US Tax reforms impact on Apple

Apple, Capitalizing on New Tax Law, Plans to Bring Billions in Cash Back to U.S.

Inside a building at Apple’s new headquarters in Cupertino, Calif. The company said Wednesday that it planned a $350 billion contribution to the American economy over the next five years.CreditJim Wilson/The New York Times

By Daisuke Wakabayashi and Brian X. Chen Jan. 17, 2018

SAN FRANCISCO — Apple, which had long deferred paying taxes on its foreign earnings and had become synonymous with hoarding money overseas, unveiled plans on Wednesday that would bring back the vast majority of the $252 billion in cash that it held abroad and said it would make a sizable investment in the United States.

With the moves, Apple took advantage of the new tax code that President Trump signed into law last month. A provision allows for a one-time repatriation of corporate cash held abroad at a lower tax rate than what would have been paid under the previous tax plan. Apple, which has 94 percent of its total cash of $269 billion outside the United States, said it would make a one-time tax payment of $38 billion on the repatriated cash.

For years, Apple had said it would not bring its foreign earnings back to the United States until the corporate tax code changed, because such a move would be too costly. Now Apple’s bet to hold back on paying such taxes is reaping rewards under the Trump administration.

In return, Mr. Trump and other Republicans can point to Apple as having come around because of their legislative action. The $38 billion tax payment from the Silicon Valley giant is set to be among the biggest payouts from the tax bill, and Apple said it would put some of the money it brought back toward 20,000 new jobs, a new domestic campus and other spending.

“I promised that my policies would allow companies like Apple to bring massive amounts of money back to the United States,” Mr. Trump tweeted on Wednesday. “Great to see Apple follow through as a result of TAX CUTS.”

Timothy D. Cook, Apple’s chief executive, said in a statement, “We have a deep sense of responsibility to give back to our country and the people who help make our success possible.”

Apple estimated that its direct impact on the American economy would total more than $350 billion over the next five years, but how much that goes beyond what the company would have spent anyway is unclear. Apple’s current pace of spending in the United States is $55 billion for 2018, so it was already on track to spend $275 billion over the next five years. After the $38 billion tax payment is subtracted, that leaves its new investment at roughly $37 billion over the next five years.

A. M. Sacconaghi, a financial analyst for Sanford C. Bernstein, said Apple had consistently spent tens of billions of dollars on areas like staffing and capital expenditures in recent years. Bringing back the overseas cash, he said, does little to aid its expansion. But it makes the company appear to answer Mr. Trump’s call for more jobs to be created in the United States.

“This is Apple putting its best foot forward consistent with objectives of the administration,” Mr. Sacconaghi said.

Apple is one of several multinational giants that have kept a total of roughly $3 trillion in global profits off their domestic books to sidestep the previous 35 percent federal corporate tax rate. Under the new tax law, companies that make a one-time repatriation of cash will be taxed at a rate of 15.5 percent on cash holdings and 8 percent on nonliquid assets. That is lower than the new 21 percent corporate rate. And under the new tax code, Apple would also have been taxed whether it brought the money back or not.

By shifting the money under the new terms, Apple has saved $43 billion in taxes, more than any other American company, according to the Institute on Taxation and Economic Policy, a research group in Washington.

Other tech giants are set to follow suit in the coming months. Companies like Microsoft, Alphabet and Cisco also shifted their profits into offshore shell companies, avoiding billions of dollars in taxes, and are now in a better position to bring the money back.

Although Republican supporters of the tax law argued that the influx of international profits would create jobs and increase wages, many economists disagreed that a one-time repatriation would have any substantial impact on real investment.

Apple’s announcement, couched as a major investment in the United States instead of a massive financial windfall, followed years of criticism that the company did not do enough for the American economy because it makes most of its products in China and parked its profits abroad.

During the 2016 presidential campaign, Apple was a frequent target of Mr. Trump, who pledged that as president he would force the company to start making iPhones and Macs in the United States. While that hasn’t happened and is unlikely to, Apple has since gone on a charm offensive to demonstrate its value to the American economy. The company has highlighted the number of jobs created by the so-called app economy, an ecosystem of software and services that run on the iPhone and other Apple products. Last year, Apple also said it was creating a $1 billion fund to invest in advanced manufacturing in the United States. On Wednesday, Apple said it was increasing the size of that fund to $5 billion and noted that it was already backing projects from manufacturers in Kentucky and Texas.

Apple, which is based in Cupertino, Calif., also took a page out of Amazon’s public relations strategy on Wednesday by saying it will open a new domestic campus in a location where it currently has no operations. Amazon garnered good will throughout the country last year when it announced plans to open a second corporate headquarters outside its home base of Seattle.

Apple currently has about 84,000 employees in the United States, so 20,000 new jobs would be a 24 percent increase. The company added that it would invest more than $30 billion in capital expenditures, or spending on parts and the equipment required to produce them, over the next five years in the United States.

For a comparison, Apple spent $14.9 billion in capital expenditures in the last fiscal year, though it did not specify how much it spends in the United States alone.

For Apple, repatriating the cash creates opportunities that could include acquisitions and higher dividends for shareholders. The company had previously chosen to borrow money to fund its stock buybacks and dividends, instead of bringing its cash back from abroad. Over the last five years, Apple has returned $233 billion in cash to shareholders through buybacks and dividends.

Paying $38 billion in taxes now is unlikely to strain Apple’s checkbook because the company had already earmarked $36.4 billion in anticipation that it would eventually have to pay taxes on its foreign earnings.

“From a financial statement perspective, it’s going to be a nonevent,” said J. Richard Harvey, a Villanova University law professor and former Internal Revenue Service official. Other companies are not as prepared, he said, and would likely have to take a significant loss should they make a one-time cash repatriation.

Apple employees will see benefits as well. Mr. Cook said in an email to staff on Wednesday that Apple was increasing investment in its employees by rewarding them with bonuses of $2,500 in restricted stock units, according to people familiar with the matter, who asked not to be identified because the plans were not public. Apple joins other companies, such as AT&T, that have issued employee bonuses since the tax law was signed.

Patricia Cohen contributed reporting from New York