Several Billion (More) Reasons to be Scared of Apple
Cory is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What if I told you that sitting in France and Germany somewhere you had a couple of billion dollars waiting for you to bring back home; you’d probably be excited, wouldn’t you?
Well that is exactly the case for tech giant Apple (NASDAQ: AAPL). This news is certain to be swept under the rug in light of APPL’s epic miss on their Q3 earnings report, but it is something people need to be aware of before they jump on the Cupertino bandwagon. Apple, like many multinationals, keeps most of its overseas profits - big surprise here - overseas. The tax burden on repatriating what some analysts say could be up to $10 billion in profits would be monumental. So they keep it overseas, and while they do pay some income tax to the nation where the sale is made, some clever accounting keeps the tax burden markedly lower than it would in the US.
Here’s the catch though, Apple sets a portion of this income aside for assumed repatriation, and notes the tax burden as a liability on its balance sheet. And as the company grows its overseas (especially European business) that liability is growing as well…even though APPL has yet to pay a dime of American taxes on this money.
So what are they going to do with the money, and what does it mean for us as investors? Apple is hopeful (and lobbying for) a tax holiday similar to the one the Bush Administration enacted in 2004, where the overseas money can be repatriated at a low rate (around 5%). Along with companies like Oracle (NASDAQ: ORCL), Microsoft (NASDAQ: MSFT), and Google (NASDAQ: GOOG), Apple is lobbying based on job creation and economic stimulation – though these impacts did not come to fruition in 2004, so I wouldn’t bet on it happening again.
As investors, we have to consider not only the analytical state of a company and the market, but keep our finger on the emotional pulse of it as well. I can’t imagine that Apple's civil responsibility would be held in high regard when people realize they are trying to keep billions from the US Government – though I would argue that Apple could reinvest this money more efficiently in the economy than the Main Streeter’s can. Similarly, Apple is unable to use this money to purchase American companies, reinvest in new products, and it is still being reported as a liability.
The takeaway here is two-fold. 1) Should this information come to the mainstream, a negative sentiment about Apple not fulfilling its “civic tax duties” could affect their value in the market and 2) the lack of desire to repatriate for investment in new companies and technologies, signals to this investor that Apple may be closer to a ceiling than some of us think.
Cory Jez has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.