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The eye-popping $38 billion tax bill that Apple said it plans to pay on its mammoth pile of accumulated foreign earnings will probably hit federal coffers in an eight-year trickle, not a one-time torrent.
The special, cut-rate “repatriation” tax that Congress imposed on multinationals like Apple gives them as long as eight years to pay the new levy — with no interest or penalties. That drawn-out schedule puts the biggest bills off until later years, meaning Apple’s first repatriation payment would probably be much closer to $3 billion, according to tax experts.
“Nobody’s going to pay it all up front,” said Douglas Holtz-Eakin, a former director of the Congressional Budget Office who now heads the American Action Forum, a Washington policy research group. “People should not expect a one-time, massive infusion of cash to the Treasury.”
The installment plan is just one of the lesser-known aspects of the new repatriation tax — and it shows how and why the U.S. Treasury’s general fund won’t receive a tsunami of revenue all at once to help underwrite the sweeping tax cuts that President Donald Trump signed into law last month.
This year, the repatriation levy is projected to raise $78.6 billion overall, according to Congress’s official estimate. Still, that’s not enough to wipe out the estimated first-year cost of the bill’s tax cuts for businesses and individuals overall. Taken as a whole, the bill is expected to reduce federal revenue by $135.7 billion this year, before accounting for any economic growth or other macroeconomic changes that might result.
U.S. multinationals are estimated to have $3.1 trillion in total untaxed overseas earnings, held as both cash and illiquid assets. Apple has the largest offshore cash pile, with about $252 billion as of the end of September, the most recent tally available. Josh Rosenstock, a spokesman for Apple, declined to comment.
Companies face a two-tiered mandatory tax on their previously-accumulated foreign income, whether they bring it back to the U.S. or leave it overseas. Cash will be subject to a 15.5 percent rate, while illiquid assets like plants and equipment will face an 8 percent levy. (Multinationals hold just over half of their so-called “permanently reinvested” foreign earnings as cash or liquid securities, according to estimates by accounting professors Jennifer Blouin of the University of Pennsylvania, Linda Krull of the University of Oregon and Leslie Robinson of Dartmouth College.)
In passing the most extensive tax-code rewrite since 1986 — a bill that cut the corporate tax rate to 21 percent from 35 percent — Congress scrapped the previous international tax system for corporations. The old system included an unusual provision 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 shift earnings overseas and stockpile profits in low- and no-tax havens.
The law gives multinational companies like Apple the option to pay what they owe over eight years — just 8 percent of the total in each of the first five years starting in 2018, followed by 15 percent in 2023, 20 percent in 2024 and 25 percent in 2025.
Going forward under the new tax system, companies will generally only be taxed on their domestic profits, not dividends from their foreign subsidiaries — though the bill included safety nets intended to capture certain foreign income and payments pegged to subsidiaries in low-tax countries like Ireland and no-tax countries like Bermuda.
In announcing billions of dollars in new investments on Jan. 17, Apple shared few specifics about how much of its plans to invest domestically were spurred by repatriation. “Much of what they’re saying they’ll be doing they already would have been doing,” said Michael Olson, a managing director and senior research analyst who covers the company for Piper Jaffray. “Apple took advantage of putting a bit of marketing spin on it.”
Overall, the repatriation measure is expected to raise almost $339 billion over 10 years, according to the Joint Committee on Taxation, Congress’s official scorekeeper. But not all of that estimated burden would fall on corporations; shareholders would pay a chunk of it.
That’s because the JCT included the effects on shareholders in its revenue estimates about repatriation, according to a person familiar with the group’s methodology. Shareholders are expected to pay more taxes resulting from the increased dividends paid out by companies once their overseas cash is freed, said the person, who asked not to be named because the estimating process hasn’t been made public.
Individuals’ dividends on shares held less than a year are taxed at ordinary income tax rates, while those held for more than a year are subject to the long-term capital gains rate of 20 percent. The JCT score also includes estimates of capital gains taxes that shareholders might pay as they see stock prices rise and decide to sell a company’s shares, the person said.
In the first few years the revenue generated from shareholders could outpace the revenue generated from multinationals’ actual repatriation tax payments, according to Edward Kleinbard, a professor at the University of Southern California and a former JCT chief of staff. In each of the first five years, companies will be paying — at the most — about 1.24 percent on their total offshore hoards. But shareholders will be paying — at the least — 20 percent on whatever portion of that hoard gets passed along to them.
The JCT declined to comment on its repatriation estimates.
In calling for the repatriation tax break, Trump and others have cited the economic growth and hiring that they say will result from companies’ returning their multibillion-dollar foreign kitties to the U.S. — now that they no longer have to keep them offshore to qualify for deferral. But some tax experts aren’t convinced by such assertions.
“I don’t know if it’s necessarily associated with growth,” said Ray Beeman, co-leader of Ernst and Young’s Washington Council advisory services group.
Companies will be free to choose whether to return any of that money to the U.S. They’ll pay the tax regardless in what’s known as a “deemed repatriation.” What happens after that is up to them.
“Deemed repatriation is a built-in test for tax reform,” Holtz-Eakin said. “Are you going to invest it here, or leave it abroad?”
©2018 Bloomberg L.P.
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