> Apple will hit up the debt markets for more dollars, it being cheaper to use other’s domestic cash than its foreign reserves
Can anyone explain why this is so? Because they are somehow getting a higher interest rate return on their reserves then they'd have to pay to borrow? (That would seem pretty impossible). Because they'd have to pay taxes if they use the foreign reserves? Something else?
> Because they'd have to pay taxes if they use the foreign reserves?
Yep.
Apple can borrow at somewhere near 2.3%[1] on the public debt markets. They have billions overseas, but if they bring it back to the US, they'd have to pay corporate income tax on it (35%).
They're just biding their time until the Chamber of Commerce lobbyists gain enough influence to get congress to pass an overseas tax holiday to repatriate the money at 15% or 20%. To this end, expect a huge PR onslaught near election time about how much economic stimulus would be provided if we changed the rules about taxes just this once (note: happens every ~10 years).
The arguement for the holiday the last time was "job creation" which didnt really bear fruit. Dont think it will happen again unless it is part of a larger tax reform bill.
The politically viable argument is that it will create jobs, and is indeed false.
The serious, economic argument is that companies shouldn't have to keep profits abroad simply because of a screwy, distortive tax system at the international level. And it is a valid concern.
(Before anyone says it, yes, I'm aware that some taxes, by design, distort behavior in a socially desirable direction. Differential corporate taxes at the international level ain't one of them.)
It's not so much about the level of taxes as it is about taxing foreign income, which is not something that other countries do, giving a competitive disadvantage to the US.
Even if Apple brings back the cash and dividends it out, that's more money in the pockets of shareholders, which are pretty much everybody with an index fund, pension funds, mutual funds, etc. That can't hurt the US compared to leaving the cash abroad.
Many other countries tax overseas profits, and many of the ones who don't, have very strict rules about foreign ownership to assure they aren't being gamed. The G20 is fairly united on this front.
The best argument for the holiday, is the fact that we're one of the only major nations doing something so foolish as double taxing foreign profits.
The idea of eg paying China's corporate income tax, and then paying America's on the way home, is absurd to say the least. A lot of companies will be stuck with 45% to 60% income tax bills on foreign profit. I can think of few things to make America less competitive overseas.
That's patently wrong. Corporation-level double taxation only applies in the extremely rare instances where the US does not have an income tax treaty with the other country.
We have tax treaties with all nations worth doing business with. Nobody is going to pay China's corporate income tax then U.S. income tax again at the corporate level for a 45-60% bill before it even gets to the shareholders.
My spider sense is tingling - from an ignorant observer on the subject of corporate taxes, this seems wrong.
As someone who isn't 100% ignorant about taxes in general, I've noticed that there's a shitload of completely wrong information about taxes out there. It's amazing how many smart people are incredibly ignorant, and then spread that ignorance, about how taxes actually work. So I have to ask:
Is this how it really works? At least for personal investments, IIRC you get some sort of foreign tax credit. From my initial searching, it seems like there's something similar for corporations.
The whole idea of 'double-taxation' is a canard. That's another topic though.
> Is this how it really works? At least for personal investments, IIRC you get some sort of foreign tax credit.
Any money Apple pays to foreign governments as income tax on profits is included in the calculation of their domestic tax liability. So if Apple had $1B in overseas profits, paid 5% in Ireland as income tax, then wanted to repatriate the remainder to the US, the government would seek $300M in tax -- not the $350M that would be indicated by our 35% corporate income tax rate.
People trotting out the 'double-taxation' nonsense are promoting the idea that Apple should be able to venue-shop for an ultra-low-tax locale to claim their profits, then be free-and-clear of their US obligations.
Two more things worth mentioning:
1. The 'overseas' money typically isn't physically overseas. The money is in US banks, circulating as loans in the US economy, but is only overseas on an accounting ledger for tax purposes. This greatly blunts the potential impact of tax holidays.
