Implications of Apple’s taxes

Apple has announced that it will be making a one-time payment of $38 billion to repatriate some of its vast overseas cash holdings.

It has also noted that it will be spending $30 billion in the US over the next five years and will create 20,000 jobs as a result. The announcement comes just shy of a month after the current US administration announced large scale tax cuts for conglomerates.

Background

Apple Inc. is one of the most successful multinational technology companies in the world. It was founded by Steve Jobs, Steve Wozniak, and Ronald Wayne in April 1976. It was incorporated as Apple Computer, Inc. in January 1977. It currently designs, develops, and sells consumer electronics, computer software, and online services. Among the company’s most successful products are the iPhone smartphone, the iPad tablet computer, the Mac personal computer, the iPod portable media player, the Apple Watch smartwatch, the Apple TV digital media player, and the HomePod smart speaker. Apple's consumer software includes the macOS and iOS operating systems, the iTunes media player, the Safari web browser, and the iLife and iWork creativity and productivity suites. Its online services include the iTunes Store, the iOS App Store and Mac App Store, Apple Music, and iCloud. The current CEO of Apple is Tim Cook.

In November 2017, Apple’s latest phone -iPhone X – hit the markets globally. It is by far the company’s most expensive unit priced at £999. It has been billed as the phone celebrating the 10th anniversary of the iPhone. The unit has been met with largely positive reviews. In addition, Apple once against posted profits for its fourth quarter results. Though its costs increased, Apple said profits were $10.7bn in the quarter, increasing 18%. “We’re happy to report a very strong finish to a great fiscal 2017, with record fourth quarter revenue, year-over-year growth for all our product categories, and our best quarter ever for Services,” said Tim Cook, Apple’s CEO. Due to higher than expected sales, Apple shares hit an all-time high, opening up 3.5 percent. Analysts said Apple was now closer to becoming the first trillion dollar company, as shares have continued to rise on the back of robust sales.

Analysis

As of the most valuable companies, Apple is the largest taxpayer in the world. It has paid over $35 billion in corporate income taxes in the last three years. Apple pays taxes in every country where its products are sold. On November 2017, the leaked documents that have been named Paradise Papers revealed the secretive new structure that allowed Apple to avoid paying billions in taxes. The papers showed that Apple chose the Channel Islands after a 2013 crackdown on its controversial tax practices in the Republic of Ireland. Up until 2014, Apple had been using a loophole called “double Irish” to exploit takes in the US and Republic of Ireland.

Apple has announced that it will be making a one-time payment of $38 billion to repatriate some of its vast overseas cash holdings. In the next five years, it will also be spending $30 billion in the US and will create 20,000 jobs as a result. The announcement comes just shy of a month after the current US administration announced large scale tax cuts for conglomerates.

Under the new cuts that were passed by the US Senate, the corporate tax rate would be 21%. This would begin from 2018. Currently the corporate tax rate has been kept at 37%. Under the new tax breaks, Apple will be able to save millions of dollars every year.

Apple has estimated that it will be spending at least $350 billion in the United States over the next five years. This includes the spending plan, hiring 20,000 people, tax payments and other businesses it will be investing in. Trump has taken credit for Apple’s announcement. He took to Twitter to note, “I promised that my policies would allow companies like Apple to bring massive amounts of money back to the United States. Great to see Apple follow through as a result of TAX CUTS.”

Tim Cook on the other head gave a more subdued response noting, “Let me be clear: There are large parts of this that are a result of the tax reform, and there’s large parts of this we would have done in any situation.”

Assessment

Our assessment is that Apple leveraging some of the astronomical $252 billion cash hoard that it has overseas is presenting a modern-day Marshall Plan for the US economy. The United States in 1948 under the Truman administration had devoted proximately $140 billion to re-build Western Europe after World War II. We believe that the $55 billion is set to be directly injected into the US economy in 2018 will create more jobs in the US. President Trump’s move to reduce taxes will motivate many large US corporates to re-shore their business back to the US. However, the reduction in taxes will partly offset the gains from injection of cash by companies like Apple in the US economy.