I think the assumption of the author is that the folks who run Apple will be seduced by profits generated by the financial arm and start emphasizing that more. Which if anyone knows anyone who works at Apple is ridiculous in the extreme. Alternatively, they take on more balance sheet risk and then the whole company is jeopardized by a financial volatility event, e.g., a big jump in interest rates.
Tim Cook and others do seem to be playing a game of chicken with congress. How long can the US division continue to borrow to find the dividend while those enormous piles of cash remain offshore?
I agree with your sentiment. The cash, even if overseas is still highly liquid and readily available.
The author though is trying to get across that certain financial instruments can have a negative multiplier effect.
Imagine a day where the S&P 500 drops by 10%, perhaps during it Apple Capital starts to liquidate a few investments. Let's say the next day is worse and we see another 12% drop. Depending on their hedging, diversification, asset class, investment type and liquidity, it could turn out to be a very bad day for Apple Capital enough to where it affects Apple Inc.
Obviously the above example is extraordinary and we're talking about highly sophisticated financial engineers but we are technically living in an extraordinary time. US Equities have not performed this well in a long time - perhaps since 1997.
What should the corporate tax rate, currently at 35%, drop to, for Apple to repatriate foreign cash?
It seems like a no brainier to drop the rate when the alternative is financial skullduggery by the Apple capitals of the world. All while the local mom & pops pay the 35% and bear the financial burden of the nation
> It seems like a no brainier to drop the rate when the alternative is financial skullduggery by the Apple capitals of the world.
Absolutely not. Just because an entity will try to work around your well-intentioned and globally standard laws does not mean you should give up on those laws.
In addition, it's quite an elitist and anti-democratic statement -- Apple is by far the world's most profitable public company, to give them a 'tax break' is to add icing onto their cake.
Apple is doing what it thinks is best -- taking on debt with the assurance of foreign assets, no matter if those assets are readily available or not.
The current US president has tossed around the idea of taxation amnesty for corporate asset repatriation -- if I was Apple, I'd lobby for that while continuing on their current practice.
Lastly, there's no real fear Apple won't be able to borrow at a handsome rate. Interest rates are still incredibly low (historically) and the Fed doesn't raise rates by full percentage points, they do it slowly and incrementally.
Disagree. Apple is one among thousands of companies avoiding tax, while Mom-and-pop companies pay exorbitant rates. No one's working around laws - they're following it diligently while maintaining their fiduciary duty to investors.
US corporate tax rates are among the highest in the world - even Canada - having a reputation for being socialist - has a lower rate. You're forcing companies to pay 0% tax in the US if they can get away paying only 5% in Ireland. And Ireland is benefiting disproportionately from American innovation - because of onerous tax rates
You install tariffs on the products and services of those corporations attempting to subvert the taxing authority, utilizing payment networks if necessary to capture the tariff.
So person A sells an iPhone to person B in China. The phone was manufactured there and never left the country. Can you tell me the reasoning that our federal government owns 35% of that sale?
There’s a reason other (more “progressive”) countries don’t tax overseas business. It’s stupid and anticompetitive.
The same reason I owe the government taxes when a non US company pays me directly when I work outside of the US. That’s what I owe the US government for their services I receive as a US citizen regardless of where my business activity took place.
You think it’s stupid and anti competitive. I think that it’s a race to the bottom otherwise and fully support the current model (although 35% is a tad too high; 20-25% is more reasonable IMHO).
To each country their own model. This works for us. Probably helps to be one of the largest economies in the world. You get to make your own rules at that scale.
Boris Johnson couldn't do that until he paid huge amounts in penalties for a citizenship hr was unaware of. He consumed no US services. Why should he be taxed?
Is that the gentleman who mangled housing in London and swindled the UK into voting for Brexit with lies (and then washed his hands of it all and walked away)? Hard to feel sorry for a person of such character.
If you refuse to support of a basic human right because of the character of just one of the persons needing those rights, what does that say about you?
To be free from taxation is not a human right (nor taxation with representation, see: Puerto Rico). I believe that’s where we’re not on the same page. Society has a cost, and while the current structure isn’t perfect, it’s the least terrible solution we’ve attempted.
If you think it’s ok that someone who has never lived in a country can be taxed as a citizen against their will by that country, then you can’t believe in any individual rights.
Except it doesn’t work for us. It makes the US a lousy place to invest and drives capital overseas. The US economy is huge because of most of its first 200 years, it’s been stagnant every since.
“investment” will continue as long as we run large deficits, if you count funding our rapidly growing federal debt as “investment”. It’s the “benefit” of our trade deficits.
Tariffs are awesome. Smoot-Hawley helped trigger an American boom they called “The Great Depression”.
You are describing a system that would give Samsung an even far lower tax rate than Apple. You can’t trap capital, it will flow overseas to where the best opportunities are. We are already making this happen with the highest corporate tax rates in the world. Adding foreign corporate taxes as a third layer on every dollar of profit would make our slide to uncompetitiveness go that much faster.
You describe the situation as it is. The current system indeed drives US corporations to reincorporate abroad by merging with a foreign companies, because they are able to immediately create huge tax synergies.
It also makes US companies more prone to acquisitions from abroad, because those acquirers can save a ton more in tax than any company could with a US holding company at the top.
You aren’t far away, but not exactly understanding what foreign subsidiaries are. They aren’t created out of mergers (not usually), and they defer taxes, not directly save them.
If Apple directly sold in France it would first pay French corporate taxes, then on the remaining profits, pay another 40% or so as corporate taxes to US and California. They might have 40% left for reinvestment and dividends.
Instead they create Apple France, which pays the French corporate taxes on its profits, but doesn’t send the rest to Apple USA. By holding those profits Apple can defer the day of taxation until a tax holiday (hopefully) so they can reinvest or pay shareholders as much as 50% of their French profits.
This ignores other wrinkles such as moving the French after tax profits to Ireland so the interest earned while they hold it is only taxed at very tiny rates.
What I'm talking about is the process after the profit has been booked and is held in a foreign account. What you describe is how to profit ends up in one of those foreign accounts.
There are certain rules for US controlled companies about what they can and cannot do with the money held in those tax deferred subsidiaries. But if a US company is not US controlled (e.g. a corporate group with a holding company not based in the US) these (anti avoidance) rules do not always apply or are applied differently.
Second, if you have an EU company acquiring a US domestic entity, they will generally be able to save more on taxes due to the high corporate tax rate.
In its simplest form: say an entity that is taxable at 20% acquires a business paying 35%, they'll be able to convert a significant portion of that 35% by legally stripping earnings in various ways (loans, consulting agreements, ip license agreements, etc).
while maintaining their fiduciary duty to investors.
I'm not so convinced. That's a huge cash pile. If they brought some back and handed it out as dividends, I'd feel the benefit. I'm not inherently averse to them investing it instead of giving it to me straight away, but at some point I do want it.
Foreign income should be exempt from US taxation, similar to the way any other properly developed nation handles things. Punishing businesses to repatriate their foreign earnings is ridiculous. All it does is incentivise them to keep their money offshore and not invest it in the US. How is that good?
Second to that, Apple can pretty much borrow funds indefinitely to do buybacks and declare dividends. I don't know what their borrowing rate is, but say they pay between 2 to 4% on their bonds, then they shouldn't have a problem achieving a similar (or even higher) yield on their offshore cash, meaning it will cost them absolutely nothing to keep it all offshore.
People continue to say Apple makes huge profits. But in reality they have a world wide market share of 20%, with Gross Margin at ~40%, Net Margin ~20%.
Both Gross and Net Margin figures have been very consistent over the years, And increasingly many profits are from the financial arms, and other services.
One way to look at it, is that despite iPhone has been getting more expensive over the past years, Apple are actually earning less % on each unit.
Sorry I should have word it more carefully, Not that I think it is worry for Apple, but and overall general Economy.
The only reason why Apple is earning 85-95% of profits of smartphone industry per year is because all other manufacturer are posting loses. When everyone decide not to make a dime like Amazon, ( or they cant ), the ones who do will obviously emerge as winner from a Profits POV.
What I find worrying is
1. Apple is obviously working in diseconomy of scale, i,e they aren't paying less per component unit with their massive scale, they are likely paying more then everyone else.
2. It is very clear there is an inflation in component ( Or everything else in Asset ) happening. From NAND, Wireless, Memory, Fabs, Screen, everything is getting more expensive, which we wont quite used to because we expect the same Screen, memory or CPU with similar characteristic or performance will cost less 3 - 4 years down the road, but this has not happen.
Both point relates to interest rate, the way those company were sustainable because they are making some profits in a likely stable or monopoly environment, and getting very cheap cash flow.
That is what i am worry about. I wish someone could tell me what happens when too much liquidity is injected into the system..... but it seems history hasn't written a page on this yet.
Pretty much all your assumptions are wrong. There is no evidence 1 & 2 are true, in fact the opposite. Apple sells more single models of phones and tablets than virtually anyone. Almost every phone they sold the last year was a 7 or a 7+.
