The End to Apple’s Cash Dilemma(aboveavalon.com)
aboveavalon.com
The End to Apple’s Cash Dilemma
https://www.aboveavalon.com/notes/2017/12/12/the-end-to-apples-cash-dilemma
148 comments
On number 2, there's no need to "pull" the cash from overseas because the 14% is a deemed tax rate, i.e you have no choice in the matter. Going forward it changes to a territorial system so the US won't be taxing international profits.
Apple will likely still issue debt because they can take on a lot more leverage given their cash flow and interest payments will still be deductible up to 30% of EBITDA or EBIT (depending on whether the House or Senate wins out on that) so it will still lower their cost of capital.
This does give them more flexibility on financing decisions and it will increase GAAP profit because Apple has been conservative and has been booking deferred taxes until now.
Apple will likely still issue debt because they can take on a lot more leverage given their cash flow and interest payments will still be deductible up to 30% of EBITDA or EBIT (depending on whether the House or Senate wins out on that) so it will still lower their cost of capital.
This does give them more flexibility on financing decisions and it will increase GAAP profit because Apple has been conservative and has been booking deferred taxes until now.
The question is why was there ever a dilemma in the first place. We were the only country to tax corporations this way, which made us incredibly uncompetitive -- but worse kept money from being invested in the US. This is great news for the USA and bad news for everywhere else in the world that would have otherwise received the investment. We should be doing everything possible to bring that money home.
kept money from being invested in the US
Not really. Much of the money "kept offshore" is invested in the US[1]. Apple's money, in particular, is managed by their subsidiary in Reno called Braeburn Capital. It just happens to be owned by a Caribbean subsidiary.
[1] https://www.hsgac.senate.gov/subcommittees/investigations/me...
Not really. Much of the money "kept offshore" is invested in the US[1]. Apple's money, in particular, is managed by their subsidiary in Reno called Braeburn Capital. It just happens to be owned by a Caribbean subsidiary.
[1] https://www.hsgac.senate.gov/subcommittees/investigations/me...
Think for a minute about the circuitous steps Apple must take just to invest in the United States with overseas revenue. Everyone in the United States should see this as a huge win.
I haven't seen anyone here argue that it's difficult to invest foreign money in the US. Apple's only complaint is that they couldn't funnel the profits from such investment back to their US shareholders, without paying taxes.
That’s the point. Being unable to pay profits to shareholders makes your business very unattractive. If Apple had directly returned its profits every year, over 60% of their profits would be paid to taxes.
Which should be really alarming. The money should go back to shareholders who then individually decide how to best reinvest it. Instead, Apple is making investment decisions on behalf of all of those people. Individuals deciding which endeavors are most worthy of investment is a very democratizing function of the market, and it's undermined by this state of affairs.
*An Irish subsidiary, that is now tax resident in the UK Crown dependency of Jersey.
That money are the proceeds from Apples sales outside the US where they paid off Ireland to get essentially a 0% tax rate. No tax at all has been paid on these profits, and you are now asking for it to be transferred to the US for no tax either.
Now the proper thing would be for that money to be taxed in Europe, and the EU commission has been working on that to get Ireland in line, but right now you are essentially asking for the biggest company in the world to pay a 0% tax rate on their overseas profit.
Now the proper thing would be for that money to be taxed in Europe, and the EU commission has been working on that to get Ireland in line, but right now you are essentially asking for the biggest company in the world to pay a 0% tax rate on their overseas profit.
> Now the proper thing would be for that money to be taxed in Europe
Of course Europeans like this argument, but is it really correct for those profits to be taxed in Europe? Did substantial value creation occur there? I'd argue not really, and at any rate Apple will have generated substantial sales, import/export, income tax revenues etc for those foreign countries in which they do operate. The IP that lead to these profits is however clearly mainly created in the USA.
I'm not stupid enough to pretend I have a good answer for this hugely complex problem, but it's clear that arguing that "the proper thing would be for that money to be taxed in Europe" is a gross over-simplification. When we talk about the EU we are talking about 28 separate sovereign States, each with their own separate tax collection laws and organisations. The body whose work that lead to those profits is for the most part 5000 miles away.
Of course Europeans like this argument, but is it really correct for those profits to be taxed in Europe? Did substantial value creation occur there? I'd argue not really, and at any rate Apple will have generated substantial sales, import/export, income tax revenues etc for those foreign countries in which they do operate. The IP that lead to these profits is however clearly mainly created in the USA.
I'm not stupid enough to pretend I have a good answer for this hugely complex problem, but it's clear that arguing that "the proper thing would be for that money to be taxed in Europe" is a gross over-simplification. When we talk about the EU we are talking about 28 separate sovereign States, each with their own separate tax collection laws and organisations. The body whose work that lead to those profits is for the most part 5000 miles away.
It's 5000 miles away, to the east in China or to the west in California? I think we can spend years discussing where that value is created.
From a purely practical point of view, Apple will only be able to sell their goods in the EU and pay no taxes on the profits for as long as they can keep finding another Ireland. And those seem to be in short supply in the future.
From a purely practical point of view, Apple will only be able to sell their goods in the EU and pay no taxes on the profits for as long as they can keep finding another Ireland. And those seem to be in short supply in the future.
> to the east in China or to the west in California?
To the west in California. In China, Foxconn makes very little profit (ie. adds little value) for each iPhone they manufacture.
> I think we can spend years discussing where that value is created.
If you consider what would happen if Apple's EU sales operations were a separate company, it becomes clear which company would make the bulk of the profit (ie. which company produces the most value).
> From a purely practical point of view, Apple will only be able to sell their goods in the EU and pay no taxes on the profits for as long as they can keep finding another Ireland.
Why couldn't Apple just spin off its EU operations as an entirely separate company? Apple US would have a very strong bargaining position when selling iPhones - it could charge Apple EU a wholesale price which was very close to the retail price. Apple EU would therefore make very little profit and pay very little tax to EU authorities.
To the west in California. In China, Foxconn makes very little profit (ie. adds little value) for each iPhone they manufacture.
> I think we can spend years discussing where that value is created.
If you consider what would happen if Apple's EU sales operations were a separate company, it becomes clear which company would make the bulk of the profit (ie. which company produces the most value).
> From a purely practical point of view, Apple will only be able to sell their goods in the EU and pay no taxes on the profits for as long as they can keep finding another Ireland.
Why couldn't Apple just spin off its EU operations as an entirely separate company? Apple US would have a very strong bargaining position when selling iPhones - it could charge Apple EU a wholesale price which was very close to the retail price. Apple EU would therefore make very little profit and pay very little tax to EU authorities.
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What is the mechanism by which it has kept money from being invested in the US?
When Apple or Google had billions of dollars kept overseas like this, they could still invest it outside the US with no additional tax burden. So when these companies were building new datacenters or hiring new employees or doing any sort of investment in their business, there was essentially a 30% discount to do it internationally rather than in the US.
Not the whole 30%, they will get a credit for taxes paid overseas, though because different tax systems don’t match up very well, double taxation is inevitable without a decent treaty in place.
It’s actually 5 levels of taxation, and no treaty can change that. Foreign corporate income tax, us corporate income tax, state corporate income tax, federal personal dividend tax, state personal income tax.
