The record $17 billion Apple bond offering this week will do more than just placate shareholders eager to get some benefit from the company's $144.7 billion in cash.
It will help Apple Inc. (Nasdaq: AAPL) avoid paying taxes, a feat that the Cupertino, CA tech giant has elevated to a high art.
The company has kept the bulk of its cash – some $102 billion – in overseas accounts to avoid paying the 35% corporate tax rate here in the United States.
Borrowing money to fund its plans for dividend increases and stock buybacks allows Apple to reward its shareholders without repatriating those foreign profits and paying U.S. taxes.
Better yet, the interest Apple will pay out in its bonds is tax deductible, which will reduce the company's tax bill even more.
It's all so elegantly devious – and perfectly legal.
This Week's Apple Bond Offering Just the Beginning
The company plans to return about $100 billion to shareholders by 2015 in the form of repurchased shares and dividend hikes.
That means this week's $17 billion Apple bond offering was merely the first of many for a company that before Tuesday had zero debt on its balance sheet.
But going tens of billions of dollars into debt when you don't have to makes sense when you realize the staggering tax advantages of this strategy.
Apple sets aside money every quarter to pay the U.S. taxes it would owe should it ever bring its foreign profits home.
As of September, Apple's accountants had designated a staggering $13.8 billion as potential U.S. tax payments, a 34% tax rate (slightly lower that the official 35% rate because companies can take credits for taxes paid to foreign governments).
Now compare that with the interest rates Apple is paying on its bonds.
The Apple bond offering this week included $5.5 billion of 10-year notes with a yield of 2.415%, $4 billion of 5-year notes at 1.076%, $3 billion of 30-year notes at 3.883%, $1.5 billion of 3-year notes at 0.511%, and $3 billion of 3- and 5-year floating rate notes at 0.05% and 0.25% above the LIBOR.
All of those rates are much, much lower than the 34% Apple would have to pay the Internal Revenue Service (IRS) on its overseas profits if it repatriated any of that cash.
The truth is, Apple would be crazy not to take on the debt.
"Companies that have very little to no debt can be opportunistic when rates hit new lows, and Apple is doing exactly that," Jason Graybill, who oversees $1.2 billion of investment-grade bonds at Carret Asset Management LLC, told The Wall Street Journal.
Apple Pays Even Less to Foreign Governments
In addition to holding most of its profits overseas to duck U.S. taxes, Apple has numerous strategies to avoid paying taxes to foreign governments.
Perhaps the most famous is dubbed the "Double Irish with a Dutch Sandwich," which routes European profits through Irish and Dutch subsidiaries – where corporate taxes are low – and then on to the Caribbean.
"They're not selling a lot of iPads in some of these tax-haven countries where the median income is a few hundred dollars a year, but they're playing accounting games to book the profits there," Rebecca Wilkins, senior counsel for federal tax policy at the non-profit Citizens for Tax Justice, told The Fiscal Times.
Such strategies are so successful that experts estimate Apple pays just 5% in taxes on its foreign profits.
So while Apple pays an effective tax rate of 26% on the profits it earns in the United States, the company's bag of tax-avoiding tricks translate to a global rate of just 13% – low even by the standards of other U.S. multinationals.
Meanwhile, the middle 20% of U.S. wage earners forked over an average of 16% of their income to the IRS.
Of course, Apple isn't the only multinational doing everything it can to dodge taxes – almost all do it to some degree. What this really shows is just how ineffective U.S. corporate tax law has become.
"We have a huge problem with our international tax system," Wilkins told the Fiscal Times. "The fact that corporations are allowed to defer paying the money until they bring the money home causes all kinds of economic distortions and a whole lot of game-playing."
For more on Apple's latest moves that affect investors, check out this post-earnings Apple update.
- Money Morning:
An Apple Stock Dividend Hike Could Help Set Cash Hoards Free
- Money Morning:
French Internet Tax Should Have U.S. Web Giants Very Worried
- The Fiscal Times:
Why Apple, with $145 Billion in Cash, Wants to Borrow Money
- The Wall Street Journal:
Apple's Record Plunge Into Debt Pool
- The Wall Street Journal:
More U.S. Profits Parked Abroad, Saving on Taxes
Apple wows market with record $17 billion bond deal