And the reason for their profit dominance isn’t other companies losses, it’s they are competing against commodity makers with compelling unique products and value. Beyond iOS and iTunes is their custom SOCs, which are years ahead of their competitors.
To what extent can Apple leverage internal research to make these investments? They have sales data and supplier numbers for their products... this could be useful not-public information, no?
Is it really fair to use such non-public information? How far can you go till it becomes insider trading. I'm aware that some investors have been looking at parking lot volume via satellite imaging in order to predict the performance of retail companies. Is that fair? Would it be insider trading if Amazon trades stocks of companies which sell through Amazon? Amazon would then ACTUALLY KNOW their sales numbers. Perhaps this whole insider trading thing is a broken idea to begin with. What if I figured out the sales numbers for a cell phone manufacturer by analyzing MAC addresses using a network of wifi sniffers, sales numbers for car manufactures by analyzing traffic camera data using ML. Used security camera footage from stores that I own to figure out what kind of hand bags people caried and then shorted Prada when I knew fewer people were bringing Prada bags into the store...
Indeed, when I think about it. Isn't big data in a way "insider trading via induction". Like isn't the goal of big data to gain the type of information that you're not aloud to take advantage of due to insider trading laws?
But isn't it equally true, that a mosaic of publicly known information could constitute non-public information? For example, the example I gave of analyzing satellite imagery of parking lots to predict Walmart sales numbers. Is that really fair?
I don't think you can deduce what is legally insider trading from an idea of what is "really fair". There really isn't much of a relationship. Matt Levine frequently writes about this.
Another example I've been wondering about lately... Could Mercer and Renaissance potentially be using data from Cambridge Analytica (he is a partial owner) to identify market opportunities or even make markets?
Funny enough that Google is exactly in that position. Google owns a company called double click who does adword bidding optimization in between other things. As I work in the business, one thing that is clear is that the only way to do that efficiently is to keep track of conversion data. This puts Google in a highly unfair position since they manage the auction and own the data which drives the auction. That said, this is not even close to what Google knows about businesses in general...
But the really interesting thing is not what Google can do with the ad exchange. But what they can do with that ad buy data in order to reconstruct the sales numbers for a company and unfairly play the derivitives markets around it's earnings call. When I say unfairly, I mean that ONLY google is privy to such knowlege. If there is any reason to think that insider trading is wrong, then Google would be similarly in the wrong here.
people like to through notional value of derivatives because those numbers look huge but are generally meaningless "the notional value of JPMorgan’s derivative trading could be as high as $70 trillion" makes for a eye catching statement. Apple most likely is holding derivatives to hedge currency risks and their exposure has very little to do with notional value.
> In theory losses on derivatives would be offset by gains in the value of Apple’s underlying business.
That is, in fact, exactly the point of them. If the derivatives are hedging currency exposure, then a move in exchange rates should lead to a change in their value equal and opposite to the change in value of the overseas assets. The whole idea is that they neutralise the effect of changes in exchange rates.
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[ 3.4 ms ] story [ 105 ms ] threadTim Cook and others do seem to be playing a game of chicken with congress. How long can the US division continue to borrow to find the dividend while those enormous piles of cash remain offshore?
The author though is trying to get across that certain financial instruments can have a negative multiplier effect.
Imagine a day where the S&P 500 drops by 10%, perhaps during it Apple Capital starts to liquidate a few investments. Let's say the next day is worse and we see another 12% drop. Depending on their hedging, diversification, asset class, investment type and liquidity, it could turn out to be a very bad day for Apple Capital enough to where it affects Apple Inc.
Obviously the above example is extraordinary and we're talking about highly sophisticated financial engineers but we are technically living in an extraordinary time. US Equities have not performed this well in a long time - perhaps since 1997.
It seems like a no brainier to drop the rate when the alternative is financial skullduggery by the Apple capitals of the world. All while the local mom & pops pay the 35% and bear the financial burden of the nation
Absolutely not. Just because an entity will try to work around your well-intentioned and globally standard laws does not mean you should give up on those laws.
In addition, it's quite an elitist and anti-democratic statement -- Apple is by far the world's most profitable public company, to give them a 'tax break' is to add icing onto their cake.
Apple is doing what it thinks is best -- taking on debt with the assurance of foreign assets, no matter if those assets are readily available or not.
The current US president has tossed around the idea of taxation amnesty for corporate asset repatriation -- if I was Apple, I'd lobby for that while continuing on their current practice.
Lastly, there's no real fear Apple won't be able to borrow at a handsome rate. Interest rates are still incredibly low (historically) and the Fed doesn't raise rates by full percentage points, they do it slowly and incrementally.
