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Monthly Archives: January 2018

Apple to Pay $38 Billion in Repatriation Taxes

Apple, Inc. said it would make a one-time tax payment of $38 billion to repatriate overseas cash holdings and also ramp up its spending in the U.S., as it seeks to emphasize its contributions to the U.S. economy after years of taking criticism for outsourcing manufacturing to China. 
 
As of last September, Apple had $252 Billion
in Cash or Cash Equivalents Abroad 
 

However, in a report from mid-December, the Institute on Taxation and Economic Policy said Apple would be the biggest beneficiary of the repatriation proposal, calling it “the company now most notorious for its international tax avoidance.”

The institute estimated Apple should have paid under last year’s tax laws $78.6 billion in taxes on its $252.3 billion in earnings being held offshore, based on an estimated 3.9 percent tax rate it paid to other governments on its offshore earnings.

Richard Phillips, a senior policy analyst with the institute, said Apple’s announcement showed that much of what it is paying taxes on is cash. Phillips said the taxes are based on money the company has held overseas but has not paid American taxes on. He pointed to the difference between the $78.6 billion figure and the $38 billion Apple said it would pay.

“$40 Billion is a Lot of Money,” Phillips said. 

The iPhone maker, whose products are mostly made in Asian factories, said it plans a wave of investing and hiring in the United States and will create 20,000 jobs through hiring at its existing campus and the new one. It will announce the location later this year.
About a third of the new spending will be on data centers to house its iCloud, App Store and Apple Music services, a sign of the rising importance of subscription services to a company known for its computers and gadgets. The company has data centers in seven states and also on Wednesday broke ground on an expansion of its operations in Reno, Nevada, where local officials granted it tax breaks on a downtown warehouse.

The U.S spending would be a significant part of Apple’s overall capital expenditures. Globally, the company spent $14.9 billion in 2017 and expects to spend $16 billion in 2018, figures that include both U.S.-based investments in data centers and other projects and Asian investments in tooling for its contract manufacturers.

If Apple’s overall capital expenditures continue to expand at the same rate expected this year, the $30 billion investment in the U.S. could represent about a third of its capital expenditures over the next five years.
 

It didn’t specify how much of that spending was already planned. Apple also is expanding from $1 billion to $5 billion a fund it established last year for investing in advanced manufacturing in the U.S.
 Chief Executive Tim Cook touted the plans as building on Apple’s support for the U.S. economy. “We have a deep sense of responsibility to give back to our country and the people who help make our success possible,” he said in a statement.
Apple said its one-time tax payment was the result of recent changes to U.S. tax law, under which companies can pay a one-time tax of 15.5% on overseas cash holdings repatriated to the U.S. The company said in November that it had earmarked $36 billion to cover deferred taxes on its $252.3 billion in overseas cash holdings, assuming that it would eventually pay some tax for bringing that home.
Apple has faced criticism over the past decade for the overseas manufacturing of its iPhone, of which it has sold more than 1 billion units, rather than manufacturing devices domestically. President Donald Trump during the presidential campaign blasted the company for outsourcing. He later called on Apple to build a factory in the U.S. and last year said Mr. Cook promised to build three manufacturing plants in the U.S.
Apple’s announcement left many details of its plans unclear, and a spokesman declined to elaborate. The company didn’t say how much it planned to return of its $252.3 billion in cash and marketable securities held overseas. It also didn’t specify whether it plans to increase dividends or share repurchases, which is something its top executives had said would be a priority following the change in U.S. tax law.
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Sources
 

Read more at: Tax Times blog

Apple Could Get a $4B Timing Reduction in TCJA's 15.5% Transition Tax?

According to taxproToday, Companies that stockpiled trillions of dollars offshore free of U.S. income tax may get one last break before paying up, provided their fiscal years don’t follow the calendar year.

