This Move Could Mean Billions for Apple Shareholders (Hint: It’s Not the iPhone 6)

Apple's (NASDAQ: AAPL  ) overseas cash has always been cited as a major opportunity for investors in the world's largest technology company, albeit one that's somewhat far removed.

Over the past several years, Apple has largely elected to keep its foreign profits stashed overseas to avoid the 35% federal tax on international corporate profits. But that all might be about to change.

Apple could use a (tax) holiday
According to reporting from Reuters, several key members of the U.S. Senate have been batting around the idea of enacting a special one-time corporate-tax holiday that would allow various companies like Apple to repatriate their overseas profits at a more favorable tax rate.

Historically, this has been a policy no-no in lawmakers' eyes. Why would that change?

According to Reuters, the group of Senate leaders are eyeing the likely revenue boon that a tax holiday would generate as a means of replenishing the coffers for the federal government's Highway Trust Fund, the fund that the U.S. government uses to finance various infrastructure improvements across the country. Apparently the coffers at the Highway Trust Fund are expected to run out no later than August, and legistlators see a corporate tax holiday as a simple strategy to infuse the fund with some fresh tax receipts.

The eBay wrinkle
One potential wrinkle in this discussion was the decision by tech giant eBay to repatriate some $4 billion of its overseas cash during eBay's most recent earnings announcement, and for good reason.

With eBay setting the precedent, some lawmakers are arguing that that companies that want to access their overseas cash badly enough will eventually repatriate their international cash stashes at the full 35% rate, a line of thinking that could scupper this Apple tax holiday story before it ever has a chance to truly take off. Hopefully eBay didn't ruin everyone else's part.

Returning home
Either way, the prospect of a tax holiday presents another significant near-term opportunity for Apple investors.

The U.S, government allowed U.S. companies to repatriate overseas profits at more favorable rates in 2004 as well, collecting only 5.25% on repatriated funds versus the normal tax rate. Of the $156 billion in cash and securities that Apple carries on its balance sheet $18 billion of that total is held domestically, giving Apple a total international cash hoard of roughly $132.2 billion. The savings for Apple and its investors could be significant. Take a look:

 

At Today's Rate Normal (35%)

At 2004 Rate (5.25%)

Possible cash repatriated after taxes

$89.7 billion

$125.2 billion

Source: Reuters and author's calculations

This of course assumes that Apple would choose to repatriate all of its overseas cash, which is my no means a given. But for illustrative purposes alone, it's worth noting that Apple's savings in this scenario could total around $40 billion at 2004 rates.

Another interesting storyline is exactly what Apple would choose to do with its then-massive domestic cash hoard. Would it dramatically increase its current buyback program or payout some kind of special one-time dividend. Possibly.

It's still far too early in this storyline for Apple investors to get overly excited about the notion of Apple's cash all sitting in its domestic bank account and the possibilities that could afford investors. But the possibility of a tax holiday on overseas profits would undoubtedly offer another short-term reason to be very bullish on Apple. Now that's the kind of holiday Apple investors can certainly support.

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  • Report this Comment On June 12, 2014, at 7:56 PM, QuandoInQuando wrote:

    Tax holiday? That would be a tiny step in the right direction. I think that the IRS should add an extra 5% premium to all foreign money brought into the United States as long as the owner spends or otherwise dispenses all of the money here. With the Multiplier Effect, the Federal, State, and local governments could easily collect more than the 35% in sales and income taxes. Meanwhile, this bundle of stimulus money is sitting in foreign countries doing absolutely nothing for the US economy.

  • Report this Comment On June 12, 2014, at 8:36 PM, QuandoInQuando wrote:

    Tax holiday? That would be a tiny step in the right direction. I think that the IRS should add an extra 5% premium to all foreign money brought into the United States as long as the owner spends or otherwise dispenses all of the money here. With the Multiplier Effect, the Federal, State, and local governments could easily collect more than the 35% in sales and income taxes. Meanwhile, this bundle of stimulus money is sitting in foreign countries doing absolutely nothing for the US economy.

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