To be fair Apple has over 90% offshore and over $100B US debt in addition. Versus Google has 60% offshore and less than $4B debt.
So equating the two is not really correct.
So equating the two is not really correct.
A lot of that debt is bonds where they borrowed against their own cash for tax reasons. Interest rates are so crazy low it's cheaper to borrow your own money than pay taxes on it.
If they bring the money back here to pay people or buy things in the us, they get taxed, but they don’t get taxed if they pay people in other countries. So it effectively makes the US more expensive for that money.
If America is so noncompetitive why are 8 of the 10 biggest companies by market cap based in America? The other 2 are in china.
This is a logical flaw. It's like saying "You say that billionaire is wasting money on lottery tickets and alcohol. But if it's a waste, how can he have so much income?"
It's possible for america to be popular for other reasons, but for the taxation of international revenues to be a negative factor.
It's possible for america to be popular for other reasons, but for the taxation of international revenues to be a negative factor.
I think the point is does it really make the US "incredibly uncompetitive" -- the original claim -- or is it closer to what you said, "a negative factor"? I think the person you responded to would agree it's a negative factor, but by pointing out 8/10 of the top companies by market cap are US-based is evidence that the US is not "incredibly uncompetitive".
Ah, I should have read the original post being replied to more carefully.
The easy solution would be to tax all earnings worldwide equally, but that doesn't work either because then they will create a subsidiary in that country which will store the cash and the mother cooperation will have no earnings on it.
Actually thinking about it, this way of taxing is pretty much the same in every country in the world.
Actually thinking about it, this way of taxing is pretty much the same in every country in the world.
> "Apple owes 35% tax to the federal government on all revenue earned"
Tax is assessed on income, not revenue. It's an important distinction. Apple had 52.6 billion in revenue, and 10.7 billion in income.
Tax is assessed on income, not revenue. It's an important distinction. Apple had 52.6 billion in revenue, and 10.7 billion in income.
Yeah that sounded odd to me.
Excuse my completely naive and ignorant views and questions.
Moral issues aside, do they have to bring it back to US? I dont see what's wrong with it sitting there doing nothing.
Are there no other way to invest the $250B cash generating 2% yearly interest? i.e Additional $5B / year? ( Isn't that is what subsidiaries are doing ? )
Why is it every call to maximize only shareholders value? Could they not provide more value in their product or product line up with those additional Interest from Cash? Investing into better after sales services particular in South East Asia Region?
Apple could provide iPhone as a Services, much like iPhone upgrade program in the US but worldwide. Combining iPhone + Apple Care + iCloud Backup as basic, and with top up like Apple Music and future Apple TV. Making Apple being the actual creditor themselves, that needs lots of cash.
As a matter of facts I have long wanted Apple to be a Virtual Mobile Carrier. There are lots of people in the world without Credit Card or dont want themselves associate with credit cards, which is different to US. And prefer to have Mobile Billing, a monthly payment. These people also failed to get iCloud backup, which is increasing dangerous as we put more important things in our phone. Apple could finally offer Visual Voicemail, and free iCloud Backup over LTE during off peak hours like 1AM to 5AM, iPhone, Apple Music, Carrier Services, All under one monthly fees.
There are lots of thing to help and improve, invest to bring more value and future returns, dividends is ok, but share buy back to me seems dump. This is speaking from a long time $AAPL investor.
Moral issues aside, do they have to bring it back to US? I dont see what's wrong with it sitting there doing nothing.
Are there no other way to invest the $250B cash generating 2% yearly interest? i.e Additional $5B / year? ( Isn't that is what subsidiaries are doing ? )
Why is it every call to maximize only shareholders value? Could they not provide more value in their product or product line up with those additional Interest from Cash? Investing into better after sales services particular in South East Asia Region?
Apple could provide iPhone as a Services, much like iPhone upgrade program in the US but worldwide. Combining iPhone + Apple Care + iCloud Backup as basic, and with top up like Apple Music and future Apple TV. Making Apple being the actual creditor themselves, that needs lots of cash.
As a matter of facts I have long wanted Apple to be a Virtual Mobile Carrier. There are lots of people in the world without Credit Card or dont want themselves associate with credit cards, which is different to US. And prefer to have Mobile Billing, a monthly payment. These people also failed to get iCloud backup, which is increasing dangerous as we put more important things in our phone. Apple could finally offer Visual Voicemail, and free iCloud Backup over LTE during off peak hours like 1AM to 5AM, iPhone, Apple Music, Carrier Services, All under one monthly fees.
There are lots of thing to help and improve, invest to bring more value and future returns, dividends is ok, but share buy back to me seems dump. This is speaking from a long time $AAPL investor.
> Given Apple’s current balance sheet strategy and assuming no change to the U.S. corporate tax code, the company is on track to soon have $300 billion of cash, almost all of which is located abroad, and $150 billion of debt.
I don't understand business. If I owed $15,000 and had $30,000 in the bank, I'd pay off my debt. Why is this different?
I don't understand business. If I owed $15,000 and had $30,000 in the bank, I'd pay off my debt. Why is this different?
But imagine your interest rate on the 15K loan is 2%. And if you withdrew the 30K you’d first lose 10K to taxes, yielding only 20K. And you actually make money on the 15K you were loaned by using it elsewhere.
It may be better to invest that money if the rate of return is higher than the interest on their debt.
Good luck finding a guaranteed rate of return higher than the interest rate on any of your debt. Most credit cards are >10%. Even on the low end, if, say, my mortgage was 4% and I had the cash to pay it off, it would certainly make sense to do it. It would only make sense not to if I could find an investment that paid over 4% guaranteed. Such an investment does not exist, period. (If it does, please let me know and I will put all my money into it).
LOL… Apple does NOT pay 4% on its debt. It's effective combined interest is 2.38%.
In my naive back-of-the-envelope calculations, it would have to hold this debt in a non-tax-effective way for more than a decade to be worse off with this debt versus repatriation. An in the meantime it can use the interest it pays in the USA to offset it's US tax bill for income earned in the USA making this effectively a lot longer.
The long-term average for the S&P500 is 12.11%… not to mention the fact that Apple can probably make better use of its money by investing in itself, rather than passively on the stock market.
All round, no matter your actual moral and ethical opinions on the matter, this is the smartest financial decision Apple can make (and they probably spend tens of millions a year on advice, legals and research to prove this).
And as much as Apple goes on about them being a California company… they're mostly a multi-national with much of their money being earned and spent outside of the USA.
In my naive back-of-the-envelope calculations, it would have to hold this debt in a non-tax-effective way for more than a decade to be worse off with this debt versus repatriation. An in the meantime it can use the interest it pays in the USA to offset it's US tax bill for income earned in the USA making this effectively a lot longer.
The long-term average for the S&P500 is 12.11%… not to mention the fact that Apple can probably make better use of its money by investing in itself, rather than passively on the stock market.
All round, no matter your actual moral and ethical opinions on the matter, this is the smartest financial decision Apple can make (and they probably spend tens of millions a year on advice, legals and research to prove this).
And as much as Apple goes on about them being a California company… they're mostly a multi-national with much of their money being earned and spent outside of the USA.
Right--I was just responding to the parent's post to the grandparent's comparison to personal debt.
