It almost never snows in Silicon Valley, but last week the flurries were really flying and the snow-job drifts were piling up high at Apple Inc.’s corporate headquarters in Cupertino.
On January 17, Apple issued a press release that reads like a White House infomercial for the Trump/Goldman tax heist that was rammed through Congress three days before Christmas 2017. It contains a flurry of “stylized facts” about all the wonderful things that Apple, armed with the tax cuts, plans to do for the U.S. economy over the next five years. These include a purported $350 billion increase in Apple’s purchases from U.S. suppliers; $30 billion of new U.S. capital investment; 20,000 new U.S. jobs; a second U.S.-based “campus”; and the expansion of something called an “Advanced Manufacturing Fund” from $1 billion to $5 billion.
True to form, most leading U.S. business media, including the Wall Street Journal and CNBC, took these Apple statements at their word and channeled them enthusiastically to their readers and viewers, like the corporate cheerleaders they usually are. They neglected to mention the following cautionary language at the bottom of the press release, in fine print:
This press release contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include without limitation those about Apple’s plans for future investments and expansion, taxes, Apple’s plans for managing its cash balances, and repatriation of overseas cash. These statements involve risks and uncertainties, and actual results may differ.
Indeed, upon closer inspection, most of the claims in the press release turn out to be “forward looking” in the very worst sense; that is to say, they avoid looking back and around at what has really been happening.
As we’ll see, most of the “new jobs” and spending have nothing to do with the tax cuts; they are linear extensions of Apple’s pre-tax cut behavior, which were already in the pipeline.
Furthermore, the press release intentionally skates past the question of precisely how Apple will be affected by the new tax law. It is especially careful to avoid mentioning that—as already reflected in its recent stock price surge—Apple is almost certain to be the tax heist’s largest single corporate beneficiary by far.
As such, this latest Apple PR campaign easily outdistances ordinary run-of-the-mill efforts at corporate self-promotion. It represents a willful effort to bury all the gory details about how this massive transfer of public wealth will actually work. Indeed, the very tone of the release implies that Apple’s fellow American taxpayers should basically feel grateful that it is willing to pay any corporate taxes whatsoever—as if Apple were not just a giant capitalist corporation, spending every waking moment figuring out how to maximize profits and minimize taxes; as if it were some medieval lord, sitting in his brand-new circular castle, saddling the peasants with all of the tax burdens and common soldiering that keep the commonwealth safe in exchange for the sheer unadulterated privilege of being lied and sold to.
Anatomy of a Scam
To begin with, as other observers have noted, Apple’s claims regarding its likely future purchases from U.S. suppliers, job creation, and capital spending turn out to be wildly overstated and downright misleading.
In particular, the levels of U.S. job creation and U.S. capital spending that Apple says it “intends” to deliver over the next five years are entirely consistent with its historical levels of U.S. job creation and spending in the past five years, if actually a little bit lower. For example, Apple’s U.S. retail stores accounted for 42,000 added jobs in the 2007-12 period. It is likely that U.S. jobs also accounted for a significant share of the 46,900 new jobs Apple added in 2012-17. Further, both of these earlier Apple job gains occurred during a period when the U.S. economy was struggling to recover from the Great Recession.
Apple doesn’t disclose the geographic details we need to precisely assess its promise to spend $34 billion more in the United States in the next 5 years. But it is quite likely that U.S. facilities accounted for a very high share of its $54 billion of total capital spending in the past five years. So this is also by no means a bold departure from pre-tax cut trends.
Furthermore, as we’ll soon see, yet another new tax break in the new law will also help Apple share the cost of all this (already-planned) investment with other U.S. taxpayers.
Of course, this is by no means impugns the importance of Apple’s contribution to U.S. employment and capital spending. It is only to argue that massive corporate tax cuts were evidently not essential for it.
As for Apple’s commitment to spend $350 billion over the next five years on U.S. suppliers—since, once again, it does not disclose any geographic details about its supplier purchases—it is impossible to judge whether this really presages a departure from historical levels. But we do know that the overwhelming share of Apple’s recent supplier purchases has been from non-U.S. vendors, mainly in China. Is this really likely to change? Without hope, there is only desire.