2. If Apple takes out debt to fund operations purely to avoid repatriating money, the US taxpayer would then be subsidizing Apple even further. Interest on debt is a deductible expense, so that 2.5% per year Apple is paying, would be deducted from their income in the next tax year.
> So if Apple had $1B in overseas profits, paid 5% in Ireland as income tax, then wanted to repatriate the remainder to the US, the government would seek $30B in tax -- not the $35B that would be indicated by our 35% corporate income tax rate.
That's not what double taxation is. Double taxation is that both corporate income and corporate dividends are taxed. Suppose a corporation makes $10/share in profit and wants to issue it as a dividend. First they would pay corporate 35% income tax on the profit and be left with $6.50/share, then if they issued a $6.50/share dividend, the shareholders would have to pay income tax on it again and be left with only $4.225 of the original $10.
If a foreign government also extracted a cut then the money would be taxed thrice.
This is an even sillier definition of double taxation than I was giving you credit for.
Dollars don't pay taxes, taxable entities do.
A corporation is a separate legal entity that serves as the tax base. If it makes an income, it will pay a tax on that income.
An individual is also a separate legal entity that serves as a tax base. If a corporation pays an individual dividends, then the individual will pay tax on the capital gains from their investment.
How is this any different than when a company pays you an income. First, the Federal government taxes you, then the State government does, then come Payroll taxes, then any local taxes, then you have to pay property tax, then you have to pay sales tax. Each dollar is quintuple-taxed! Or more!
> "Would you rather pay 10% income tax twice a year, or 50% income tax once a year?"
But that obviously misses the point. The problem with double taxation is that it makes the rate misleading. If you've lost 35% to corporate income tax and then 15% to qualified dividends or capital gains tax, you're paying ~45% in total, but people point to the 15% rate and trot out the "pays lower tax rate than secretary" trope.
> How is this any different than when a company pays you an income. First, the Federal government taxes you, then the State government does, then come Payroll taxes, then any local taxes, then you have to pay property tax, then you have to pay sales tax. Each dollar is quintuple-taxed! Or more!
Those are all different taxes. Income tax is the same tax paid on the same money, twice. It's recursive. Compare how corporate income tax works to how sales tax works. If you're a business you don't pay sales tax on your raw materials, you only collect it once on the finished product. The total amount of sales tax paid on a car doesn't increase just because you increase the number of intermediary entities between the iron mine and the car dealership. With corporate income tax, it does.
That's not the crux of his argument whatsoever, it's just a random statement being held up as a straw man.
> Income tax is the same tax paid on the same money, twice.
Except it's capital gains, intentionally taxed at a lower rate than income. The first tax is levied on corporate income, the second tax is capital gains which is taxed on the individual level. Different tax bases necessitate different tax treatment.
> Compare how corporate income tax works to how sales tax works. If you're a business you don't pay sales tax on your raw materials, you only collect it once on the finished product.
That's only true in the US. The majority of G20 countries that don't have capital gains + corporate income tax use a VAT to achieve the same ends.
Look at effective tax rates for individuals and corporations based in the US. We're one if the lowest taxed countries in the 1st world.
> That's not the crux of his argument whatsoever, it's just a random statement being held up as a straw man.
Let me rephrase: The quoted statement is the closest thing he comes to as an argument on point. The rest of it is falsities and random talking points with no relation to the question.
> Except it's capital gains, intentionally taxed at a lower rate than income.
It's taxed at a lower rate because it's double taxation. It's the political middle ground between not having double taxation and having it at the full ordinary income rate.
> The first tax is levied on corporate income, the second tax is capital gains which is taxed on the individual level.
They're the same tax. It's all income tax.
Consider what happens when both entities are corporations. When Ford makes income, they pay income tax on it. If the income was from selling cars they would have paid the ordinary income rate. If it was because Ford owns shares of Exxon and Exxon issued a dividend, it would be the dividend rate. In either case, when Ford issues what's left over after paying its income taxes as a dividend, its shareholders have to pay income taxes on it again. And it's the same tax (again) whether the shares in Ford are owned by Henry Ford or Apple, Inc.