Credit cards are unsecured debt. Hence they have very high interest rates because there is a fairly high risk that the debt won't be repaid.
Mortgages are secured debt. If the debtor fails to pay back the debt, the house can be seized and sold to cover the debt. That makes it pretty low risk, but there is still some risk because house prices sometimes drop precipitously, so it might not always cover the whole loan.
Apple's debts are secured by cash sitting in a bank account. There is literally next to no risk of default. They will get an even better interest rate than someone very creditworthy will get on a mortgage.
Mortgages are secured debt. If the debtor fails to pay back the debt, the house can be seized and sold to cover the debt. That makes it pretty low risk, but there is still some risk because house prices sometimes drop precipitously, so it might not always cover the whole loan.
Apple's debts are secured by cash sitting in a bank account. There is literally next to no risk of default. They will get an even better interest rate than someone very creditworthy will get on a mortgage.
https://www.twino.eu/en/ guarantees over 10%
But it also doesn't need to be guaranteed - companies are fine accepting some risk. So you could just buy Apple stock.
But it also doesn't need to be guaranteed - companies are fine accepting some risk. So you could just buy Apple stock.
At least with personal finance, if you're comparing investing with paying off a loan, the potential gain must be risk-free in order to compare apples to apples. Paying off a 4% loan is a risk-free 4% return.
If I was $15k in debt and had an interest rate like Apple's, no way would I prioritize paying off that debt. I'd invest the money I have and turn it into more.
I believe there’s some tax advantage for them. Possibly they can claim a tax deduction of some kind on the debt interest. And of course this way not only do they get that but they avoid paying any taxes on the profits they’ve funneled overseas.
(I am not an accountant so fully prepared to be told I am well wrong.)
(I am not an accountant so fully prepared to be told I am well wrong.)
I also think most companies usually invest their additional cash into things that they think will grow faster than their debt interest. Long term it makes more sense to grow a part of their company that will have a larger return investment than being debt free.
Because to pay off the debt, Apple first would have to move the cash back to the US, at which time by the current tax law, it would be taxed by 35%. So, to pay back $150B, they would have to bring back about $230B, paying $80B in taxes.
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> One fear that investors have with companies holding excess cash is that future management teams will waste the cash on frivolous M&A and other questionable investments. This results in the value of the cash being discounted, leading to a lower stock valuation.
Great example of why I maintain that price != value. The former is an objective metric while the latter is probably subjective to a problem, context, application, etc..
Great example of why I maintain that price != value. The former is an objective metric while the latter is probably subjective to a problem, context, application, etc..
> Instead of using M&A to buy revenue or users, which is a disastrous strategy in Silicon Valley, Apple looks to fill asset holes in terms of technology and talent.
Um, Facebook buying WhatsApp and Instagram or Google buying YouTube wasn't a disastrous strategy.
Um, Facebook buying WhatsApp and Instagram or Google buying YouTube wasn't a disastrous strategy.
For every smart buy like YouTube there's been dozens of utter failures. MySpace. Netscape. Flickr. Softimage.
It's to the point where being acquired is the kiss of death for most start-ups. Sure, you get your exit, but your product is toast.
Apple has a very particular culture and it's difficult for other companies to integrate into that. Google was more accommodating, like with Nest, but even then they realized they had to restructure and make Alphabet for it to actually work.
Sure, Google bought YouTube, but they also bought Boston Dynamics and fumbled it.
It's to the point where being acquired is the kiss of death for most start-ups. Sure, you get your exit, but your product is toast.
Apple has a very particular culture and it's difficult for other companies to integrate into that. Google was more accommodating, like with Nest, but even then they realized they had to restructure and make Alphabet for it to actually work.
Sure, Google bought YouTube, but they also bought Boston Dynamics and fumbled it.
Motorola too!
It's quite a list, isn't it? Sony's aquisition of Ericsson, Microsoft of Nokia's phone business, which like Danger did not end well.
It's insane that corporations are taxed less than individuals abroad. If you live abroad and work - you pay income tax, whether that money is repatriated or not.
That is the case for a handful of countries, the US among them. In the vast majority of countries you don't have to pay income taxes when you live and work abroad. Of course you still pay such taxes in the country where you live and work.
I wonder what $80b in extra tax receipts could do for American education, healthcare or social mobility.
Ah well, at least Apple shareholders get a few more dollars.
Ah well, at least Apple shareholders get a few more dollars.
Since we already spend more on education, healthcare and social mobility now than ever before, pretty much nothing.
It’s like a mob unhappy with their winter meals seeing a large grain store that a prosperous farmer has stored up to plant next years harvest with, and saying “Let’s eat that until we are full!”.
Yea but you’ll be starving next winter.
It’s like a mob unhappy with their winter meals seeing a large grain store that a prosperous farmer has stored up to plant next years harvest with, and saying “Let’s eat that until we are full!”.
Yea but you’ll be starving next winter.
With that amount of money the federal government could make a few interest payments on its debt and not even really make a dent in the total
Sad thing is we don't need the tax receipts to pay for those things. Its a political problem , not a fiscal one .
That may be true, but the political problem is one where American politicians put low taxation above almost all social issues.
Having the political will to collect that money is the first step to correcting the political problem you refer to.
Having the political will to collect that money is the first step to correcting the political problem you refer to.
Orrin Hatch, after voting for a trillion-dollar tax cut, said there wasn't any money for CHIP.
Whats even funnier is how inefficient we are with the capital we use in healthcare and education.
How could one profit off of this? Buy Apple stock now?
That assumes some of this isn't baked into the price already. But yes, if you think the market hasn't factored in any one or more of these potential actions, then buying the stock would be the most logical way to profit...
> if you think the market hasn't factored in any one or more of these potential actions
And if you believe that, I have a bridge you might be interested in buying.
And if you believe that, I have a bridge you might be interested in buying.
The market does seem to be frequently bad at that sort of thing. I've done pretty well (better than my index funds) over the years by reading the news and buying shares in companies that seem to have more wealthy futures. I very rarely sell so I can see how they've done over many years and, by and large, pretty well.
Maybe everyone assumes that the market has already factored it all in so they don't bother buying so it isn't factored in because the increased demand never arose. Maybe I'm just out of sync, and as other people start to notice this they'll start buying and it'll turn back around and then the market will have factored these things in because lots of people assume it hasn't.
Maybe everyone assumes that the market has already factored it all in so they don't bother buying so it isn't factored in because the increased demand never arose. Maybe I'm just out of sync, and as other people start to notice this they'll start buying and it'll turn back around and then the market will have factored these things in because lots of people assume it hasn't.
Or maybe you got lucky. Not saying you did, but how would you tell the difference?
I'll never know for sure, but it's a long run over eight years or so. I rarely buy shares in specific companies, and even more rarely sell, so I can see that they outpace the index funds I buy. I could be just lucky. I buy individual companies basically entirely based on reading the news, and if I'm reading it in the news, the professionals knew it long before I did.
I used to assume that if I read it in the news, it was all priced in and there was no point in me buying, but I noticed that often, it wasn't. Maybe I just got lucky and I miss the news reports on the companies that subsequently crash.