A timing quirk in the tax overhaul that President Donald Trump signed last month may be good news for companies such as Apple Inc., Microsoft Corp. and Cisco Systems Inc., all of which began their fiscal years before Jan. 1. Firms including Alphabet Inc., Amgen Inc. and General Electric Co., with fiscal years that began on Jan. 1, appear to be shut out of the benefit.

Apple alone, which disclosed an offshore cash hoard of $252 billion as of Sept. 30, may be able to lop more than $4 billion off a future tax bill, according to Stephen Shay, a tax and business law professor at Harvard Law School who wrote about what he called the “potential loophole” last month. He characterized the boon as a side effect of the speed with which congressional Republicans passed their tax bill.

“This bill was passed on a speed train schedule with no time to think,” said Shay, who was a senior Treasury Department official during the administrations of former presidents Barack Obama and Ronald Reagan. It’s up to Treasury and the Internal Revenue Service to create rules to prevent companies from taking advantage, he said.

In passing the most extensive tax-code revisions since 1986, Congress scrapped the previous international tax system for corporations, an unusual arrangement that allowed companies to defer U.S. income taxes on foreign earnings until they returned the income to the U.S. That “deferral” provision led companies to stockpile an estimated $3.1 trillion offshore.

In switching to a new system that’s designed to focus on domestic economic activity, congressional tax writers also imposed a two-tiered levy on all that accumulated foreign income: Cash will be taxed at 15.5 percent, less liquid assets at 8 percent. Companies can pay over eight years.

The timing issue that Shay surfaced stems from a provision that, in effect, gives a company until the end of its fiscal year to measure what’s cash and what isn’t for tax purposes. Consequently, companies that began new fiscal years before Jan. 1 get an extra chance to reduce foreign cash they’ll accumulate this year, which they can do by distributing cash dividends to their U.S. parents before tallying up what’s left to be taxed, Shay wrote.

Under Separate Changes Effective Jan. 1, 2018, 
Any Dividends Would be Tax-Free in the U.S., he noted.

The law actually specifies two dates that companies should use in tallying their offshore cash piles, and they have to pay the 15.5 percent rate on whichever tally is larger. The options: The two-year average of foreign cash as of Nov. 2, the date the House introduced its tax bill; or the end of the firm’s current fiscal year, if it began before Jan. 1.

Here’s how Shay said it could work for Apple, which began its fiscal year on Oct. 1: Under the Nov. 2 formula, the company’s two-year average offshore cash stash was $234 billion. Shay said Apple’s historical earnings suggest that figure could grow to $289 billion by Sept. 30, when its year ends.

Therefore, Shay said, if Apple’s foreign subsidiaries operate on the same fiscal year, they could distribute as much as $55 billion to their parent, taking the overseas cash total down to match the Nov. 2 number. And because there’s a 7.5 percentage-point difference in the two tax rates, the company’s tax savings thanks to the distribution could amount to $4.1 billion, he said.

A spokesman for Apple didn’t respond to requests for comment; nor did spokesmen for Cisco and Alphabet. Spokesmen for Microsoft, Oracle, Amgen and GE
Declined to Comment.

The IRS didn’t respond to a request for comment. One line in the tax bill says that if federal officials determine that a company has shifted cash or cash equivalents into other assets with “a principal purpose” of trying to reduce their tax bills, the transaction will be disregarded. But Shay said that line isn’t enough to prevent abuse, and the IRS should produce detailed, concrete guidance for companies.
As it stands now, if companies use the strategy to try to reduce their tax bills, it would be up to the IRS to challenge the move—and then see whether its position holds up in court, said Eric Solomon, a co-director of the national tax practice at Ernst & Young LLP.

 
Need International Tax Help?
 
 
We Can Advise on How These Tax Cuts Can Benefit You!
 
Contact the Tax Lawyers at 

Marini & Associates, P.A.  
 
 

for a FREE Tax Consultation
Toll Free at 888-8TaxAid (888) 882-9243

 

Read more at: Tax Times blog