Apple Inc.'s dividend and stock repurchase plan is big. United States tax law potentially kept it from being even bigger.
The maker of the iPhone and iPad has amassed almost $100-billion (U.S.) in cash. There's only so much research and development one company can do, so Apple said Monday that it will pay shareholders a quarterly dividend of $2.65 a share starting in July, a decision that will cost about $10-billion a year, according to Bloomberg News. The company also said it will buy back $10-billion worth of stock over three years.
But those moves effectively are being backed by a much smaller cash stockpile than the $100-billion. That's because $64-billion of those profits were earned by Apple affiliates overseas. And that money isn't coming home any time soon.
"We think that the current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate the substantial amount of foreign cash they have," Apple chief financial officer Peter Oppenheimer said on a conference call. "That's our view and we've expressed it."
The U.S. is a rare country that seeks a cut of the profits its companies earn abroad. It's a hot political issue, as some law makers – with the support of the business lobby – argue the policy is causing companies to keep money overseas that would otherwise be used to spur investment and create jobs at home. Mr. Oppenheimer's comments will no doubt fuel the debate.
There is a rationale for this policy besides simple revenue generation. It's called "capital export neutrality," the obtuse term economists came up with to describe the idea that if companies are taxed at the same rates across jurisdictions, they will base decisions on economics rather than dodging taxes. The Internal Revenue Service doesn't seek to double tax foreign profits; it expects only the difference between the U.S. federal rate of 35 per cent and the rate paid abroad.
This clearly is punitive for U.S. companies, which face the highest taxes on profits in the world. (The country's myriad system of deductions cushions the blow.) In recognition of that, the IRS allows U.S.-based companies to defer paying taxes on overseas profits until that income is repatriated. Because economic growth has been so much stronger in Asia and Latin America over the past few years, the international affiliates of U.S. companies have been generating the bulk of the income. And because of the U.S. tax system, companies have an incentive to leave that money abroad.
There are many reasons to change the system. (Scott Hodge, president of the Tax Foundation, lists ten.) Doing so figures prominently in the broader debate about overhauling the U.S. tax code, something both Democratic and Republican politicians say they are prepared to do next year after they see the results of November's presidential election.
Working against those who would end the U.S. global approach to corporate tax collection in favour of a territorial one is the debt-burdened country's need for revenue. President Barack Obama, for example, has said any revamp of the tax system must be revenue neutral. Mr. Obama is willing to cut the federal rate on business income, but he may still expect to collect on what companies earn abroad.
Also working against a shift to a territorial tax system is a lack of evidence that corporations will use the money to create jobs. In 2004, the administration of George W. Bush introduced a tax holiday on the repatriation of foreign profits. By most accounts, the policy was a failure. The Center on Budget and Policy Priorities lists many of the studies supporting that assessment here.
Then as now, giving corporations a break on their international profits was justified as an economic stimulus measure. Instead, companies used the windfall to … boost dividends and repurchase shares.