I used to assume that if I read it in the news, it was all priced in and there was no point in me buying, but I noticed that often, it wasn't. Maybe I just got lucky and I miss the news reports on the companies that subsequently crash.
What news you're reading is also relevant.
For example if you were closely following video game enthusiast press you may have found out a lot about Nintendo's mobile game plans much sooner than more typical investors which may only read newspapers such as the Financial Times and WSJ, which devote limited column inches to the activities of video game companies.
For example if you were closely following video game enthusiast press you may have found out a lot about Nintendo's mobile game plans much sooner than more typical investors which may only read newspapers such as the Financial Times and WSJ, which devote limited column inches to the activities of video game companies.
This. If you throw darts at the stock page you have a 50% chance of beating the market.
I have thrown a dozen or so darts, and my rate seems to be around 80%. But then, I'm not just throwing darts; I'm reading that companies are going to do better in the future and will see a rise in stock price, and it makes sense, so I sometimes buy them. Maybe I'm just the lucky one. I started with ARM a good eight years ago, when I read that they were going to do really well by supplying Apple. Of course, if I'd done the same thing with Imagination technologies 8 years ago, it would have been a less happy ending; I can only assume that the news I read at the time was more effusive about ARM.
Most recently (13 months ago - this isn't a regular thing), a British pasty retail outfit named Greggs. The news said things were looking good, I could see their stores were busy, I bought some shares, they're up about 40% in 13 months (which is unusually good, I freely admit, and I certainly didn't expect that). That's really all I do, and it seems to work out (and it really is rare when I do; typically, I just dump all my pennies into index funds - easily 80% of my pennies are in index funds). I think some of the big name successful investors do something similar, but obviously on a much grander and more informed scale. Plus the British house-builders. Every time the UK government announces another plan to help young people get fifty year mortgages, it's time to buy some more of them! They will crash eventually, I'm sure :(
Most recently (13 months ago - this isn't a regular thing), a British pasty retail outfit named Greggs. The news said things were looking good, I could see their stores were busy, I bought some shares, they're up about 40% in 13 months (which is unusually good, I freely admit, and I certainly didn't expect that). That's really all I do, and it seems to work out (and it really is rare when I do; typically, I just dump all my pennies into index funds - easily 80% of my pennies are in index funds). I think some of the big name successful investors do something similar, but obviously on a much grander and more informed scale. Plus the British house-builders. Every time the UK government announces another plan to help young people get fifty year mortgages, it's time to buy some more of them! They will crash eventually, I'm sure :(
> I have thrown a dozen or so darts, and my rate seems to be around 80%.
The odds of that happening by chance are <50% but still quite high, about 6-7% depending on exactly how you reckon it. So one person in 15 will get this result purely by chance.
There are studies that show that very few (like <<1%) professional money managers can beat the market consistently. You may well be one of those rare people, in which case you could make billions on Wall Street. But until you amass a much longer track record than you have, the odds are much higher that you are just one of the lucky ones. There are a lot more lucky people out there than most people realize.
The odds of that happening by chance are <50% but still quite high, about 6-7% depending on exactly how you reckon it. So one person in 15 will get this result purely by chance.
There are studies that show that very few (like <<1%) professional money managers can beat the market consistently. You may well be one of those rare people, in which case you could make billions on Wall Street. But until you amass a much longer track record than you have, the odds are much higher that you are just one of the lucky ones. There are a lot more lucky people out there than most people realize.
As long as people don't mind me waiting 18 months between trades, and not trading amounts remotely large enough to have any effect on the market, sure.
Professionals do have a much harder job of it. As Simon says, they can't sit on their hands for 18 months like I do. I expect if they parked most of the money in an index fund, their customers would start asking why they're paying managed fund rates for an index fund.
Might as well go on the record here, and come back in a year to see how I did. I'm considering UK pizza chains and the like; as the UK gets poorer, and people have less money to spend, the money that used to go on eating out drifts downwards into takeaway pizza and the like. All the signs are that the people of the UK are going to have less money and be faced with higher prices, so I'll look for a pizza chain or similar to invest in.
Professionals do have a much harder job of it. As Simon says, they can't sit on their hands for 18 months like I do. I expect if they parked most of the money in an index fund, their customers would start asking why they're paying managed fund rates for an index fund.
Might as well go on the record here, and come back in a year to see how I did. I'm considering UK pizza chains and the like; as the UK gets poorer, and people have less money to spend, the money that used to go on eating out drifts downwards into takeaway pizza and the like. All the signs are that the people of the UK are going to have less money and be faced with higher prices, so I'll look for a pizza chain or similar to invest in.
Yea, all that's true, but Eli has a significantly easier job. A professional manager has to make a lot of decisions and still has to invest money even if they don't have any insightful ideas. On the other hand Eli will only invest if he gets a good idea, and if not, then no investment.
That's no excuse. Eli can always park his undeployed capital in an index fund. So if he can consistently pick winners 80% of the time he'll still beat the market even if he has fallow periods.
Excuse for what? Of course Eli can do that, and it has nothing to do with my point.
Excuse for not taking his (alleged) talent to Wall Street and making billions of dollars.
> it has nothing to do with my point
which was:
> A professional manager has to make a lot of decisions and still has to invest money even if they don't have any insightful ideas.
Implying that Eli's talents could not be deployed on Wall Street because he could not operate under the constraints on which professional money managers have to operate. But that's not true.
> it has nothing to do with my point
which was:
> A professional manager has to make a lot of decisions and still has to invest money even if they don't have any insightful ideas.
Implying that Eli's talents could not be deployed on Wall Street because he could not operate under the constraints on which professional money managers have to operate. But that's not true.
> I'm reading that companies are going to do better in the future and will see a rise in stock price, and it makes sense, so I sometimes buy them.
I think that way about my index funds too. But then it's impossible to know the reason for the price rise. Maybe it's because of millions of other guys like me who read the same articles, came to the same conclusion as me, and put their money in too.
I think that way about my index funds too. But then it's impossible to know the reason for the price rise. Maybe it's because of millions of other guys like me who read the same articles, came to the same conclusion as me, and put their money in too.
Either way, those rises don't seem to be "priced in" in any way that means they won't actually go up. Maybe it'll all turn around soon.
A monkey throwing darts will outperform the market on average.
The monkey is giving even weight to each option rather than weighting according to risk. The monkey is picking a riskier portfolio than an index fund, and in compensation for accepting greater downside risk will have greater average returns.
Markets are subtle like that =)
Of course, the monkey is likely to attribute the difference to skill rather than risk...
The monkey is giving even weight to each option rather than weighting according to risk. The monkey is picking a riskier portfolio than an index fund, and in compensation for accepting greater downside risk will have greater average returns.
Markets are subtle like that =)
Of course, the monkey is likely to attribute the difference to skill rather than risk...
Not sure I follow your logic:
1. What are you calling the market in your first sentence?
2. Why/how is an index fund somehow less risky? What is the fund indexing and how does that compare to the market in your first sentence?
In your scenario, if the index fund is properly designed to capture the risk of the "market" as you have defined it, a monkey has equal chance of performing better or worse than the index fund and the average monkey (or an average of a large enough set of monkeys) will perform with the index fund. Certainly, though, if your index fund is not designed to be reflective of the market, but of some subset, then it will carry different risk, but not necessarily less risk. However, a monkey randomly picking stocks from a pool will not, on average, outperform the average return of that pool of stocks.
