with all 'their'
money, they just get cut off from the Apple, Inc ecosystem and a new entity is
created that will play the game correctly.

So how do you force "Apple, Inc" which is a separate company from all the
other "Apple $PLACE" around the world to pay tax on money that, legally, it
doesn't have ... without also adversely affecting any number of smaller
companies that couldn't possibly bear such a tax burden?

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tdicola
Who wants to bet as a part of TPP (now that it's fast-tracked) there will be
plenty of tax holidays or even tax reductions for moving foreign cash back
into the US?

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WiseWeasel
Another option would be to list their stock in a country without this profit
double-taxing issue (or less of one), and pay dividends there instead.

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riemannzeta
It seems like such a no-brainer for IRS policymakers to offer Apple (and
companies like it) a tax holiday on foreign cash reserves. Smart for US, smart
for them. What countervailing political forces hold that back? Is it simply
that the US feels like it shouldn't have to negotiate how much a company like
Apple should pay in tax?

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ninjaroar
I don't see how it makes sense at all to offer a tax holiday. If the IRS is
going to give Apple a tax holiday, can they give me a tax holiday too?

~~~
clarky07
what is 0% of 100 billion? 0

What is 10% of 100 billion? 10 billion.

10 billion is more than 0 dollars, so it makes sense. 0 is what they will get
if the keep the rate the same as it is now.

>If the IRS is going to give Apple a tax holiday, can they give me a tax
holiday too?

That sure would be nice, I wouldn't mind one. That being said, we don't have
billions of dollars to offer, and it's unlikely we have money overseas that
needs repatriated.

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sunir
Why can't the foreign subsidiaries buy Apple stock? I am sure that isn't
allowed or else they would do it but what is the regulation preventing it?

Alternatively borrow money for the buybacks from their own foreign
subsidiaries either at zero percent or very low or at prime and then default?

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markbnj
I'm curious about share buybacks. If a publicly-traded company amasses a pile
of cash, isn't that cash owned by the shareholders? If the company uses that
cash to purchase its shares, aren't shareholders being paid with their own
money?

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cissou
Those who want to sell will just "exchange their stock for cash". Some might
want to do so, others might not. The bought back shares are destroyed so the
overall stock price rises: nothing is gained, nothing is lost (in value), it's
just cash that came out.

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arikrak
That's the problem with corporate tax holidays, now companies wait around for
another one. Instead the government should permanently reduce the tax rate for
overseas corporate profits.

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marcusgarvey
TBH, I'm more intrigued by the business model behind this site than the story
itself. Research content on one 1 subject, membership at $10 a month. Who are
its customers? Small traders and investors who can't pay for more costly info?
I wonder if revenue is covering the cost of research.

~~~
chmaynard
I'm a small investor in Apple and a (former) member of Above Avalon. I enjoyed
reading the free content on this site for a few months, so I decided to try
out the paid version. So far I'm not convinced that the paid content is worth
the cost. That said, I think Neil does a fine job and I recommend the site to
anyone with an interest in Apple as a company.

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pbreit
I would have liked to have seen some other options explored: a) decrease share
buybacks/dividends, b) bring cash back and pay the tax, c) invest in foreign
markets.

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nraynaud
Noob question: what about letting the valuation crash Ann buying back at a
discount and then progressively going out of the market ?

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uptown
So in the end, they'd have intentionally destroyed their company in order to
make their share value cheap-enough to buy them all up so they could own all
of a company they intentionally destroyed? That doesn't sound very wise.

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WalterBright
They could use it to open R&D centers in foreign countries.

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setpatchaddress
They do. There's only so much that's productive unless you're funding basic
research, which Apple, for better or worse, doesn't do.

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NateDad
I noticed "give to charity" was no where on the list. Imagine the good $200
billion could do.

