Apple Gains Unanticipated Tax Advantage

Repatriation of corporate foreign-held cash is one provision of the 2018 Tax Cut and Jobs Act. To properly analyze the investment potential of companies with foreign holdings, investors must calculate the tax companies must pay on these holdings in 2018. A crucial but easy to overlook factor in calculating these numbers is the start of each company’s fiscal year.

Companies with a fiscal year starting after January 1st gain an advantage

For corporations with fiscal years starting on January 1st, the amount they pay in taxes on foreign cash is pretty well set. Cash will be taxed at 15.5 percent, less liquid assets at 8 percent. However, for companies that have fiscal years starting later in 2018, there is still time to shift assets for tax advantages. Because Apple’s fiscal year starts on October 1st, it could save up to $4.1 billion in taxes on its overseas cash and overseas liquid assets.

The provision allows companies until the start of their fiscal year to total what assets do and do not qualify as cash for tax purposes. Because the tax bill took effect on January 1st, 2018, companies that have a fiscal year starting after January 1st have extra time to gain tax advantages. Conversely, those with a fiscal year starting on January 1st, such as General Motors, have no such time to gain this advantage.

For example, if a company’s fiscal year starts on October 1st, then it has until September 30th to tally what it declares as cash for the tax year. During the nine months until its fiscal year begins, the company is free to adjust its cash positions in tax-advantaged ways. Corporations can reduce taxable foreign cash by distributing portions of it to its U.S. parents as cash dividends. It can then tally a lower amount of taxable foreign cash on its tax returns.

The bill mandates that corporations should use the total of foreign-held cash on a specific date to calculate the 15.5 percent tax rate on foreign-held cash and 8 percent tax rate on liquid assets. Their tax accountants may choose between the amount of foreign-held cash they had on November 2nd, 2017—the day lawmakers introduced the bill in Congress—and the last day of their fiscal year. With the ability to reduce the taxable foreign-held cash over a nine-month period, a company with September 30th as their final day of the fiscal year are expected to use it for purposes of declaring foreign-held cash.

How will the loophole work for Apple?

On November 2nd, 2017, Apple had $234 billion in offshore cash as calculated on a two-year average. Using previous earnings, analysts estimate that the $234 billion could rise to around $289 billion by September 30th. The $55 billion gained during this time period can then be distributed to U.S. parent companies, thus reducing overseas cash back to the $234 billion. This move would save Apple $4.1 billion in taxes. The $4.1 billion is calculated based on the 15.5 percent tax rate for cash and the 7.5 percent tax rate for liquid assets.

This is great news for companies like Apple. They have one last chance to cut their tax bill on overseas cash. No doubt their tax accountants will be working hard this year to maximize this advantage.