In your scenario, if the index fund is properly designed to capture the risk of the "market" as you have defined it, a monkey has equal chance of performing better or worse than the index fund and the average monkey (or an average of a large enough set of monkeys) will perform with the index fund. Certainly, though, if your index fund is not designed to be reflective of the market, but of some subset, then it will carry different risk, but not necessarily less risk. However, a monkey randomly picking stocks from a pool will not, on average, outperform the average return of that pool of stocks.
An index fund is more likely to invest in BoringBigCo than NewShinyCo. The monkey is equally likely to invest in BoringBigCo and NewShinyCo. The latter strategy has more risk.
That assumes that risk is not symmetrically distributed. That might be the case, but that would be news to me.
Why would it be symmetrically distributed?
Good question. It actually doesn't have to be symmetric, it just has to be distributed in such a way that a random sample will not give you a biased return. (A symmetric distribution is sufficient but not necessary.) The reason this has to be the case is that if a random portfolio gave you a biased return, then the sum of random portfolios would give you a biased return. But the limit of the sum of random portfolios is the whole market, and that can't be biased.
Perhaps it's easier to see from the other side: the monkey is getting the same expected returns as "buy one of everything on your list," but the index fund is not, because the index fund is employing a different weighting strategy (e.g. buy the 30 or 500 largest companies). Of course, if you define "market" using the same list that an index fund uses, the monkey's expected performance converges with that of the index fund.
That depends on the fund, some track indexes like the CRSP U.S. Total Market, which has almost 100% of the US equity market.
Survivorship bias seems worth investigating here. Do people who make bad stock buying decisions come to these threads and comment on them?
Apple is already massively undervalued.
$884B market cap. $150B in free cash (which you can effectively take off the top of the market cap).
So an adjusted market cap of $734B.
A net income after tax (yes, they still pay tax) of $48B.
So an adjusted P/E of 15.3x.
Some other P/Es of popular tech companies:
Facebook: 33.14x Google: 35.03x Salesforce: 12,992x Amazon: 293.84 Intuit: 41.36 Twitter: Can't have a P/E if you don't make money.
$884B market cap. $150B in free cash (which you can effectively take off the top of the market cap).
So an adjusted market cap of $734B.
A net income after tax (yes, they still pay tax) of $48B.
So an adjusted P/E of 15.3x.
Some other P/Es of popular tech companies:
Facebook: 33.14x Google: 35.03x Salesforce: 12,992x Amazon: 293.84 Intuit: 41.36 Twitter: Can't have a P/E if you don't make money.
Do also remember Apple also has over a $100B of debt which you subtract from the cash.
> the company is on track to soon have $300 billion of cash, almost all of which is located abroad, and $150 billion of debt
> This has led Apple, along with other Silicon Valley firms, to keep foreign cash offshore as it is the financially prudent thing to do for shareholders.
The kept the cash offshore with the belief that they would eventually be able to bring it back without paying taxes. They started a multi-year political lobbying campaign to change the tax system. And it worked. If our political system was not up for sale they would have eventually had to bring the cash home and pay their damn taxes.
The kept the cash offshore with the belief that they would eventually be able to bring it back without paying taxes. They started a multi-year political lobbying campaign to change the tax system. And it worked. If our political system was not up for sale they would have eventually had to bring the cash home and pay their damn taxes.
Why should American corporations pay both foreign and US corporate tax on income made overseas? Almost no other country requires this of their companies and it's a major competitive disadvantage for American businesses.
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Edit: I'm rate-limited, but in response to below I'll reproduce what I've posted in prior discussions about this:
We’re really better off eliminating the corporate tax altogether. It’s a pretty small portion of tax revenue and the only reason it exists is to be a plank for politicians who want to tax the "greedy corporations." All corporate income is either paid as dividends, paid as salaries, or reinvested. When it is paid as dividends, it is taxed as capital gains. When it is paid as salaries, it is taxed as income. When it is reinvested, it is either lost, or eventually becomes income and capital gains. There is no need to have another layer of taxation that just makes a giant accounting mess and creates all sorts of ridiculous incentives to use tax shelters.
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Edit: I'm rate-limited, but in response to below I'll reproduce what I've posted in prior discussions about this:
We’re really better off eliminating the corporate tax altogether. It’s a pretty small portion of tax revenue and the only reason it exists is to be a plank for politicians who want to tax the "greedy corporations." All corporate income is either paid as dividends, paid as salaries, or reinvested. When it is paid as dividends, it is taxed as capital gains. When it is paid as salaries, it is taxed as income. When it is reinvested, it is either lost, or eventually becomes income and capital gains. There is no need to have another layer of taxation that just makes a giant accounting mess and creates all sorts of ridiculous incentives to use tax shelters.
Why should American corporations pay both foreign and US corporate tax on income made overseas?
They don't. They pay the highest rate in either jurisdiction, so either the US or the foreign rate. In the US, they get a tax credit for the amount of taxes paid to a foreign tax authority so that they are never double-taxed on their corporate income. Note that every country in the world of significant economic size taxes corporate income.
Dividends are taxed twice, as corporate profits and again when received by the shareholders as dividends, but they should be. Dividend taxes are the price shareholders pay for getting limited liability and all sorts of government protections and incentives.
They don't. They pay the highest rate in either jurisdiction, so either the US or the foreign rate. In the US, they get a tax credit for the amount of taxes paid to a foreign tax authority so that they are never double-taxed on their corporate income. Note that every country in the world of significant economic size taxes corporate income.
Dividends are taxed twice, as corporate profits and again when received by the shareholders as dividends, but they should be. Dividend taxes are the price shareholders pay for getting limited liability and all sorts of government protections and incentives.
Foreign cooroate income is triple taxed, foreign income taxes, then us repatraition taxes, the state income taxes. Then on what’s left sgarehokders pay dividend and state taxes.
That’s sextuple taxed.
That’s sextuple taxed.
Most of what you said isn't true.
Foreign subsidiary gets taxed by, say, Australia at 25%. It pays dividend to US parent, 0% withholding tax. But the US parent gets an "indirect foreign tax credit" for the taxes its subsidiary pays. (The IFTC is only available to corporations, not individuals, partnerships, or non-corporate LLCs.) It's complicated, but the IFTC can include prior-year foreign taxes paid by Australia Sub, and correspondingly the total IFTC sent up to US Parent is proportional to the total amount of foreign earnings remaining in Australia being dividended up. If that's 100%, then USParent gets a full credit of 25% for the Aussie tax paid by the subsidiary. Note that the US Parent will also pay state taxes on the dividend, and will thus get a SALT deduction for those taxes (but not a credit, so not a dollar-for-dollar reduction).
The dividend, paid out to US shareholders, is subject to reduced rates, so it's actually taxes less than normal income. Exact rate depends on your bracket. Recipients will get taxed by their home states as well, but will also get a state tax deduction (at least through 2017...2018 onward depends on the GOP tax bill).
The effective rate of tax on foreign earnings from foreign subsidiary to ultimate shareholder thus becomes roughly 50% or less...cheaper than in every other economically relevant nation (meaning 1st and 2nd world countries) after all taxes and credits and deductions are taken into account. The US has the highest "statutory" tax rates but the lowest effective tax rates in the first world for business income.
