technology

Tim Cook’s $181 Billion Headache: Apple’s Cash Held Overseas

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Apple Falls Out of Favor With Investors

Apple Inc.’s cash topped $200 billion for the first time as the portion of money held abroad rose to almost 90 percent, putting more pressure on Chief Executive Officer Tim Cook to find a way to use the funds without incurring U.S. taxes.

Booming iPhone sales overseas are adding to Apple’s cash pile, pushing the company to embrace offshore affiliates to preserve and invest the money. Cook, who was called before U.S. Congress in 2013 to defend Apple against allegations of dodging taxes, is facing questions on what Apple will do with its cash pile and fielding calls from investors, such as billionaire activist Carl Icahn, to return shareholder capital.

“They don’t really have that much on-shore cash,” said Tim Arcuri, an analyst at Cowen & Co. “They’re still sort of hamstrung on what they can do, barring the ability to repatriate a bunch of off-shore cash.”

Cook has been vocal about his desire for U.S. lawmakers to amend the country’s tax laws so that companies can repatriate more cash. Apple’s overseas cash has climbed 70 percent since Cook spoke to Congress, and now makes up 89 percent of Apple’s $202.8 billion in cash and investments at the end of June, the company said Tuesday, up from 72 percent of $146.6 billion in cash two years ago.

Driving that is Apple’s booming global revenue. Sales in greater China, for example, more than doubled to $13.2 billion in the latest quarter from a year earlier.

At the same time, Apple’s U.S. federal lobbying spending has been climbing, and reached a record $4.1 million last year as it advocated on a wide range of issues. The company’s lobbying climbed 46 percent in the second quarter from a year earlier. The iPhone maker added three lobbyists on the issues of taxes in the past year, and is addressing concerns such as corporate and international “tax reform,” according to records filed with the U.S. Senate this week.

Tax Policy

Under current law, U.S. companies owe the full 35 percent corporate tax rate -- the highest of any industrialized nation - - on income they earn around the world. They receive tax credits for payments to foreign governments, and have to pay the U.S. the difference only when they bring the money home.

That system encourages companies to shift profits to low-tax foreign countries and leave the money there. As a result, more than $2 trillion is being stockpiled overseas by U.S. companies.

U.S. President Barack Obama and House Ways and Means Chairman Paul Ryan, R-Wisconsin, are trying to find a way to impose a one-time tax on the stockpiled money to encourage cash repatriation, change the underlying system and plow the proceeds into highways.

Returning Cash

Apple is also seeking to return more of its growing cash hoard to investors. In April, the company unveiled plans to boost capital return program by $70 billion, increasing a share-buyback authorization by $50 billion and increasing dividends by 11 percent. At the end of June quarter, the company had returned $126 billion of its $200 billion program, including $90 billion in share repurchases, Chief Financial officer Luca Maestri told analysts on Tuesday.

To pay investors, Apple has issued almost $50 billion in debt around the world, including bonds denominated in yen and Swiss francs. Apple also used $10 billion in cash to pay U.S. taxes last year, according to a regulatory filing.

On top of this, Apple has already assumed for accounting purposes that a lot of the cash has come home, suggesting that the impact of cash repatriation on future earnings would be minimal. At the end of its latest fiscal year, Apple estimated that bringing home the $69.7 billion in earnings on which it hasn’t taken a charge would cost about $23.3 billion in U.S. taxes.

Cook has said that Apple is already the largest taxpayer in the U.S. and reiterated a need for “comprehensive” tax reform. A representative for Apple declined to comment.

“It’s not smart for all of these companies, including us, to have all this money offshore, which can’t be invested in the United States,” the CEO said at a tech conference held by the Wall Street Journal last year. “It would be reasonable to, say, force a tax on the offshore piece but let it all flow free -- let the capital have a free flow.”

(A previous version of this story removed a reference to Apple’s lobbying spending being at a record in the second quarter.)

For more, read this QuickTake: Profit Shifting

(Updates with 2014 lobbying spending in sixth paragraph.)
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