Apple’s press release does contain one passage that helps us understand its core motivation for suddenly showcasing all these bold “new” plans, most of which, as already indicated, were in the oven. This is its only mention of the generous new tax law’s impact:
Apple, already the largest US taxpayer, anticipates repatriation tax payments of approximately $38 billion as required by recent changes to the tax law. A payment of that size would likely be the largest of its kind ever made.
This simple statement is a brilliant distortion on many levels; again, it almost makes it sound as if Apple will be doing other taxpayers a favor. Nothing could be further from the truth.
To begin with, it pays to read the fine print. The new tax law does require MNCs like Apple to pay a modest (8 to 15.5 percent, depending on whether the assets involved are illiquid or cash) tax on the heretofore untaxed stash of offshore profits and royalties accumulated since 1986. As of fall 2017, this is estimated to be worth about $2.6 trillion for all U.S. MNCs. In the case of Apple, by far the largest such offshore stash holder, the figure is $252.3 billion. The $38 billion “repatriation tax payment” noted by Apple’s press release is indeed consistent with a 15.1 percent average tax on this accumulated offshore stash.1
However, a careful reading of the new tax bill reveals that Apple and its MNC brethren are not actually required to pay this “repatriation tax” bill on their accumulated offshore stash now, but will have up to eight years to do so—interest free!—despite the glaringly obvious fact that Apple has plenty of ways to make money off the deferred cash in the meantime. Under the law’s terms they can opt for an installment plan that allows them to pay just 8 percent of the total repatriation tax liability each year for the first five years, then 15 percent, 20 percent, and finally 25 percent, in 2026!2
I’m sure we all know quite a few hard-working American taxpayers who would like to have eight years to pay their taxes, no interest asked. Perhaps they should have hired a few more tax lobbyists. The upshot is that this is one heck of a deal, especially for Apple, the world’s largest, most profitable corporation. And to a great extent it has Donald Trump to thank for it. Meanwhile, Goldman Sachs CEO Lloyd Craig Blankfein, ordinarily regarded as a Hillary supporter, was singing Donald’s praises for the tax law just this week. Speaking of corporate lobbyists and those who hire and unleash them, Apple should probably thank him, too.
But it gets even better. Once again, according to the fine print of the tax bill, Apple and the other MNCs are not actually required to “repatriate” their offshore stashes to the United States, much less to invest them here. They may do so, but the only legal requirement is that they commit to pay the repatriation tax. Having done that, they are free to do anything their hearts desire. If they decide to “repatriate”—which normally just requires a bookkeeping entry, since most of the cash is in fact invested by way of Wall Street banks—MNCs like Apple might decide to invest them in U.S. capital projects. But they might also freely decide to use them to buy back their own shares, increase dividend payouts, or burn them as a sacrifice to the pagan idols on the beach at Mar-a-Lago.
Or they may even freely decide to invest them in new offshore business operations, or leave the offshore stash precisely where it lies, booked as “offshore” investments in marketable securities. Assuming Apple does that, and simply realizes the same average gross yield on cash and marketable securities that it realized in 2017 —1.9 percent—then, given the installment option, it might actually be able to pay the entire $38 billion “repatriation tax” bill out of the (perhaps untaxed) incremental investment income that will be generated by its cash stash over the next eight years. Moreover, it may actually end up with more offshore wealth than it started with—nearly $258 billion by 2026!3
Now, obviously, Apple might decide that other uses of the offshore cash stash may offer even higher net tax returns. But the key point remains: Given the installment plan opportunity, whatever Apple decides to do with the stash it will not pay anything close to a 15 percent net present value cash tax on its offshore profits stash.
Indeed, after all is said and done, depending on what we assume about Apple’s cost of capital and the future yields on its stash, by 2026 Apple will probably end up paying at most a plus 2 percent to a minus .5 percent rate “repatriation tax rate.”4 (Of course, the same analysis applies to the dozens of other U.S. MNCs with offshore profit stashes.)
As if all this were not generous enough, the Trump/Goldman tax heist also permits U.S. companies like Apple to enjoy an amazing immediate 100 percent write-off for capital spending undertaken during the next five years.5 Recall the “$30 billion of capital spending over the next five years” that Apple bragged about in its press release? Once again, most of this appears to have been already in the pipeline, long before anyone assumed this tax law would be force-marched through Congress.