Foreign subsidiary gets taxed by, say, Australia at 25%. It pays dividend to US parent, 0% withholding tax. But the US parent gets an "indirect foreign tax credit" for the taxes its subsidiary pays. (The IFTC is only available to corporations, not individuals, partnerships, or non-corporate LLCs.) It's complicated, but the IFTC can include prior-year foreign taxes paid by Australia Sub, and correspondingly the total IFTC sent up to US Parent is proportional to the total amount of foreign earnings remaining in Australia being dividended up. If that's 100%, then USParent gets a full credit of 25% for the Aussie tax paid by the subsidiary. Note that the US Parent will also pay state taxes on the dividend, and will thus get a SALT deduction for those taxes (but not a credit, so not a dollar-for-dollar reduction).
The dividend, paid out to US shareholders, is subject to reduced rates, so it's actually taxes less than normal income. Exact rate depends on your bracket. Recipients will get taxed by their home states as well, but will also get a state tax deduction (at least through 2017...2018 onward depends on the GOP tax bill).
The effective rate of tax on foreign earnings from foreign subsidiary to ultimate shareholder thus becomes roughly 50% or less...cheaper than in every other economically relevant nation (meaning 1st and 2nd world countries) after all taxes and credits and deductions are taken into account. The US has the highest "statutory" tax rates but the lowest effective tax rates in the first world for business income.
>...The US has the highest "statutory" tax rates but the lowest effective tax rates in the first world for business income.
Lots of people claim this, but it doesn't appear to be true:
>...The U.S. effective corporate tax rate consistently ranks among the five highest of nations considered. The only nation with a higher ETR in each study is Japan, which not by coincidence is the only developed nation with a higher statutory rate than the U.S. Other major nations found to possess a higher ETR than the U.S. in at least one study include France, Italy, and Germany, but no clear patterns emerge; the U.S. outranks this sample more often than not. Significantly, both Italy and Germany have enacted rate cuts since many of these studies were conducted.
https://files.taxfoundation.org/legacy/docs/sr195.pdf
Lots of people claim this, but it doesn't appear to be true:
>...The U.S. effective corporate tax rate consistently ranks among the five highest of nations considered. The only nation with a higher ETR in each study is Japan, which not by coincidence is the only developed nation with a higher statutory rate than the U.S. Other major nations found to possess a higher ETR than the U.S. in at least one study include France, Italy, and Germany, but no clear patterns emerge; the U.S. outranks this sample more often than not. Significantly, both Italy and Germany have enacted rate cuts since many of these studies were conducted.
https://files.taxfoundation.org/legacy/docs/sr195.pdf
All these credits are misdirection, they don’t change anything. foreign profits go through 5 layers of taxes and you yourself admit takes at least 50% in taxes. Even for a poor retiree holding Apple stock.
Apple pays 8% income tax to foreign governments. The credit means it still has to pay US taxes on the 92% that’s left. It would be CRAZY to tax money already lost to taxes.
Returning foreign profits would have worked out this way before repatriation.
Apple pays 8% to foreign governments and repatriates 92% that’s left.
Apple pays 9% to state of california. 84% is left.
Apple pays 35% to Federal government, 55% is left.
Apple pays the 55% as dividends to shareholders.
CA middle class taxpayer pays 9% to state of CA. 50% is left.
CA middle class taxpayer pays 20% federal dividend rate, 40% is left.
You understand now why Apple didn’t repatriate?
Taxing investment at 60% is an egregious rate, and it’s bad for society. The best tax rate for investing for society is zero, to encourage investing.
Change the corporate rate to zero, and compensate by taxing dividends at ordinary income rates. Besides encouraging more investment (and raising the same or more tax over time) you restore progressivity to our tax system.
Apple pays 8% income tax to foreign governments. The credit means it still has to pay US taxes on the 92% that’s left. It would be CRAZY to tax money already lost to taxes.
Returning foreign profits would have worked out this way before repatriation.
Apple pays 8% to foreign governments and repatriates 92% that’s left.
Apple pays 9% to state of california. 84% is left.
Apple pays 35% to Federal government, 55% is left.
Apple pays the 55% as dividends to shareholders.
CA middle class taxpayer pays 9% to state of CA. 50% is left.
CA middle class taxpayer pays 20% federal dividend rate, 40% is left.
You understand now why Apple didn’t repatriate?
Taxing investment at 60% is an egregious rate, and it’s bad for society. The best tax rate for investing for society is zero, to encourage investing.
Change the corporate rate to zero, and compensate by taxing dividends at ordinary income rates. Besides encouraging more investment (and raising the same or more tax over time) you restore progressivity to our tax system.
>Dividend taxes are the price shareholders pay for getting limited liability and all sorts of government protections and incentives.
We provide for limited liability because we think it is beneficial to society in encouraging investment and risk-taking; it is not a sacrifice or expense we expect compensation for.
We provide for limited liability because we think it is beneficial to society in encouraging investment and risk-taking; it is not a sacrifice or expense we expect compensation for.
It's both/and, there are costs associated both with the laws around llcs and providing the need to play the of liability holder of last resort in certain circumstances.
I agree with everything you said except the double taxation of dividends.
Australia has probably the best system in the world for dividends. We use a franking credit to offset the tax paid by the corporation so effectively we have no double taxation of dividends.
I've never seen the point to any double taxation and I applaud any government willing to help citizens and business work around double taxation.
Australia has probably the best system in the world for dividends. We use a franking credit to offset the tax paid by the corporation so effectively we have no double taxation of dividends.
I've never seen the point to any double taxation and I applaud any government willing to help citizens and business work around double taxation.
Dividends, especially qualified dividends are taxed way below regular income though, to reflect this.
As I understand it, if the cash is repatriated, the income is taxed at US corporate tax rates minus what they've already paid to a foreign government. So essentially they would be paying an amount equivalent to the US corporate tax. Framing it as "foreign and US corporate tax" is misleading.
There was a day, not long ago, where paying taxes was a societal duty. We all benefit from the governments programs and thus need to fund the government. There shouldn’t be this huge pressure to find a way to not pay for taxes at an ethical and functional level.
You might not (probably don’t) agree with everything government does, but government still needs to be funded. Many local governments would really benefit from paid taxes, fwiw.
You might not (probably don’t) agree with everything government does, but government still needs to be funded. Many local governments would really benefit from paid taxes, fwiw.
There isn’t any period when higher than necessary tax rates were willingly paid. Tax policy that assumes any tax rate is fully collectible is responsible for the tax preparation and structuring industry.
The societal duty to perform sacrifices in order to receive benefits from a higher power is indeed an ancient idea, though.
The societal duty to perform sacrifices in order to receive benefits from a higher power is indeed an ancient idea, though.
There was a day, not long ago, where state and federal spending was less than 15% of GDP. Now it’s over 25%.
We also benefit from investment. So why are we taxing it at such high rates? The real corporate tax rate should be zero to encourage investing in the US. You could raise as much tax revenues by taxing dividends and capital gains at ordinary income rates. Which also would make our tax system more progressive.
