Apple will see up to $47bn potential benefit from tax reform

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Apple will see as much as $47bn slashed from its expected tax liability if Republicans push through their current tax plan, making it the biggest beneficiary of the legislation now working its way through Congress.

The massive scale of the tax cut, based on calculations by tax experts and the Financial Times, has come into focus in recent days as the Senate and House bills have converged over their treatment of the estimated $1.3tn of cash American companies hold offshore. The details of the tax legislation have yet to be finalised.

The potential windfall for the world’s most valuable company stems from the reduced tax rate that would be applied to foreign earnings that it currently holds outside the US. Like many US companies, Apple has opted to leave the bulk of its overseas earnings abroad rather than pay the 35 per cent corporate tax rate that would apply if the money were brought home under the current regime.

The Republican proposals call for taxing that money at rates of no more than 14.5 per cent, whether or not it is returned home. Apple has $252bn in foreign cash and investments, about a fifth of the total overseas holdings for all US companies, according to rating agency Moody’s. Apple’s total dwarfs the $132bn held by Microsoft, the US company with the second biggest foreign cash pile.

It estimates that it would have to pay $78.6bn in taxes if it brought the money back under the current regime. However, with Apple choosing to defer the tax indefinitely, that bill is unlikely ever to come due in full.

Under the Senate version of the tax bill, Apple would immediately have to pay an estimated $31.4bn on its past overseas earnings, according to Richard Harvey, a tax professor at Villanova University who has testified before the Senate on Apple’s tax affairs. That number would drop to $29.3bn if the company were to lose its fight with the European Commission over a €13bn claim of back taxes in Ireland.

The difference between the two numbers is at least $47bn, a figure that exceeds the annual profits of any other US company. Unlike most other US multinationals, Apple has already taken billions of dollars of charges in past years to reflect its potential taxes. It has set aside $36.4bn for those bills — more than the tax charge it is now likely to face — and would likely record the difference as a one-off profit.

“Apple is more realistic than other companies,” said John Robinson, professor of accounting at Texas A&M University. “I think they are trying to be conservative.” Apple has previously indicated in its accounts that it plans to bring back only half its foreign cash hoard. However, executives have made little secret of their hope of repatriating much more, probably for use in stock buybacks.

“Obviously, we would be looking to bring the cash back, and that would give us additional flexibility around our capital return activities,” Luca Maestri, Apple’s chief financial officer, said earlier this year. The special overseas earnings rate of about 14 per cent in the current tax bills represents a huge discount to the standard corporate tax rate, but it is higher than the 10 per cent that President Donald Trump first proposed.

At that rate, Apple’s US tax bill would have been $12.5bn lower still. In addition to the one-off windfall, the Republican tax bills would exclude future foreign profits from US taxes, handing a significant benefit to US multinationals. “Overall, companies like Apple will be happy with it. They are a getting a territorial system and a lower rate. It’s a good deal,” Prof Harvey said.