TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, May 3, 2013

NY Times: Apple's Bond Sale Takes Big Bite Out of its Taxes

New York Times:  Apple’s Move Keeps Profit Out of Reach of Taxes, by Floyd Norris:

Why would a company with billions of dollars in the bank — and no plans for a large investment — decide to borrow billions more ... 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. ...

Starbucks could get away with paying no taxes in Britain, and Apple can get away with paying little in the United States relative to the profits it makes, 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.

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