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Apple Inc. (NASDAQ: AAPL) has been the subject of much scrutiny in how the company deals with its taxes, or as some law makers would say, avoids its taxes. This has been a hot issue for the iPhone giant as many think the firm is gaming the system and that whatever money it’s earned should first be taxed and then put to use in the United States. And now with tax reform on the table in the United States, there might be a compromise between both sides that could be mutually beneficial, at least says one analyst.

Merrill Lynch maintained its Buy rating for Apple based on expected strength of the iPhone X cycle, a significant cash balance that affords optionality to enter new markets, and a continuing strong cash return program. However, tax reform did play a role in this report.

The brokerage firm looked at two aspects of potential tax law reform and their implications on Apple, while acknowledging that there is significant uncertainty around ultimate legislation. First, Merrill Lynch considered a lowering of the repatriation tax on foreign earnings from 35% to 8.75% for earnings held in cash. Second, it looked at future EPS benefit from a lowering of the U.S. statutory tax rate from 35% to 20%, combined with the removal of interest deductibility. The firm concluded that:

• Existing deferred tax liability on the balance sheet could allow for substantially all of Apple’s foreign cash to be repatriated to the U.S. if the repatriation tax rate is reduced to 8.75%.
• Lowering the U.S. statutory tax rate to 20% would be about $1.00 accretive to earnings.

In terms of the numbers, it’s estimated that Apple has $223 billion of cash outside the United States (91% of total cash, excluding cash trapped by EU litigation) and approximately 67% of Apple’s annual global earnings are foreign.

Every year, Apple provisions for U.S. taxes on about 70% of its global earnings. Merrill Lynch believes that if the repatriation rate were reduced to 8.75%, Apple could substantially repatriate all of its offshore cash by paying the taxes already provisioned. Specifically, if the repatriation rate is 8.75% (instead of 35%), then Apple has already accumulated an excess deferred tax liability of $10.2 billion versus what it needs to pay ($19.5 billion) in order to repatriate the $223 billion of unrestricted foreign cash. The excess $10.2 billion on its balance sheet would allow Apple to repatriate an additional $117 billion for future foreign earnings. This would provide a significant arsenal of cash for incremental capital return and M&A.

Merrill Lynch expects Apple earnings benefit by $0.80 to $0.90 in fiscal 2018-19 if the U.S. statutory tax rate were to be reduced to 20%. The firm assumes Apple will provision U.S. taxes on its entire global earnings and will not designate a portion of its earnings indefinitely reinvested outside the U.S. (as it currently does).

Shares of Apple were last seen at $155.94, with a consensus analyst price target of $173.23 and a 52-week range of $104.08 to $164.94.