We also benefit from investment. So why are we taxing it at such high rates? The real corporate tax rate should be zero to encourage investing in the US. You could raise as much tax revenues by taxing dividends and capital gains at ordinary income rates. Which also would make our tax system more progressive.
It’s misleading because it’s far worse than what you describe.
First they pay income tax to the foreign government.
Then out of what’s left the pay state corporate income tax.
Then out of what’s left they pay federal income tax, or the special repatriation tax.
Then the dividend what’s left to shareholders who pay state income taxes on it.
Then out of what’s left they pay federal dividend taxes.
A little old retiree in California is lucky if they don’t lose 60% of their share of their Apple profits to taxes.
First they pay income tax to the foreign government.
Then out of what’s left the pay state corporate income tax.
Then out of what’s left they pay federal income tax, or the special repatriation tax.
Then the dividend what’s left to shareholders who pay state income taxes on it.
Then out of what’s left they pay federal dividend taxes.
A little old retiree in California is lucky if they don’t lose 60% of their share of their Apple profits to taxes.
Remember that the point of these exercises, for the company, is not to avoid double taxation, but to avoid even so much as single taxation, by ensuring that the only country in which they legally make profit is one which won't tax them for turning a profit. The actual sales which eventually (after many twists and turns of international finance) resulted in those profits may have happened anywhere, and it's meant to be difficult to untangle exactly where (since if you could easily do that you could tax it).
A better solution, of course, would be a tax on the value of goods sold, at the location where the sale occurs, since it's hard to argue that an Apple Store in the US whose customer was standing in front of the register was somehow actually in a Caribbean tax haven.
A better solution, of course, would be a tax on the value of goods sold, at the location where the sale occurs, since it's hard to argue that an Apple Store in the US whose customer was standing in front of the register was somehow actually in a Caribbean tax haven.
Except that Apple pays massive amounts of taxes, more than any company in the history of the world.
I shudder to imagine how much you think they should pay.
I shudder to imagine how much you think they should pay.
Some cursory Googling indicates that the last few years Apple has managed to keep its taxes paid at a rate of between 18% and 19%.
For comparison, the Republican tax plan currently being debated in Congress is capping at 20% or 21% (depending on which day's negotiations you're looking at). And I personally am paying a rate around 36%.
I wonder what rate you think Apple and other large companies should be paying, and how much the rest of us would have to pay to give them that cut.
For comparison, the Republican tax plan currently being debated in Congress is capping at 20% or 21% (depending on which day's negotiations you're looking at). And I personally am paying a rate around 36%.
I wonder what rate you think Apple and other large companies should be paying, and how much the rest of us would have to pay to give them that cut.
I think Apple and other corporations should pay zero in income taxes. Because taxing investment makes no sense. Let alone sextuple-taxing it like we do today.
And your googling is in accurate. Apple pays 24.6% in taxes.
And your googling is in accurate. Apple pays 24.6% in taxes.
And when Apple’s owners make their share of that profit through capital gains and dividends, the government will take another cut.
You mean when they pay the capital-gains tax rate, which is much lower than the rate us ordinary mortals pay on our income?
The poor oppressed billionaires and even, yes, the mere multi-multi-millionaires, do not have my sympathy. I doubt you're going to change that.
The poor oppressed billionaires and even, yes, the mere multi-multi-millionaires, do not have my sympathy. I doubt you're going to change that.
Uh, this isn't about sympathy. I'm just pointing out that once you add the levels of taxation, it's about the same as the income tax rate. What looks like favorable treatment is just the government taking multiple cuts of the profits, where for wages it just takes one bigger one.
This isn’t about billionaires. A poor retiree in CA with Apple stock is losing close to 60% of their dividends to taxes:
The reason capital gains rates are lower than individual income rates is partial compensation for the effects of inflation. If inflation is 2% per year and your investment increases 20% over 10 years, you lost money but still owe taxes. During high inflationary periods this effect kills the stock market, because taxes make investing becomes a guaranteed loser.
The reason dividend rates are so low is that the money has already been taxed multiple times in its way to the shareholder. Foreign, State and Federal Corporate income taxes. Your 20% dividend rate is just the tail end of about 60% in total taxes, including state income taxes too.
The reason capital gains rates are lower than individual income rates is partial compensation for the effects of inflation. If inflation is 2% per year and your investment increases 20% over 10 years, you lost money but still owe taxes. During high inflationary periods this effect kills the stock market, because taxes make investing becomes a guaranteed loser.
The reason dividend rates are so low is that the money has already been taxed multiple times in its way to the shareholder. Foreign, State and Federal Corporate income taxes. Your 20% dividend rate is just the tail end of about 60% in total taxes, including state income taxes too.
"A poor retiree in CA" doesn't own AAPL. Not directly, not through a 401(k) or other vehicle. They're living off Social Security payments.
And retirement investment vehicles, smartly managed, start moving out of stocks and into less volatile securities as you reach actual retirement. So if that retiree is still in AAPL post-retirement, there are other issues going on.
And retirement investment vehicles, smartly managed, start moving out of stocks and into less volatile securities as you reach actual retirement. So if that retiree is still in AAPL post-retirement, there are other issues going on.
Even poor retirees own stocks, and they pay huge tax rates on their dividends. You can’t deny that.
[deleted]
Not perfectly sure about US tax system, but as far as I understand the basics are similar everywhere. Corporate tax or profit tax is paid, well, on profit and since salaries are sort of "operational expenses" are not subject to corporate taxes. Having profits corporations can effectively do two things (using many different mechanisms): pay dividends or reinvest.
As I see it, dividends are income and should be taxed as such - corporate tax plus capital gains tax should at least equal plain income tax so different means of income are not discriminated. In this light, having profits and dividends taxed separately effectively discounts taxes on reinvested profits.
As I see it, dividends are income and should be taxed as such - corporate tax plus capital gains tax should at least equal plain income tax so different means of income are not discriminated. In this light, having profits and dividends taxed separately effectively discounts taxes on reinvested profits.
Because it's the law? The problem is that especially with non-physical assets, it's easy to make them "foreign income' solely to evade taxes. With a large American company I worked with as a contractor, as part of their standard release process we would transfer the product binary to their Irish subsidiary, which they would then license the product from so that this income was "Irish" sales of their software.
It should be the law because it is the law? I don’t think that works.
And as for the Irish arrangement, I think it’s a good demonstration on why having a corporate tax at all is more trouble than it’s worth. It’s better to just get rid of it and make up the shortfall in capital gains and income taxes.
And as for the Irish arrangement, I think it’s a good demonstration on why having a corporate tax at all is more trouble than it’s worth. It’s better to just get rid of it and make up the shortfall in capital gains and income taxes.
> The kept the cash offshore with the belief that they would eventually be able to bring it back without paying taxes. They started a multi-year political lobbying campaign to change the tax system.
So far as I can tell Apple is getting absolutely hammered under the terms of this new tax bill, so I'm not sure this is the case https://www.bloomberg.com/news/articles/2017-11-03/multinati...
So far as I can tell Apple is getting absolutely hammered under the terms of this new tax bill, so I'm not sure this is the case https://www.bloomberg.com/news/articles/2017-11-03/multinati...
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Or keep it offshore and use it to finance foreign investments.
