Why would a company with billions of dollars in the bank — and no plans for a large investment — decide to borrow billions more?
High & Low Finance
Floyd Norris writes the High & Low Finance column for the Friday Business section.
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A decade ago, that was a question some short-sellers were asking about Parmalat, the Italian food company that had seemed to be coining money.
It turned out that the answer was not a happy one: The cash was not real. The auditors had been fooled. A huge fraud was being perpetrated.
Now it is a question that could be asked about Apple. Its March 30 balance sheet shows $145 billion in cash and marketable securities. But this week it borrowed $17 billion in the largest corporate bond offering ever.
The answer for Apple is a more comforting one for investors, if not for those of us who pay taxes. The cash is real. But Apple has been a pioneer in tactics to avoid paying taxes to Uncle Sam. To distribute the cash to its owners would force it to pay taxes. So it borrows instead to buy back shares and increase its stock dividend.
The borrowings were at incredibly low interest rates, as low as 0.51 percent for three-year notes and topping out at 3.88 percent for 30-year bonds. And those interest payments will be tax-deductible.
Isn’t that nice of the government? Borrow money to avoid paying taxes, and reduce your tax bill even further.
Could this become the incident that brings on public outrage over our inequitable corporate tax system? Some companies actually pay something close to the nominal 35 percent United States corporate income tax rate. Those unfortunate companies tend to be in businesses like retailing. But companies with a lot of intellectual property — notably technology and pharmaceutical companies — get away with paying a fraction of that amount, if they pay any taxes at all.
Anger at such tax avoidance — we’re talking about presumably legal tax strategies, by the way — has been boiling in Europe, particularly in Britain.
It got so bad that late last year Starbucks promised to pay an extra £10 million — about $16 million — in 2013 and 2014 above what it would normally have had to pay in British income taxes. What it would normally have paid is zero, because Starbucks claims its British subsidiary loses money. Of course, that subsidiary pays a lot for coffee sold to it by a profitable Starbucks subsidiary in Switzerland, and pays a large royalty for the right to use the company’s intellectual property to another subsidiary in the Netherlands. Starbucks said it understood that its customers were angry that it paid no taxes in Britain.
Starbucks could get away with paying no taxes in Britain, and Apple can get away with paying little in the United States, thanks to what Edward D. Kleinbard, a law professor at the University of Southern California and a former chief of staff at the Congressional Joint Committee on Taxation, calls “stateless income,” in which multinational companies arrange to direct the bulk of their profits to low-tax or no-tax jurisdictions in which they may actually have only minimal operations.
Transfer pricing is an issue in all multinational companies and can be used to move profits from one country to another, but it is especially hard for countries to monitor prices on intellectual property, like patents and copyrights. There is unlikely to be a real market for that information, so challenging a company’s pricing is difficult.
“It is easy to transfer the intellectual property to tax havens at a low price,” said Martin A. Sullivan, the chief economist of Tax Analysts, the publisher of Tax Notes. “When a foreign subsidiary pays a low price for this property, and collects royalties, it will have big profits.”
The United States, at least theoretically, taxes companies on their global profits. But taxes on overseas income are deferred until the profits are sent back to the United States. That is why Apple thinks it cannot afford to bring the cash home.
There is something ridiculous about a tax system that encourages an American company to invest abroad rather than in the United States. But that is what we have.
“The fundamental problem we have in trying to tax corporations is that corporations are global,” says Eric Toder, co-director of the Tax Policy Center in Washington. “It is very, very hard for national entities to tax entities that are global, particularly when it is hard to know where their income originates.”
Posted By: ross gerber
Thursday, May 2nd 2013 at 5:35PM
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