U.S. Tax Code Keeps Apples Far From Their Tree
How the tax code stupidly prevents companies like Apple from spending $1.2 trillion in the U.S.
The death of Steve Jobs last October hasn’t slowed down Apple very much: sales for the new third generation iPad have already broken records, the company has debuted a (possibly) new logo featuring a groovy, retro-flecked rainbow apple, and CEO Tim Cook announced plans to spend almost half of its $100 billion cash hoard on issuing its first dividend since 1995 and buying back up to $10 billion in shares.
Though Apple has consistently proven a bright spot amid the generally gloomy economic news of recent years, even it is not immune to the havoc so often wreaked by our labyrinthine and inefficient tax code.
Apple’s recent spending announcement did not include any of its $60 billion stashed overseas, which the company has no plans to repatriate in the foreseeable future.
In a conference call, Apple CFO Peter Oppenheimer blamed U.S. tax law for the company’s unwillingness to bring overseas profits home:
“Repatriating cash from overseas would result in significant tax consequences under U.S. law. We have expressed our views to Congress and the administration. We think current tax laws provide significant disincentive to U.S. companies that would otherwise repatriate significant cash they have on hand.”
Apple currently pays an uncommonly low international tax rate of under 3%, compared to 13-25% for most major international corporations. Bringing that $60 billion pile of cash home would send Apple’s tax rate hurtling into this range, somewhere between 4 and 9 times its current level. Yikes! No wonder they’d prefer to keep it over there.
This is a problem I’ve written about before and it’s a problem that’s not going away any time soon.
The U.S. tax code currently operates under a worldwide tax system. When a corporation earns money in a foreign country, it pays taxes in that country. Then, when it repatriates those profits, it has to pay the IRS the difference between what it paid to that foreign country and what it would have paid were that money earned here in the States. This amounts to a huge disincentive for multinational corporations to bring money back to the U.S.
Most countries, including 26 of the 34 in the OECD, operate under a territorial system which only taxes profits in the country where they’re earned. There is no penalty for repatriation. Mitt Romney has made transitioning to a territorial system a large plank of his economic plan and I have to say I agree.
70 large U.S. corporations, including such giants as Apple, Google, Microsoft, GE, and Pfizer, have a combined $1.2 trillion in cash stashed overseas. Thanks to the punishing constraints of the worldwide system, these firms are reluctant to spend and invest this money in the U.S.
As cash-strapped as the government currently is, it’s not getting at any of this money anyway. Plus, if these companies were allowed to invest it in the United States without being penalized, the IRS would be able to tax all of the income it creates. And that’s to say nothing of the even greater bounce the economy would likely get. I’m willing to bet a trillion dollar injection from companies as innovative as Apple and Google would do more to stimulate the economy than any appropriations bill President Obama and Congress can cook up.