How To Bring Apple's Overseas Cash Hoard Home

listened in yesterday morning as Apple CEO Tim Cook and CFO Peter Oppenheimer explained what they’re planning to do with Apple’s $98 billion in cash (pay a $2.65 quarterly dividend and buy back a lot of shares). What they really talked about, though, was mainly just what they’re planning to do with the $34 billion in cash the company has here in the U.S. There’s another $64 billion sitting in Apple’s overseas subsidiaries, and according to Oppenheimer, most of it will keep sitting there until U.S. tax laws change:

Repatriating the cash from offshore would result in significant tax consequences under current U.S. law. We have expressed our views with Congress and the administration. We think that the current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate the substantial amount of foreign cash that they have.

The current setup for taxing the foreign operations of U.S. corporations allows them to defer taxes on their profits from international operations until they bring the cash back to the U.S. So the cash usually either just sits there, or is reinvested in factories or acquisitions overseas. Which isn’t what the citizens of the U.S. (or the shareholders of Apple) really want, is it?

Apple and lots of others, including President Bush’s Advisory Panel on Federal Tax Reform back in 2005, have been arguing for a switch to a territorial tax system in which we don’t even try to tax the overseas earnings of U.S. corporations. Apple would be free to bring its money back and pay an even bigger dividend or make big investments in the U.S. or whatever. An economic distortion caused by the tax code — by which foreign corporations operating in the U.S. are favoured over U.S.-based corporations, and U.S. corporations are discouraged from investing here — would be removed. The playing field would be leveled. Everybody wins!

Nothing’s ever that simple when it comes to taxes, though. It’s not that the current system — the product of a political compromise in 1962 — is worth defending. In addition to the distortions mentioned above, the overseas tax deferral gives U.S. corporations strong incentive to move as much of their earnings as possible to low-tax jurisdictions such as Ireland. Despite occasional attempts by the IRS to curtail this phenomenon, corporations keep finding legal ways to do this. “It cannot simply be the luck of the Irish, for example, that explains the extraordinary and systematic profitability of Irish subsidiaries of U.S. firms,” attorney Edward D. Kleinbard in wrote in a 2007 Tax Notes article called “Throw Territorial Taxation From the Train” (it’s so far behind a paywall that I can’t even link to it).

Moving to a territorial system would only increase the incentives to play such games, Kleinbard went on to argue. Under the current system, those profits are stuck in Ireland. Under territorial taxation, companies could do whatever they wanted with them. A bigger and bigger percentage of corporate profits would thus find their way to countries where taxes are low.

U.S. corporations, through growth of their overseas operations and increasingly aggressive tax management, have already dramatically reduced their U.S. tax burden. In 1950, corporate profits equaled 12% of U.S. GDP and corporate taxes 6%; in the third quarter of 2011, profits were up to 13.1% of GDP and corporate taxes down to 2.7%. To put it another way, corporate income taxes provided close to one-third of federal revenue in the 1950s; in fiscal 2011 they provided just 7.9%. Going to a territorial tax system might boost the economy by bringing investment capital back to the U.S., but by encouraging more aggressive tax avoidance it might also speed the decline in corporate tax revenue.

Kleinbard and others (mostly tax lawyers, I’ve noticed) argue that the solution isn’t to give up on taxing foreign income, but to tax it when it it’s earned, with deductions for any foreign taxes paid, instead of letting companies defer taxes indefinitely. (There’s actually a lot more to Kleinbard’s proposed “business enterprise income tax” than that, but I’m trying to keep it simple here.) This would be a true worldwide tax system, and it too would create a level playing field: U.S. corporations would pay the same total taxes regardless of where they located their operations. The Obama administration’s corporate tax reform proposal doesn’t go quite this far, but it does call for an (as yet unspecified) minimum tax on overseas income for U.S. corporations.

It’s a question of whether it’s more important to level the playing field between U.S.-based corporations and foreign corporations (to make sure our corporations can compete), or to level the playing field among U.S. corporations (to make sure everybody pays their fair share of taxes). Not surprisingly, Apple and just about every other U.S.-based corporation are pushing for the former. It also may be a question of whether we want to maximise economic growth or maximise corporate tax revenue, but I’m less sure of that tradeoff. The one thing I am pretty sure of is that sticking with the current tax regime is probably the worst choice of all.

This post originally appeared at Harvard Business Review.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at