So, it's actually largely kept, denominated in USDs, in US banks -- quite a lot of it in US Treasury bonds. So they can finance investment in US companies with it pretty easily right now.
https://www.bloomberg.com/graphics/2016-apple-profits/
Offshore has to do with ownership, not custody, currency, and obviously not control.
https://www.bloomberg.com/graphics/2016-apple-profits/
Offshore has to do with ownership, not custody, currency, and obviously not control.
Most of them said they are not going to hire more and they are not going to invest in new companies. They will be using the money for dividends.
Dividends are less likely than share buybacks as it's a one time windfall and makes everything easier for management.
Apple's already paying out dividends.
I'm not a securities expert, but depending on how options contracts are worded, a stock buyback might increase the value of options awarded to executives, whereas a dividend is more or less a net negative.
I'm not a securities expert, but depending on how options contracts are worded, a stock buyback might increase the value of options awarded to executives, whereas a dividend is more or less a net negative.
Apple also already does stock buybacks [1]... $150+ billion worth since 2012 and plans for tons more in the future.
Investors like consistent (and increasing!) dividends, a one time windfall from overseas cash coming back won't let you raise the dividend forever. They could do a one time special dividend, but that's still less efficient than a buyback from management's perspective.
Dividends are taxable and you can't choose when to pay that tax, capital gains are only taxed when you sell which lets investors put off having to pay tax. The idea being buying back shares and retiring them will make the remaining shares more valuable.
You mentioned it might make options more valuable... Well that's a feature not a bug, at least if you're the one getting the options (which the people who decide what to do certainly are!). All the more reason for a buyback.
[1] https://www.fool.com/investing/2017/05/31/are-apples-stock-b...
Investors like consistent (and increasing!) dividends, a one time windfall from overseas cash coming back won't let you raise the dividend forever. They could do a one time special dividend, but that's still less efficient than a buyback from management's perspective.
Dividends are taxable and you can't choose when to pay that tax, capital gains are only taxed when you sell which lets investors put off having to pay tax. The idea being buying back shares and retiring them will make the remaining shares more valuable.
You mentioned it might make options more valuable... Well that's a feature not a bug, at least if you're the one getting the options (which the people who decide what to do certainly are!). All the more reason for a buyback.
[1] https://www.fool.com/investing/2017/05/31/are-apples-stock-b...
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Great! Shareholders can use those gains to invest in other things. And, dividends get taxed y’know.
Yeah this is the bit nobody seems to realise - the money isn’t outside the US at all. There’s an in-house ‘hedge fund’ managing it all in Delaware.
Edit: Reno
Edit: Reno
The cash is not directly owned by Apple Inc. the US corporation. Probably is not so easy for an Apple foreign subsidiary to invest in US companies (investing as in M&A, of course, not buying stocks as financial investment).
It seems to me that the American tax system should, if it is to encourage anything, encourage investment in America.
The spending doesn't even need to be foreign. Apple can easily take out loans at interest rates near 0% as secured by overseas cash. The overseas cash is almost as good as cash in the US.
Ya, they can always open up a few R&D centers in say china, or finance a non-American acquisition using overseas money. Microsoft has done this well (MS china, as well as a Skype and Nokia).
As the article explains they want to use the money to pay out profits to shareholders, preferably via buybacks. They need to repatriate it to do that. Another foreign factory doesn't get them the cash in hand that they want.
> The kept the cash offshore with the belief that they would eventually be able to bring it back without paying taxes.
Remember to commend them for that spot on analysis.
Standing ovation on my end
I'm extremely excited for the territorial system and those implications for US world-citizens.
Remember to commend them for that spot on analysis.
Standing ovation on my end
I'm extremely excited for the territorial system and those implications for US world-citizens.
It'd be fine if this were actually a territorial system.
Dropbox develops its software in the US, markets from the US, does basically everything in the US. Yet for some reason service payments goes to Dropbox Ireland.
It's not representative of reality, and neither is Apple profits not going back to the US headquarters. The work was done in the US, the profit is going to be handed back to the shareholders. The R&D is in the US. The only thing Apple Japan (for example) is doing is reselling Apple US stuff. There's no real reason for the local subsidiary to book the entire profit.
There's a reason people find this problematic. It's because it's a tax game not representative of what's happening in the real world.
Dropbox develops its software in the US, markets from the US, does basically everything in the US. Yet for some reason service payments goes to Dropbox Ireland.
It's not representative of reality, and neither is Apple profits not going back to the US headquarters. The work was done in the US, the profit is going to be handed back to the shareholders. The R&D is in the US. The only thing Apple Japan (for example) is doing is reselling Apple US stuff. There's no real reason for the local subsidiary to book the entire profit.
There's a reason people find this problematic. It's because it's a tax game not representative of what's happening in the real world.
the US levels of taxation are higher than the vast majority of other countries. it even goes further in taxing profits made overseas than other countries.
how can we honestly hold that against these companies?
how can we honestly hold that against these companies?
If it wasn't worth it, they wouldn't be doing business there.
The highest tax bracket is high, but tax laws also have many, many deductions and loopholes. As a result, US corporations as a whole pay about 18% in tax, which is somewhat lower than most western countries.
If these laws were changed to make a flat 20% tax with no deductions, it would be revenue neutral or even slightly positive, but then the companies would all complain about the loss of deductions.
If these laws were changed to make a flat 20% tax with no deductions, it would be revenue neutral or even slightly positive, but then the companies would all complain about the loss of deductions.
You are ignoring state taxes and tax deferral from not repatriating. Once repatriation taxes are paid the US rate increases substantially, even with a lower repatriation rate.
Apple pays nearly 40% in the US combined with state corporate income taxes. On foreign earnings it pays about 10% to foreign governments. Combined it works out to 23%, but when the repatriated earnings are taxed it will shoot up.
Apple pays nearly 40% in the US combined with state corporate income taxes. On foreign earnings it pays about 10% to foreign governments. Combined it works out to 23%, but when the repatriated earnings are taxed it will shoot up.
Citation needed. That’s a lot of very specific numbers.
It’s actually 24.6%.
https://www.apple.com/newsroom/2017/11/the-facts-about-apple...
https://www.apple.com/newsroom/2017/11/the-facts-about-apple...
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1. There's no reason to believe that's going to happen anytime in the near to distant future. They are in the midst of a super upgrade cycle which figures to result in record profits again when they report in January and that growth is likely to continue for the foreseeable future.
2. Pulling the cash from overseas doesn't make sense simply because they can issue bonds at a far lower rate, practically zero, than what they would pay in repatriation. I'm not so sure if the repatriation rate were lowered permanently that they would even bring much back at all. If it were a one-time benefit, then sure. If/when they need cash they can hold their nose and pay the tax rate, but I would argue that the market has already priced the supposed tax penalty into the share price. To put it another way, if they were granted a one-time repatriation rate far below what they would be forced to pay currently, you would see the share price jump because that is effectively adding billions of cash to their balance sheet from the federal government's.
3. Going back to the first point, if sales did slump they would probably need the cash anyway with or without the bond issuances. Hoarding enormous piles of cash to avoid taxes is a luxury of the few extraordinarily profitable international companies of the world, not those that have diminishing sales.