But now Apple’s $30 billion, plus the $4 billion of additional investment in the Manufacturing Fund, will probably qualify for this 100 percent full write-off.
By comparison, Apple’s entire “provision for taxes” in 2017—a bookkeeping entry—totaled $16 billion, while the “cash taxes” it actually paid totaled just $12 billion.
This means that its effective average “cash tax rate” was already only 18 percent of operating income even before the new tax law—just half the former top U.S. nominal corporate tax rate of 35 percent.
Going forward, with the Trump/Goldman’s newly established 21 percent peak nominal rate for domestic U.S. corporate income, Apple’s accountants will undoubtedly be on the prowl for new ways to reduce its cash tax rate below even the new statutory maximum. Here is one of them: Applying the new 21 percent rate, and assuming that Apple does indeed make the $34 billion of U.S. investment over the next five years, this instant write-off could eliminate close to half of its entire U.S. corporate tax liability during that period. Of course, this is on top of the “repatriation tax” loan scam described above.6
Looking Forward: The Offshore Advantage Continues
The other key fact about the new tax law that Apple’s January 17 press release neglected to mention is that U.S. law has now adopted a fairly aggressive version of a “territorial” corporate income tax. This means that, subject to certain restrictions, MNCs like Apple will no longer have to pay very much if any income tax on the non-U.S. earnings of their foreign subsidiaries.7 For U.S. MNCs like Apple, whose domestic U.S. business now accounts for just 35 percent of its worldwide sales and 27 percent of its earnings—down from over half for both measures a decade ago—this may be the greatest single windfall of all.8 As I recently discussed, it is also by far the greatest concern for developing countries.
Of course many observers would claim that this cat was already out of the bag. As we noted, as least since the late 1970s there has been a kind of “tax race to the bottom,” especially among rich countries. Under the impact of this bout of tax competition, the 70+ percent rates of the 1960s and 1970s and the 48 percent rates of the early 1980s have long since given way to much lower nominal corporate rates all over the planet.
Furthermore, in the past two decades, at least 27 of the 35 OECD countries have already adopted their own versions of “territorial corporate income taxes,” and the few that have not, like Korea, Mexico, Chile, and Israel, are under intense pressure to do so.
At first, in the 1970s and 1980s, the United States led this trend, but then it fell behind. As of 2017, before the passage of Trump/Goldman, its 35 percent nominal CIT rate was the highest in the OECD. The lag was partly just due to the fact that most U.S. MNCs and their accountants had long since engineered “private” ways around the old system—like Apple’s complex arrangements with Ireland, Bermuda, the Netherlands, and the Isle of Jersey—that were not easy give up, especially for the thousands of “enablers” in the accounting and legal professions whose livelihoods depended on them.
In effect, because of such offshore arrangements, plus numerous domestic deductions and loopholes, very few large U.S. corporations have been paying anything like this 35 percent headline rate—certainly not giant MNCs like Apple. The average “effective” corporate income tax was already well under 20 percent even before Trump/Goldman, and for many MNCs it was even lower.
Indeed, the root cause of the giant $2.6 trillion offshore cash stash and the repatriation tax scam is the fact that, under the old system, U.S. taxation of profits and royalties booked abroad was deferred entirely until these were remitted back home to their corporate parents. This gave U.S. MNCs an irresistible incentive to find creative ways to book as much income as possible offshore—for example, by booking their software, trademarks, and other intellectual property in low-tax havens and then paying themselves royalties tax free. To do so, they had the help of the world’s “global haven industry,” staffed by the world’s largest accounting firms, law firms, and banks, and located in more than 111 low-tax secrecy jurisdictions around the planet from Ireland to Singapore. Over time, of course, many top-tier MNCs like Apple assembled their own outstanding in-house teams of enablers. In a sense, therefore, they not only financed the rise of the global haven industry; they enlisted in it.
Was there an alternative to the recent tax heist, given the fact that tax competition already had such a head start with such powerful interests behind it? Was a global progressive corporate tax reform, aimed at halting the “race to the bottom,” ever in the cards? One would not know it from anything the Democrats did, or rather did not do—like developing and articulating an alternative tax reform proposal to show the contrast with the GOP proposal. But the short answer is “of course.” The key obstacles have always been political, not technical. But the United States alone has always exerted a huge influence on international corporate tax policy. For the moment, it is a heavyweight on the wrong side of the global tax justice scale.
