The Government Might Help Apple Inc. Bring Back Foreign Cash

Apple's domestic cash needs aren't waning anytime soon as it remains committed to long-term capital returns to shareholders. Will Congress enact another repatriation tax holiday?

Jun 11, 2014 at 5:00PM

Aapl Cash

Source: Apple 10-Q.

Apple (NASDAQ:AAPL) sure has a lot of cashing sitting around abroad. As Apple's international business flourishes, the Mac maker continues to grow its international coffers. Pesky repatriation taxes have kept Apple, and many other companies, from bringing home some of those dollars, instead opting to keep all that money "indefinitely reinvested" outside of the U.S. That could be about to change.

Party like it's 2004
Congress is now considering another tax repatriation holiday, which could incentivize companies to bring home foreign cash. The additional revenue could help beef up the Highway Trust Fund, which helps the government pay for transportation infrastructure. This Fund is expected to run out of cash by the end of August. The Department of Transportation's projections do look rather dreary. Nothing is set, and the debate is ongoing, but lawmakers are certainly thinking about it.

There was a repatriation tax holiday back in 2004, which reduced repatriation taxes to around 5%. This created a difficult precedent, because companies have been holding out for another. The companies that took advantage of the 2004 holiday actually ended up cutting more than 20,000 net jobs, calling into question whether or not the holiday actually led to increased domestic investment. The Treasury believes the 2004 holiday ended up costing taxpayers billions of dollars.

For the current proposed holiday, the Joint Committee on Taxation estimates that it could end up costing nearly $100 billion in tax revenue during the next 10 years. The holiday could generate almost $20 billion in tax revenue for the first two years, but then subsequently lead to lost tax revenue.

Having another tax holiday would further crystallize the perception among companies that these holidays do come around from time to time, further incentivizing them to keep foreign cash where it is until the next holiday rolls around.

Apple's workaround thus far has been to issue debt, which it started in 2013 to help fund its aggressive capital return program. Paying around 2% in interest sure beats a 35% repatriation tax.

The one... and only?
One major tech company recently bucked the trend by opting to pay Uncle Sam: eBay (NASDAQ:EBAY). Instead of taking out debt to increase domestic reserves, eBay simply decided to take a $3 billion non-cash charge in order to repatriate $6 billion.

While Congress sees this as evidence that some companies are indeed willing to pay up, a lot of why eBay chose to pay is because it wanted to maintain its credit rating. eBay currently has $4.1 billion in long-term debt, and levering up further could put its "A" credit rating at risk. If Congress does decide to enact a tax holiday, eBay will just have had bad timing.

Apple needs more (domestic) cash
At the end of March, Apple had $132.2 billion in cash held by foreign subsidiaries. That was the vast majority of its total $150.6 billion in gross cash at the time. However, Apple issued another $12 billion in debt at the end of April to raise domestic cash, bringing total long-term debt to around $29 billion.

If Congress offered a similar 5% repatriation tax holiday, that might be enough to motivate Apple to bring more cash home. While a 5% tax is still greater than the 2% interest -- which is tax deductible -- that Apple pays to effectively tap foreign reserves, the difference is much more manageable. When Mr. Cook went to Washington in 2013 to discuss Apple's tax practices, he pushed for broader corporate tax reform even though it would result in a higher tax bill for the Mac maker.

Part of Apple's proposed reform (link opens PDF) included a "reasonable tax on foreign earnings that allows free movement of capital back to the U.S." Cook & Co. may very well consider 5% a "reasonable" rate. Apple could earn political goodwill in the process, and its domestic cash reserves have been under significant pressure due to the aggressive capital return program.

As opposed to issuing debt every year to fund the program, as it has done during the past two years, Apple could repatriate a large chunk of money to help fund the program for several years. As of the end of March, Apple had cumulatively spent $66 billion on its capital return program. Then it boosted the program's total size to $130 billion.

Apple is very much committed to aggressively returning cash to shareholders in the long run, so its domestic cash needs aren't going to lighten up anytime soon. An act of Congress would help.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Evan Niu, CFA owns shares of Apple. The Motley Fool recommends Apple and eBay. The Motley Fool owns shares of Apple and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information