Friday, May 3, 2013

Apple Is Borrowing Money Because Of Taxes

Apple is borrowing money.

What beggars disbelief is that Apple has over $140 billion in cash on its balance sheet. Why would it borrow money? It has to do with U.S. international taxation.

The U.S. has a “worldwide” tax system. This means that an American is taxed on worldwide income, irrespective of whether the American lives in the United States. This creates tremendous inefficiencies when an American expatriates – that is, move overseas with no immediate intention of returning. It is more common than you may first think. I for example have family who have expatriated. They have married and have children of their own. It is more likely that I will play in the NFL than they will return to the U.S.

Apply that “worldwide” idea to business taxation and you begin to understand the problem. Take a company with plants, workforces, storefronts and offices around the world – a company like Apple. Tell Apple that it has to pay U.S. tax on monies generated in Australia, South Africa or Japan, and you are motivating Apple to seriously reconsider its reason for being a U.S.–based company.

There are exceptions in the tax code, both delaying and accelerating the general tax treatment discussed above.  Apple has gotten itself caught in one. It has been able to move profits away from the U.S., but it now faces problems returning them to the U.S. Consider also that Apple is facing pressure to share its cash hoard with shareholders. How does it get that overseas cash into the U.S. to pay dividends?

It borrows. A company that is probably on sounder financial footing than the U.S. government is borrowing money because of U.S. taxation.

Brilliant policy there, Washington.

We may return to this topic in a future blog. For now, here is the Reuters video:

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