Jared Hunt column: Billion-dollar moves to get around tax laws
The notion that the U.S. needs to reform its corporate tax code is nothing new. But two business stories over the past week have really driven home the almost laughable state of the nation’s tax laws.
Apple Inc., which has nearly $151 billion worth of cash and liquid assets on its balance sheet, said last week it planned to return some value to shareholders by upping its $100 billion stock buyback program by another $30 billion. It is also increasing its dividend by about 8 percent.
So that means Apple’s going to tap that big pile of cash to pay all that, right?
Apple this week issued $12 billion in bonds to help finance the plan.
“But, wait, if the company has so much cash why is it racking up a huge pile of debt to pay for this?,” a rational person might ask.
The answer: the U.S. tax code.
About 88 percent of Apple’s cash, roughly $130 billion, is parked in the accounts of foreign subsidiaries to avoid U.S. taxes. It’s there to avoid the U.S.’s 35-percent corporate tax rate.
The moment Apple brings the cash back to the U.S. to pay shareholders, it has to pay taxes on it.
“To repatriate our foreign cash under current U.S. tax law, we would incur significant tax consequences and we don’t believe this would be in the best interest of our shareholders,” incoming Chief Financial Officer Luca Maestri said during a call with analysts last week.
Apple’s $12 billion debt issue featured bonds with various terms, ranging from three to 30 years, with yields ranging from 1.05 to 4.45 percent, according to Bloomberg.
“Hey, a 4.45-percent interest rate is a lot better than paying a 35-percent tax rate,” someone who knows math might say.
Not so fast, my friend.
Thanks to the U.S. tax code, those interest payments are also tax deductible. So instead of repatriating money and taking a 35-percent tax hit, Apple will get to reward its shareholders with money it can essentially borrow for free thanks to U.S. taxpayers.
“Isn’t that nice of the government?” Floyd Norris of The New York Times wrote when Apple did a similar deal last year. “Borrow money to avoid paying taxes, and reduce your tax bill even further.”
Meanwhile, pharmaceutical company Pfizer on Monday also thumbed its nose at the U.S. tax code when it announced a plan to buy British rival AstraZeneca for $99 billion. The move will allow the company to avoid paying U.S. taxes by reincorporating in Britain, which is cutting its tax rate from 23 to 20 percent and implementing policies that make it easier for companies to avoid having overseas profits taxed.
Pfizer, the maker of popular drugs like Lipitor and Viagra, was founded in Brooklyn, N.Y., in 1849. Both the New York Times and Washington Post described the move as a way for the company to “effectively renounce its United States citizenship.”
None of this is new. The New York Times said Pfizer is now joining dozens of companies that have made moves to incorporate overseas in search of more favorable tax systems.
Meanwhile, companies are building billion-dollar cash piles overseas — and not investing it domestically — to avoid U.S. taxes.
Everyone and their uncle has an opinion on how to reform the U.S. tax code. One has to wonder how many more accounting shell games we’ll witness before someone bites the bullet and makes a serious attempt at reform.