> That's only true in the US. The majority of G20 countries that don't have capital gains + corporate income tax use a VAT to achieve the same ends.
VAT and sales tax are economically equivalent, VAT is just collected at different points in the supply chain (which makes tax evasion more difficult). VAT is only collected on the increase in value over the cost of the raw materials (the "value added"), i.e. the portion of the sale price that hasn't already been taxed.
> Look at effective tax rates for individuals and corporations based in the US. We're one if the lowest taxed countries in the 1st world.
What does that have anything to do with double taxation?
Note also that the reason effective tax rates in the US are so low is the massive amount of tax avoidance that occurs. The nominal rates that US corporations would pay if they didn't all hold their profits in foreign subsidiaries are some of the highest in the world -- which is highly discriminatory against smaller non-international US corporations that can't play the same tricks.
The corporate dividend tax paid by individuals tops out at 20% today, so the example total should be $5.20. States usually tax both corporate profits and dividends at 5-10% also, so that's another 10-20% but that's usually deductible against the other taxes. Expect to keep about $4.30 from the $10 profit, if it's distributed as dividends.
The 20% rate only applies to qualified dividends. If you don't meet the qualifications (e.g. you don't satisfy the holding period requirements) the dividends are taxed at the higher ordinary income rate.
The corporate foreign tax credit is even more generous than the FTC available to individuals. They get credit for taxes paid on the dividends (i.e., withholding taxes) and in some cases for the foreign taxes the dividend-paying company paid on its income.
A lot of this money have been funelled through tax havens and have never been taxed at all. There is no need to feel sorry for Apple and Google. They are abusing the tax system far more than they are hindered by it.
"As is often the case in Washington, the scandal isn’t what’s illegal -- it’s what’s legal, in this instance tax- avoidance systems with names like the Double Irish and the Dutch Sandwich. As detailed in a Bloomberg Businessweek investigative story last May, Forest Laboratories Inc. (FRX), which makes the antidepressant Lexapro, sells almost 100 percent of its drugs in the U.S. and cuts its U.S. taxes dramatically by attributing the bulk of profits to a law office in Bermuda.
Similarly, Google reduced its income taxes by $3.1 billion over three years by shifting income to Ireland, then the Netherlands, and ultimately to Bermuda. Microsoft has used a similar arrangement. Records in the Cayman Islands and Ireland show that Facebook is setting up such a structure too. "
> I can think of few things to make America less competitive overseas.
How about double taxing American salaries overseas? E.g. if I visit the states on business, I have to pay US taxes AND Chinese taxes for any time I spend there (neither recognizes the other's jurisdiction in that case). That is about a 60% tax rate, and you can't even deduct the taxes you paid to either country from the other.
A cynic would say that if politicians want the tax holiday to appease their campaign donors, it doesn't have to /actually/ create jobs, voters just have to /believe/ it creates jobs.
tl;dr: Microsoft had beaucoup bucks stashed in the EU that they didn't want to bring back to the US due to our corporate taxes, so they put it to use by buying Skype.
Also, keep in mind that not every corporation is in such an enviable position as is Apple.
You got a lot of replies talking about the global taxation of US companies' profits. That is a problem; no other developed nation tries to tax foreign profits already taxed once again at home because it leads to just this kind of problem.
But the really big problem is that the US has the developed world's highest corporate tax rates. At 35% federal and 0-14% state, US rates exceed all other first world jurisdictions. Few big corporations pay that much because the USA has a lot of special credits and deductions that lobbyists for big companies have slipped into the code for themselves, like executive entertainment expenses and "research" or "domestic" manufacturing and oilfield operations and banking interest and such. Foreign profits don't enjoy such deductions at the margin, so the full rate would have to be paid.