Looking Backwards: Where the $252 Billion Came From
In Apple’s case, all this offshore chicanery means that a significant portion of its $252 billion of accumulated “offshore profits and royalties” actually derived from domestic U.S. activities like software engineering and branding. Apart from the legal chicanery that permitted these rights to be transferred to, say, Bermuda or Jersey at ridiculously low valuations, their royalties would have been taxed years ago at the higher U.S. rates paid by domestic corporations.
Without more transparency from Apple, it is hard to parse the resulting $252 billion into “legitimate offshore” and “dodgy diversions.” But tax experts have long suspected that a significant share deserves a closer look from IRS auditors—especially the $129 billion that Apple has accumulated in Ireland alone, including $114 billion since 2009. Unfortunately, now that the new tax law is in place, this is unlikely to happen.
Looking forward, then, we may safely assume that on the margin, Apple will not only face a much lower effective domestic U.S. corporate tax rate on its (shrinking share) of domestic earnings. It will also continue to enjoy a very low (10 percent at most) U.S. tax rate on its (relatively high-growth) offshore business.9 And it will also be aided by the new law’s indirect effects on tax competition, and on the lower effective corporate tax rates that key developing countries like India, South Africa, and Argentina may be compelled to adopt.
In sum, from the standpoint of U.S. national interests, it is not clear that, on balance, the new tax bill really offers Apple and other MNCS any net incentives at all to expand their U.S. operations, invest at home, or even “repatriate” its offshore cash hoard. After all, 10 percent is less than 21 percent, even in Cupertino.
In the interests of full disclosure, I have been a huge fan of Steve Jobs and Apple Computer since at least the early 1980s, a former senior executive at one of its early allies in the software industry, an avid consumer of its products, and a (very modest) shareholder since the early 2000s. In that capacity, along side far larger investors like Al Gore (230,137 shares), I’m one of Apple’s remaining 22,750 individual shareholders who (as of October 2017) collectively own about 39 percent of the company.10
A comparative handful of Apple’s own management team also constitute important shareholders: Arthur Levinson, the company’s chairman and largest individual shareholder, reportedly owns 1.1 million shares; its CEO, Tim Cook, owns at least 901,000. While the number of individual investors has declined by about 21 percent since 2009, many of us old-timers retain a nostalgic attachment to this extraordinary company based not only on its track record, but also on the fact that it has long been just ever so slightly “radical” in the best sense of the world—willing to take risks and challenge establishments. Just remember the famous original ad for the Macintosh during Super Bowl XVIII way back in 1984.
You’d think by now that we would all be delighted with Apple. It is the largest, most successful corporation in history, with a market capitalization fast approaching $1 trillion and more than 600 million customers in 100 countries who use over a billion of its devices every day. In the past year alone its stock price has soared by 60 percent, from $110 around the time of Donald Trump’s election to more than $170 today.
However, for many Apple fans, customers, and at least a few stockholders, it was never just about commercial success. Sadly, it is increasingly clear that in the past decade, Apple has itself become the establishment. To the extent that the soaring stock price simply reflects expected tax cuts and a gigantic wealth transfer, none of us should be celebrating, no matter how “rich” they make us.
Unfortunately, by now the other 61 percent (and rising) of Apple shares outstanding is owned by a hodgepodge of institutional investors like Black Rock, State Street Corporation, Warren Buffett’s Berkshire Hathaway, and some 2,581 others. By and large, these are cold-blooded entities, citizens of nowhere, that could not care less where a corporation is headquartered, where it invests, how many jobs it creates, or how many students use its computers, so long as it brings home the bacon. Nor do these institutional investors care where or even whether a corporation pays taxes, so long as it does not damage its reputation by getting caught or by appearing to misbehave. Apple’s January 17 press release seems to have been written on their behalf.
As for products and markets, Apple also appears to have become much more conservative in that domain. The phenomenally successful I-Phone line alone now accounts for 62 of net revenues, up from 16 percent in 2009. Its top market will soon be one-party state-capitalist China (24 percent of sales and rising), not the officially democratic capitalist United States (27 percent and falling) or social-democratic Europe (20 percent). This has made repeating anything like the 1984 anti-Big Brother ad campaign unimaginable, simply because it would be banned in so many high-growth markets.
