Lower tax rate could un­leash tril­lions

Ap­ple’s cash pile is as big as the GDP of Fin­land and Ja­maica, com­bined

The Hamilton Spectator - - CANADA & WORLD - THOMAS HEATH

So much cash is rain­ing on some U.S.-based cor­po­ra­tions that they are at a loss over what to do with all the money.

With the $256.8 bil­lion sitting in its bank ac­count, Ap­ple could com­fort­ably go out and buy Chevron, the sec­ond-largest U.S. oil com­pany, at to­day’s mar­ket price with­out bor­row­ing a penny. The tech­nol­ogy gi­ant would still have $50 bil­lion left to buy more than 770,000 Tesla model S elec­tric cars or about four Ger­ald R. Ford class air­craft car­ri­ers.

Then there’s Mi­crosoft. The Seat­tle-based soft­ware maker has the sec­ond-largest stash, at $126 bil­lion, enough to buy a $100,000 home for 1.2 mil­lion Amer­i­cans.

And the bl­iz­zards of green are not lim­ited to the tech sec­tor.

Leg­endary in­vestor War­ren Buf­fett will pre­side over his an­nual Berk­shire Hathaway share­holder meet­ing this week­end in Omaha — known as “Wood­stock for Cap­i­tal­ists” — while his com­pany sits on $86 bil­lion in cash. That’s enough to pay for New York City’s gov­ern­ment op­er­a­tions for a year.

The cash hoards are com­ing to the fore­front as earn­ings sea­son is heat­ing up. U.S. com­pa­nies are re­port­ing mostly ro­bust prof­its, and the stock mar­ket, es­pe­cially tech­nol­ogy shares, are bal­loon­ing. Some in­vestors have cau­tioned that eq­ui­ties are frothy in light of the geopo­lit­i­cal risks such as North Korea and the po­lit­i­cal di­vide in the coun­try.

A big part of the rea­son be­hind the rich cor­po­rate caches is taxes — or un­paid taxes. Ap­ple, Mi­crosoft and many other U.S.-based in­ter­na­tional com­pa­nies are sitting on well more than $2 tril­lion in cash from un­taxed over­seas prof­its, which could be brought back to the United States to be used for in­vest­ment and div­i­dends if law­mak­ers lower the U.S. cor­po­rate tax rate, which at 35 per cent is one of the high­est in the world.

“Ap­ple is one of the best com­pa­nies in the world, and a third of their value is sitting in vaults in Switzer­land and Lux­em­bourg and Dublin,” said Ti­mothy Loughran, a fi­nance pro­fes­sor at the Univer­sity of Notre Dame’s Men­doza Col­lege of Busi­ness. “Isn’t that pa­thetic?”

The Trump ad­min­is­tra­tion has promised to lower the cor­po­rate tax rate sig­nif­i­cantly. Econ­o­mists and politi­cians on both sides of the aisle have said a lower cor­po­rate tax rate or a tax hol­i­day that repa­tri­ates money from over­seas will un­leash hun­dreds of bil­lions of dol­lars, if not tril­lions, in div­i­dends and busi­ness in­vest­ments in the U.S.

“Com­pa­nies have been ac­cu­mu­lat­ing cash over many years,” said David Kass, a fi­nance pro­fes­sor at the Univer­sity of Mary­land’s Smith School of Busi­ness. “The per­verse dis­in­cen­tives of our cur­rent cor­po­rate tax sys­tem are dis­cour­ag­ing cor­po­ra­tions from bring­ing back in­ter­na­tional prof­its to in­vest in the U.S.”

Ap­ple chief ex­ec­u­tive Tim Cook, in an in­ter­view with The Wash­ing­ton Post last year, said fed­eral and state taxes on Ap­ple’s cash re­serves, the vast ma­jor­ity of which are over­seas, are about 40 per cent. Many U.S.-based com­pa­nies leave their earn­ings over­seas rather than pay the U.S. rate.

“We’ve said at 40 per cent, we’re not go­ing to bring it back un­til there’s a fair rate,” Cook said, adding that his com­pany is the largest U.S. tax­payer. “There’s no de­bate about it. It is the cur­rent tax law. It’s not a mat­ter of be­ing pa­tri­otic or not pa­tri­otic.

“We think it’s fine for us to pay more, be­cause right now we’re pay­ing noth­ing on that and we leave it over there,” he said. “But we — like many, many other com­pa­nies do — wait for the money to come back.”

If the cor­po­rate rate is re­duced or a hol­i­day is granted, Ap­ple, Mi­crosoft and oth­ers could pay a spe­cial div­i­dend, buy back shares or both. They could also make ac­qui­si­tions, al­though Ap­ple has pre­ferred to grow or­gan­i­cally by in­vent­ing new prod­ucts such as the iPhone and iPad and in­vest­ing in it­self.

Ap­ple earned $45.6 bil­lion in profit in 2016 on rev­enue of $215 bil­lion. On Tues­day, it re­ported sec­ond quar­ter prof­its of $11 bil­lon on rev­enue of $52.9 bil­lion and an­nounced a 10.5 per cent in­crease in its div­i­dend to $13.22 bil­lion an­nu­ally.

Ap­ple is now the big­gest-pay­ing div­i­dend stock in the world.

JOHN TAG­GART, NEW YORK TIMES

Ap­ple has ac­cu­mu­lated $256.8 bil­lion in cash.

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