President Obama and congressional Republicans have suggested that the rate be lowered and some of the deductions be eliminated. Congressional Democrats and special interests that each want to keep their own favorite deduction have been preventing a deal for years.
It's more likely that we'll just get a overseas tax holiday at 20% or so sometime in the next decade while the system at home remains a mess. Apple can wait it out and see.
> no other developed nation tries to tax foreign profits already taxed once again at home
That statement is demonstrably false. I know for a fact that in Australia foreign income is taxed again. Credits are available for some or all of the tax paid in the foreign country depending on the existence and nature of bilateral tax treaties between the two nations. I believe similar schemes operate in most developed nations.
Also of note is that the company tax rate in Australia is 30% but with far fewer special credits and discounts so the effective rate is quite close to the nominal rate.
> Because they'd have to pay taxes if they use the foreign reserves?
This is the main reason.
> Because they are somehow getting a higher interest rate return on their reserves then they'd have to pay to borrow? (That would seem pretty impossible).
This is also a possibility. Apple has extraordinarily good credit. They can consequently borrow at near-zero interest rates. They can then invest that amount of money in some (perhaps only slightly) higher risk security than their own bonds and turn a profit -- and if the money was originally held by a foreign subsidiary then so is the profit from the investment.
I believe it to be the taxes. If they repatriate those dollars they'll pay a significant tax. I believe there are also bills in congress that may someday make it through to address this, but it probably won't be soon. Getting to not pay tax on foreign profits is just bad policy, imho.
It's mainly a tax thing: to bring the offshore cash to the US, which it would have to do, it would have to pay income tax on it. The combination of deferring this tax and the reduced dividend payout which come from buying back their stock more than pays for the interest on the debt.
Maybe the proper framing is that Apple (through Braeburn Capital) hid this money in offshore tax shelters much like Google and pretty much any other large corporation does.
Bringing it back simply allows Tax authorities to "see" it again.
Perhaps the fact that it's even possible for companies to shelter the vast bulk of their earnings from tax is the problem in the first place?
It's perversely amusing to me that while an indiviual US citizen's overseas earnings are fair game for the IRS (and AFAIK no other country does this to their citizens), a corporation's earnings are totally invisible.
The reason is because these companies have children who are native citizens of the other country, which the parent company has full control over. They give the children some asset (e.g. intellectual property) and pay them an allowance (e.g. license fees for the IP).
The IRS can't touch that money any more than they can touch the money of your Jamaican love-child.
Actually that says China taxes residents on worldwide income, and non-residents on China-sourced income. The US taxes non-resident citizens on worldwide income.
China has a significantly broader definition of residence than does the U.S. A Chinese resident company includes companies incorporated in China as well as companies managed from China; Chinese citizens are taxed on their worldwide income for several years after they leave China, possibly indefinitely if they maintain their household, familial, or economic connections to China. In practice, this means that China effectively imposes worldwide taxation on its companies and citizens.
In the U.S. residence is a very straightforward. A company is a resident if it is incorporated in the U.S. An individual is a resident if he is a citizen, a greencard holder, or passes a mathematical "substantial presence" test.
Non-resident U.S. citizens are subject to worldwide taxation...but they have a very generous $100k floor, plus foreign tax credits for foreign taxes paid on their income.
China will tax world-wide income for non-citizens if they spend 5 contiguous years in China. I recently had my month out (ok, it was more than a year ago) to avoid this situation.
The $100k floor only applies to work done outside of the US. If you work for an American company, you'll invariably go on business trips back home, which mess up your taxes substantially as this isn't covered on the US/China tax treaty.
> Part of the problem is that the US is unique in taxing world wide income.
It's not taxing world wide income. Apple hasn't paid US taxes on these foreign profits. That's the whole point. They only have to pay taxes on that income if they bring it back in the US.
They're selling the fruits of design and engineering work that happens in the US, and so this is arguably where most of the value creation happens, and that that should be taxed despite the fact that the nominal sale and creation is happening overseas.