Of course, the company may just be between product cycles, with great new ones soon to be introduced that will change the very nature of our being. However, under Tim Cook’s more conservative papacy, the company has become more prosaic. Its strategic focus has shifted from big bold ideas to a kind of execution-oriented incrementalism—plus a whole new level of financial chicanery, including the kind of tax games that we’ve just explored.
In any event, the growth of Apple’s top-line revenue and operating cash flow have both slowed dramatically (see chart below). During the Tim Cook era, so far, the company has increasingly behaved like a giant financial rotisserie, returning more and more of its cash to shareholders in the form of dividends and share buybacks. Such behavior is widely considered by finance experts to be a clear sign that a company is running out of good ideas.11
Indeed, ever since Cook assumed the helm in 2012, Apple has even borrowed over $116 billion to make these payments, even while it has more than doubled its cash stash. Of course, during his last years at Apple Steve Jobs also accumulated gobs of cash. He also invested in the business at rates that Cook has matched or slightly exceeded, except for acquisitions.
But under Jobs, Apple was at the very beginning of several product life-cycles, with revolutionary new products like the iPhone and the I pad, revenues and cash flow that were both growing at double-digit rates, and the company still breaking into high-growth global markets like China. So some cash accumulation was inevitable.
Furthermore, Jobs had a visceral contempt for the very notion that an innovative, risk-taking company like Apple would ever act like some bureaucratic GE-type financial conglomerate. He refused to waste time managing quarterly earnings to please Wall Street pundits; to placate investment bankers and institutional investors with gratuitous borrowing, share buy backs, or dividend payouts; or to engage in the kind of rhetorical snow-making and outright tax scams we described earlier. Jobs’s Apple was not in the business of spinning up tax cuts and then handing giant wads of cash back to wealthy shareholders and institutions who for the most part are in the habit of “thinking alike.” He preferred to take big risks and invest in big ideas.
Of course, it is impossible for outsiders to assess what an intensely secretive company like Apple is really up to. Maybe it is working on bold new missions like individualized health care, robotics, 3D imaging, and electric vehicles. We certainly hope so. But this is all very far from the liberating “IT revolution” that so many in the industry once believed in. Maybe they simply failed to predict what the macro-social effects of the new technologies would be. But we somehow have ended up with a much harder-edged, neo-Darwinian version of what the industry is all about.
Worst of all, our most successful IT companies, which once prided themselves on egalitarianism and the relentless free spirit of democratic societies, have ended up contributing directly to unprecedented levels of inequality, partly just by way of their tax agendas. Many of them have promoted “representation without taxation” at home while turning a blind eye (or worse) to dictatorship abroad. This undermines liberal democracy, the ultimate golden goose for all of us—even Apple.
It would be remarkable if all this somehow did not come back to haunt us. Indications abound that Apple Inc. may indeed be experiencing some limits to growth; perhaps this is inevitable given the company’s size and complexity. But it no less sobering to those who believe that entrepreneurship—by corporations and governments alike—should be a progressive force. It often has been, and it can be so again.
1. This implies that Apple’s offshore stash consists of $237 billion of “cash” assets and $15 billion of less-liquid assets. The 8 percent rate applies to less liquid offshore assets, and the 15.5 percent rate to cash. In Apple’s case, the $38 billion estimated tax liability works out to about 15.1% of its $252.3 billion of offshore cash and marketable securities as of October 2017, which implies that roughly 94 percent of these assets were in liquid assets like tradable securities.
2. See http://docs.house.gov/billsthisweek/20171218/Joint%20Explanatory%20Statement.pdf. 482-3: A U.S. shareholder may elect to pay the net tax liability resulting from the mandatory inclusion of pre-effective-date undistributed CFC earnings in eight…installments… The timely payment of an installment does not incur interest. 487: “The Senate amendment follows the House provision in allowing a U.S. shareholder to elect to pay the net tax liability resulting from the section 951 inclusion in eight installments. However, if installment payment is elected, rather than requiring eight equal installments, the Senate amendment requires that the payments for each of the first five years equal 8 percent of the net tax liability, the sixth installment equals 15 percent of the net tax liability, increasing to 20 percent for the seventh installment and the remaining balance of 25 percent in the eighth year.” 489: With respect to this provision, the Conference agreement and the final bill followed the Senate version.
