Will US tax reform tempt Apple back home?

Apple has announced plans to repatriate some of its cash holdingsAnother bite of the Apple

Could times be a-changing for tech giant Apple? After coming under fire for its tax evasion policies, it seems as if the company could be softening its stance towards corporate tax obligations, as CEO Tim Cook announced in January that Apple would be making a payment of $38 billion to repatriate part of its overseas cash holdings. Cook also committed to spending $30 billion in the US over a five-year period, creating 20,000 jobs and a new campus in the process.

The announcement is something of a volte-face for a company whose business model is built on holding assets in low-tax jurisdictions, despite operating in countries across the world. It’s an approach that’s attracted increasing criticism from lawmakers in the US, UK and European Union who are keen to make Apple face up to its fiscal responsibilities.

Back in 2013, a Senate committee hauled Apple over the coals for employing a ‘highly questionable’ network of offshore accounts to avoid paying taxes in the US. Senator John McCain said that US citizens were ‘mad as hell’ that one of the largest companies in the world was paying taxes at rates that were often less than 1%. In December last year, the Irish government was tasked by the European Union (EU) with collecting $15 billion of unpaid – and unfairly avoided – taxes, although Apple is challenging the ruling.

Tax reforms are prompting a corporate rethink

Apple’s one-off payment has been announced in the wake of recent changes to US tax law as part of the GOP’s broader tax reform program. Provisions in the bill include cutting the corporate tax rate from 35% to 21% and lowering levies on repatriating overseas profits. It’s good news for Apple – and a host of other companies – but, assuming mooted repatriation rates of 15.5%, Apple will still need to hand over around $39 billion if it wants to bring back its estimated $252 billion cash holdings.

And there’s potentially bad news in the bill for the patents Apple holds abroad, as deliberations continue over the way overseas profits are taxed in the US. In effect, Apple assigns a large chunk of the value of its products to patents and intellectual property including trademarks which, in turn, are distributed to subsidiaries in countries with low tax rates, like Ireland. New provisions in the tax bill will simultaneously introduce a minimum tax level on foreign patent income and lower the tax on licensing income from patents held in the US, making it more attractive to repatriate intellectual property as well as cash.

Cook hasn’t said how much cash the company intends to repatriate, nor how it would use the funds. However, it has already set aside $36.3 billion for these payments, which may offer an indication that plans are afoot to bring back a substantial sum. Industry experts are speculating that Apple is likely to use the funds to increase its shareholder returns in the first instance, improving dividends and share repurchases. But the company may also choose to assign some cash to pay down its $97 billion of debt. No-one is expecting a wave of high-profile acquisitions at this stage.

What about manufacturing?

President Trump has stated that his ‘real dream’ is to see more US-based manufacturing – but will Apple step up? Currently, the vast bulk of Apple’s devices – including the iPhone – are produced in China, although Apple has moved some production back to the United States: a number of iMacs are already assembled in the US, as is the Mac Pro. While the tax cuts aren’t likely to immediately impact Apple’s manufacturing status, it could encourage the company to spend more with its US suppliers, who may be able to pass on their tax savings in the form of lower prices.

There are, nevertheless, signs that Apple intends to make significant investments in the US. Just a year ago, the company agreed to a program of job creation in America, announcing a $1 billion fund to increase its manufacturing capacity in the US. The Apple Park campus was opened last year in Cupertino and plans are underway for a new campus focused on tech support for customers later this year.

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