US corporate tax rates are among the highest in the world - even Canada - having a reputation for being socialist - has a lower rate. You're forcing companies to pay 0% tax in the US if they can get away paying only 5% in Ireland. And Ireland is benefiting disproportionately from American innovation - because of onerous tax rates
There’s a reason other (more “progressive”) countries don’t tax overseas business. It’s stupid and anticompetitive.
You think it’s stupid and anti competitive. I think that it’s a race to the bottom otherwise and fully support the current model (although 35% is a tad too high; 20-25% is more reasonable IMHO).
We previously would take taxes by force remember.
If you think it’s ok that someone who has never lived in a country can be taxed as a citizen against their will by that country, then you can’t believe in any individual rights.
You are describing a system that would give Samsung an even far lower tax rate than Apple. You can’t trap capital, it will flow overseas to where the best opportunities are. We are already making this happen with the highest corporate tax rates in the world. Adding foreign corporate taxes as a third layer on every dollar of profit would make our slide to uncompetitiveness go that much faster.
It also makes US companies more prone to acquisitions from abroad, because those acquirers can save a ton more in tax than any company could with a US holding company at the top.
If Apple directly sold in France it would first pay French corporate taxes, then on the remaining profits, pay another 40% or so as corporate taxes to US and California. They might have 40% left for reinvestment and dividends.
Instead they create Apple France, which pays the French corporate taxes on its profits, but doesn’t send the rest to Apple USA. By holding those profits Apple can defer the day of taxation until a tax holiday (hopefully) so they can reinvest or pay shareholders as much as 50% of their French profits.
This ignores other wrinkles such as moving the French after tax profits to Ireland so the interest earned while they hold it is only taxed at very tiny rates.
There are certain rules for US controlled companies about what they can and cannot do with the money held in those tax deferred subsidiaries. But if a US company is not US controlled (e.g. a corporate group with a holding company not based in the US) these (anti avoidance) rules do not always apply or are applied differently.
Second, if you have an EU company acquiring a US domestic entity, they will generally be able to save more on taxes due to the high corporate tax rate.
In its simplest form: say an entity that is taxable at 20% acquires a business paying 35%, they'll be able to convert a significant portion of that 35% by legally stripping earnings in various ways (loans, consulting agreements, ip license agreements, etc).
See https://en.wikipedia.org/wiki/Tax_inversion
I'm not so convinced. That's a huge cash pile. If they brought some back and handed it out as dividends, I'd feel the benefit. I'm not inherently averse to them investing it instead of giving it to me straight away, but at some point I do want it.
The problem is big companies can get around taxes.
Second to that, Apple can pretty much borrow funds indefinitely to do buybacks and declare dividends. I don't know what their borrowing rate is, but say they pay between 2 to 4% on their bonds, then they shouldn't have a problem achieving a similar (or even higher) yield on their offshore cash, meaning it will cost them absolutely nothing to keep it all offshore.
Both Gross and Net Margin figures have been very consistent over the years, And increasingly many profits are from the financial arms, and other services.
One way to look at it, is that despite iPhone has been getting more expensive over the past years, Apple are actually earning less % on each unit.
In some ways, this is worrying.
The only reason why Apple is earning 85-95% of profits of smartphone industry per year is because all other manufacturer are posting loses. When everyone decide not to make a dime like Amazon, ( or they cant ), the ones who do will obviously emerge as winner from a Profits POV.
What I find worrying is
1. Apple is obviously working in diseconomy of scale, i,e they aren't paying less per component unit with their massive scale, they are likely paying more then everyone else.
2. It is very clear there is an inflation in component ( Or everything else in Asset ) happening. From NAND, Wireless, Memory, Fabs, Screen, everything is getting more expensive, which we wont quite used to because we expect the same Screen, memory or CPU with similar characteristic or performance will cost less 3 - 4 years down the road, but this has not happen.
Both point relates to interest rate, the way those company were sustainable because they are making some profits in a likely stable or monopoly environment, and getting very cheap cash flow.
That is what i am worry about. I wish someone could tell me what happens when too much liquidity is injected into the system..... but it seems history hasn't written a page on this yet.
And the reason for their profit dominance isn’t other companies losses, it’s they are competing against commodity makers with compelling unique products and value. Beyond iOS and iTunes is their custom SOCs, which are years ahead of their competitors.
However, I'm not sure why this wouldn't be fair. More accurate valuations seem like a positive thing.
That is, in fact, exactly the point of them. If the derivatives are hedging currency exposure, then a move in exchange rates should lead to a change in their value equal and opposite to the change in value of the overseas assets. The whole idea is that they neutralise the effect of changes in exchange rates.