May 16, 2013

In lieu of the recent IRS scandal it might seem a little like a case of the pot calling the kettle black. Nevertheless, it looks like Apple CEO Tim Cook will be appearing in front of the Senate Permanent Subcommittee on Investigations on Tuesday, May 21, to explain why the company is borrowing money to pay investors when they have $102 billion in offshore funds.

As of March 2013 Apple reported having a total of $145 billion cash on hand, but $102 billion was stashed in offshore funds. On April 24, CEO Tim Cook announced that Apple would return $100 billion to shareholders by the end of 2015. To finance the expanded capital return, Apple will raise its dividend 15 percent and increase its share buyback program six-fold to $60 billion. In other words, Apple is going to go into debt, for the first time in more than a decade, in order to keep investors happy.

Why go into debt? Why not just use some of those offshore billions they’ve got lying around gathering dust? Because, to bring that money into the U.S., Apple would have to pay a 35 percent corporate tax. Why pay an outrageous tax bill when a company with a AA-rating like Apple’s can borrow money at a 1.9% interest rate?

Under current tax laws, money in offshore accounts can not be spent or invested in the United States. It can’t even be given to the shareholders who rightfully own the money, until someone antes up 35% to cover the taxes. At that point, once the taxes are paid, the investors would also be responsible for paying income taxes on their dividends – a double whammy for investors.

It should be noted that the money in these offshore accounts was earned outside the U.S. and the appropriate taxes are paid to the countries involved.

For major corporations like Apple, which has more money than it knows what to do with, it just makes sense to leave that money in offshore accounts. Analysts estimate that the amount of corporate money in offshore accounts could exceed $1 trillion, money which could be boosting the US economy if it were repatriated.

Apple isn’t the only U.S.-based corporation holding money in offshore accounts. Last year, a lobbying coalition consisting of Google, Microsoft, Cisco and Apple sought a tax holiday, similar to one in 2004, for repatriating offshore funds. In 2004 Congress agreed to let companies repatriate money at a discounted tax rate of only 5 percent.

The 2012 effort was suspended because Republicans were focused more on permanent tax policy and Democrats were worried about the potential loss of tax revenue.

What they failed to understand is that there is no loss of revenue as long as Apple and other major corporations can use those offshore funds to secure low-interest loans right here on American soil. It only makes sense: Why pay a 35% tax when you can get the same results with a 1.9% loan?

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