Since the foreign countries tax the sales, they (and the earning of all Americans overseas) should not be taxed again to get the money back into the US. It is a BS way to operate and the US is the only country who tries it.
> They're selling the fruits of design and engineering work that happens in the US, and so this is arguably where most of the value creation happens, and that that should be taxed despite the fact that the nominal sale and creation is happening overseas.
There is an easy solution: Tax the corporation's US payroll. The obvious problem with doing that (or any other thing that causes effective tax rates to increase in response to employing US workers) is that it creates a large monetary incentive to move the "value creation" somewhere else.
The whole problem is that we're trying to tax stupid things. Taxing corporate profits is stupid because profits don't have a nexus with any particular jurisdiction, so they get moved to whichever jurisdiction has the lowest taxes. The only way to avoid that is to tax something other than profits -- something that actually exists in your jurisdiction. Payroll tax, consumption tax, etc. And between them, the consumption tax is better because a disincentive to buy things made in other jurisdictions causes less harm to the local economy than a disincentive to hire the people in your jurisdiction would.
Edit: People who downvote comments without providing any reasoning are cowards.
Sort of. Personal income tax (with the exception of half of social security and medicare) is paid by the employee. Some economists say it shouldn't matter whether it's the employee or employer who pays, on the theory that people will contract around it either way. They will sometimes but not always. In practice it creates a psychological advantage for the party not paying the tax during salary negotiations, because the number being negotiated is generally pre-tax. If the taxes subsequently paid are paid by the employee then it gives a perceptual advantage to the employer because the employee will actually receive less than the number agreed upon, and vice versa if the employer pays the tax on top of the salary.
It also changes who is affected by changes in the tax rate for all the employees whose compensation was negotiated before the rate changed. Making the payee of US payroll taxes the employer rather than the employee would similarly be a de facto raise for almost all US workers at the time of implementation because the employer would effectively begin paying your income taxes.
So what I mean is, make the corporation pay it, not the employee. Assuming you actually want a tax on labor at all, given that it discourages hiring in your jurisdiction.
> Personal income tax (with the exception of half of social security and medicare) is paid by the employee.
Sure, but income tax is different than payroll tax, and some payroll taxes (the federal ones that support Social Security and Medicare, particularly) are split between the employee and the employer.
> Making the payee of US payroll taxes the employer rather than the employee would similarly be a de facto raise for almost all US workers at the time of implementation because the employer would effectively begin paying your income taxes.
I think you mean "payer" rather than "payee". The payee of federal income and payroll taxes is the federal government, not either the employee or the employer.
> So what I mean is, make the corporation pay it, not the employee. Assuming you actually want a tax on labor at all, given that it discourages hiring in your jurisdiction.
To the extent the US has a tax on labor qua labor (payroll tax vs. income tax), that's already halfway true (income tax isn't strictly a tax on labor, since its not limited solely to labor income.
All of that is true, but it seems like a pedantic tangent. Are you saying that converting personal and corporate income tax into employer-paid payroll tax would not be more difficult for corporations to avoid paying than existing corporate income tax?
> US gov wants to take something like 35% in taxes of "repatriated" earnings.
You are surprised that the US wants to tax earnings? The US taxes everyone's earnings. If they want to keep it overseas they can avoid the tax. If they want to bring it back they need to pay a tax on the amount minus the credit for the foreign tax already paid. They would have been taxed if they earned the money in the US, so I'm not sure why this is surprising.
Taxes and delays make it easier and faster to get debt than to move a couple billion from, say, France or China, to the US. It's complex, but there's a lot of stuff explaining this in other comments around here. I'm sure someone will do the break down again.
Can anyone explain why this is so? Because they are somehow getting a higher interest rate return on their reserves then they'd have to pay to borrow? (That would seem pretty impossible). Because they'd have to pay taxes if they use the foreign reserves? Something else?