Apple Avoids Tax with Debt Offering: Only About $9 Billion or So

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Apple Inc. (NASDAQ: AAPL) made news this week with a record $17 billion corporate bond offering. What is so different about this offering is that it is meant to fund its dividend and share buyback plan. You would think that Apple’s $100+ billion cash arsenal would be enough, but Apple would have to pay a serious tax to repatriate that cash needed for buybacks and dividends. Now it looks as though Apple may have saved some $9.2 billion in taxes by not repatriating that cash.

There are more than a couple of things to consider here, but Moody’s projected that Apple saved $9.2 billion or so by issuing this debt rather than repatriating its cash held overseas. It has been very controversial for companies to not repatriate their overseas cash. Many people in the public consider this corporate tax evasion. Will they think that when it pertains to Apple?

For starters, Apple paid about $6 billion in federal corporate income taxes in 2012. The interest payments on the $17 billion will come to just over $300 million because Apple’s borrowing costs are so low. To repatriate $17 billion, Moody’s showed that some 35% of the overseas capital would be taxed. That means that Apple would have had to bring back in about $26 billion and then give more than $9 billion to the government.

Bloomberg broke this down in detail today.

Another consideration is the Moody’s rating this week on the Apple debt issue. The ratings agency shared its logic as to why Apple was not Aaa rated. The ratings agency said:

We assigned Apple a Aa1 rating and not a Aaa rating for three main reasons: the business risk inherent in the consumer technology sector; the potential for the company to adopt an increasingly shareholder-friendly financial policy; and the possibility that the company’s diminishing US cash holdings will eventually require it to issue more debt to meet shareholder payouts.

The public needs to understand one thing about U.S. companies “hiding cash overseas.” Some companies may do this solely to avoid tax, but if a U.S. company is doing business overseas it must do that business in a locally domiciled corporation in that country. That money is taxed in that nation, if the company was profitable. For these companies to then bring that capital back into the United States, there is a tax (or penalty) for doing so on top of the tax paid overseas.

Not paying taxes on overseas cash may be controversial to many who want more government revenues. It is a very complicated issue. The thing here is that this was a no-brainer decision for Apple. Do the math: about $300 million per year in interest or a bill of $9.2 billion — what would you do if that was your money?