3. The example in Chart 3 assumes that Apple’s 1.9% per year projected average gross investment yield on its offshore stash is tax free, because it continues to be booked “offshore” with non-US Apple subsidiaries, and because under the terms of the Trump/Goldman tax law, going forward, income generated by such non-U.S. subsidiaries are eligible for a 100 percent “permanent exemption” from U.S. tax. Under an alternative scenario, in which Apple effectively has to pay the new 21 percent marginal corporate tax rate that applicable to domestic corporate income on such investment yields, it still ends up with a $248 billion cash stash by 2026.
4. This assumes, based on the work of other analysts (see for example https://www.gurufocus.com/term/wacc/AAPL/WACC/Apple%2Binc) that Apple’s own weighted average cost of capital is about 9.6%, that its gross yield on offshore investments averages 1.9% over the next eight years, that these yields are subjected to U.S. income tax rates that vary from 0% to 21%, and that Apple chooses to take full advantage of the Trump/Goldman eight year installment tax plan. Under these assumptions, the net present value, in $2017, of the future stream of tax payments on the $252 billion offshore stash varies from +$1.5 billion to minus $5 billion, for an effective NPV tax rate of -.5% to 2%.
5. See http://docs.house.gov/billsthisweek/20171218/Joint%20Explanatory%20Statement.pdf, p. 189: “The 50 percent allowance is increased to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft).” This basic Senate provision on accelerated depreciation for the next five years was adopted in the Conference report.
6. In 2017, Apple’s overall “cash tax rate” – cash actually paid as a share of operating income – was 18.1 percent, compared with the nominal US rate of 35 percent. The gap was mainly accounted for by its offshore cash stash, but it also took benefitted from favorable tax treatment for R&D and employee share compensation.
7. This is done by virtue of a so-called “permanent exemption” from taxation of dividends paid by non-US subsidiaries that are at least 10 percent owned by their US parent companies. The provisions of the new law with respect to offshore income are quite complex, and it appears that offshore earned income by US MNCs might in theory be subject to US income tax rates on the order of perhaps 10 percent. But this is clearly well below the 21 percent nominal tax rate that will apply to domestic corporate income.
8. See Apple’s latest 10-K (October 2017), available at http://investor.apple.com/secfiling.cfm?filingID=320193-17-70&CIK=320193.
9. In theory, the Trump/Goldman tax law provides for 10 percent surcharges on so-called “GILTY” offshore income, over and above 10 percent ROAs generated by U.S.-owned offshore subsidiaries. It also includes a similar tax on so-called offshore “Base Erosion” profits. In practice, implementing these new offshore taxes for all of the foreign subsidiaries of U.S. MNCs will be a reporting nightmare for IRS and a bonanza for accounting firms, and may take years to be enforced—by which time it is hoped that this atrocious law will have been amended.
10. As of Apple’s last 10-K, published on October 20, 2017, there were 25,333 Apple shareholders of record, who collectively owned 5.25 billion fully diluted shares of common stock. According to the latest SEC 13F reports on institutional ownership of Apple stock, 2583 institutional shareholders accounted for 60.8% of Apple share ownership, including the top five institutions – Vanguard Fund, Blackrock, State Street, FMR LLC, and Berkshire Hathaway, that owned 22.5 percent. See http://www.nasdaq.com/symbol/aapl/ownership-summary . For our purposes here orders of magnitude will suffice, so we have extrapolated the implied ratios forward to January 2018.
11. Shareholder buybacks have been widely criticized in the finance literature. See, for example William Lazonick, “Profits Without Prosperity,” HBR, September 2014, at https://hbr.org/2014/09/profits-without-prosperity. But a recent Sept 2017 HBR survey piece about shareholder buybacks argued that they have their uses. See Alex Edmans, “The Case for Stock Buybacks.” HBR (September 2017), at https://hbr.org/2017/09/the-case-for-stock-buybacks Edmans concedes that that shareholder buybacks are often a signal the a company is running out of investment ideas. They may be a more appropriate use of corporate cash than wasting spending on bad investments, and a more flexible, tax-efficient way to distribute this cash to certain categories of shareholders than dividends. QED.