What the Apple (Nasdaq: AAPL) Bond Deal Is Really Telling Us

Email
    Text size

Apple Inc. (Nasdaq: AAPL) sold about $12 billion worth of bonds today (Tuesday), almost exactly one year after it conducted a monster $17 billion bond sale.

Both of the Apple bond deals are primarily intended to fund efforts to return money to shareholders. Last week the Cupertino, Calif.-based company announced it had increased its share buyback program by $30 billion to $90 billion and raised its quarterly dividend 8% to $3.29 a share.

nasdaq: aaplBut that's a lot of debt to take on when you have $150 billion of cash and marketable securities on your balance sheet and free cash flow of about $40 billion per year.

So why do it?

The sort answer: It's a tax dodge.

Most of AAPL's cash is held overseas. If the company repatriates that money for any reason - like share buybacks - it must pay the U.S. corporate tax rate of 35%, which happens to be the highest in the world.

It makes much more sense to for Apple to borrow the money it needs at extremely low interest rates. And what little interest Apple does pay is tax-deductible, further reducing the company's tax burden.

And while this behavior may smell like a company cheating on its taxes, it's all perfectly legal - and from a fiduciary standpoint, exactly the right thing to do.

It's just one example of some of the strategies U.S. companies have devised to avoid the high corporate tax rate.

The strange state of affairs argues for serious corporate tax reform, as the high rate we have now with countless loopholes encourages behavior that allows some big companies to pay low or even no taxes and harms the U.S. economy in other ways.

Apple is far from alone...

Apple (Nasdaq: AAPL) Bond Deal Just One Way to Beat High Taxes

The Apple bond deal shows just how far big multinational corporations will go to avoid bringing money home.

It was recently estimated that major U.S. companies have a total of about $2.1 trillion in foreign profits sitting overseas.

On that list, AAPL is only fifth, with $54.4 billion. Number one is General Electric Co. (NYSE: GE) with $110 billion, followed by Microsoft Corp. (Nasdaq: MSFT) with $76.4 billion and drug makers Pfizer Inc. (NYSE: PFE) with $69 billion and Merck & Co. Inc. (NYSE: MRK) with $57.1 billion.

In addition to providing money to pay dividends and do stock buybacks, as Apple is doing, that money could also be re-invested back into the companies.

But at least that money has a chance at someday returning to the United States. A more drastic strategy some companies are using is sending billions in profits away forever.

In recent years companies are using foreign acquisitions to relocate their headquarters to more tax-friendly countries, such as Ireland.

That's part of the incentive behind two recent proposed mergers, Pfizer's bid for U.K.-based AstraZeneca Plc (NYSE ADR: AZN) and Walgreen's intent to acquire European drug store chain Alliance Boots, which is based in Switzerland. Walgreen's already has a 45% stake in Boots.

The technical term for this is a "tax inversion," and it has become a popular tool. According to a 2011 Ernst & Young report, the United States lost 46 headquarters from the Fortune Global 500 between 2000 and 2011.

And it's all to escape the high U.S. corporate tax rate.

"The tax code is punitive," explained Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Money goes where it's treated best."

The Obama administration is seeking to curb tax inversions by changing the law to only allow them if a company transfers 50% of its shares to owners overseas, up from the current 20%.

But a much better solution would be an overhaul of the entire corporate tax code to lower the rate and close loopholes. Only a comprehensive solution will put an end to all the crazy corporate tax avoidance, from the Apple bond deal to the holding of vast profits offshore to the transfer of corporate headquarters overseas.

"It's not just a matter of fixing the tax system," Fitz-Gerald said. "They have to fix what they hope to accomplish with the tax system."

Do you think it's long past time to fix the U.S. corporate tax code so that corporations like Apple, GE, and Pfizer pay their fair share of taxes and bring their profits home to benefit their U.S. operations? Speak your mind on Twitter @moneymorning or Facebook.

Washington has a habit of making bad financial policy, and the corporate tax code is just the tip of the iceberg. Another government policy is effectively transferring wealth from the middle class to the Too Big to Fail Banks on Wall Street. Here's how you're being ripped off year in and year out...

Related Articles: