Americans Are Paying Apple Millions to Shelter Overseas Profits

by Andrea Wong

Over the years, Apple Inc. has become the poster child for U.S. multinationals accused of sheltering overseas profits to avoid the IRS. What’s gone largely unnoticed is that it’s been paid more than half a billion dollars by the U.S. government to do just that.Taking advantage of an exemption tucked into America’s Byzantine tax code, Apple stashed much of its foreign earnings—tax-free—right here in the U.S., in part by purchasing government bonds, according to people with direct knowledge of the matter. In return, the Treasury Department paid Apple at least $600 million and possibly much more over the past five years in the form of interest, a Bloomberg review of its regulatory filings shows.

The untold story of Apple and its taxes wends its way from Cork, Ireland, to New York and then Reno, Nevada. But according to tax experts interviewed by Bloomberg News, the maker of iPhones is hardly unique. Many of the biggest U.S. multinationals have seized on the same exemption, which lets them avoid or delay repatriation taxes by buying Treasuries with their overseas cash. (The top 10 alone hold over $100 billion of the bonds.) That, in effect, enables the companies to turn billions of dollars in potential tax liabilities into millions of dollars in taxpayer subsidies—all while they publicly bemoan the sky-high taxes that make it impossible for them to bring the money home.From the government’s standpoint, “it’s as if you are paying someone to borrow a bike that’s actually yours to begin with,” said Reuven Avi-Yonah, a professor who specializes in corporate and international taxation at the University of Michigan Law School. “The whole thing is full of uneasy compromises in order to dance around the reality that most of the money isn’t actually offshore—it’s really here.”

Blurred Lines

The maneuver is perfectly legal and no one is suggesting that it’s a big money maker for Apple or anyone else at today’s low interest rates. If the companies sold the bonds, the cash would still be considered foreign earnings and subject to eventual taxation. What’s more, the interest they earn from buying U.S. debt—which helps finance government spending—is taxable.

But if nothing else, the purchases reflect how the distinction between what’s foreign and what’s not for multinationals often exists only in the world of accounting.

In response to requests for comment, Apple spokesman Josh Rosenstock referred Bloomberg to the company’s annual financial statements filed with the Securities and Exchange Commission, without elaborating further. In the most recent filing, Apple said it paid $10.4 billion in worldwide income taxes for its last fiscal year.

The Internal Revenue Service declined to comment, as did the Treasury Department, which oversees the U.S. government tax agency.

Tax Exemption

The issue of what to do with U.S. companies’ overseas earnings—which has vexed lawmakers for years—has become more urgent with the election of Donald Trump. As a candidate, Trump promised to get companies to bring back some of the $2.6 trillion they hold internationally by enacting a one-time repatriation tax of 10 percent (from the 35 percent rate).

The current exemption, spelled out in Section 956(c)(2) of the U.S. tax code, has been in place since 1962. But over the past two decades, global companies (particularly in technology and pharmaceuticals) began to use it aggressively as one way to reduce the tax bill on their burgeoning overseas profits. It states companies can repatriate income without paying a penny in taxes—as long as it is used to buy Treasuries or other U.S. securities like stocks and corporate bonds.

If a company decides to use the money for any other purpose, like capital spending, it would still be subject to a 35 percent tax. And the money reverts back to accounts designated for foreign cash if the securities are sold. (Part of the reason companies still earmark the cash as “held overseas” for accounting purposes.)

‘Honor System’

“It’s an honor system, a self-assessment system,” said J. Richard Harvey, a former top tax official at the IRS and Treasury Department, who now teaches law at Villanova University. “Many companies like Apple are very aggressive in taking advantage of arguably, loopholes in the law.”

It’s impossible to know precisely how much taxpayer money has been paid out to companies that have parked their cash in U.S. government debt, simply because the multinationals aren’t required to provide detailed breakdowns. However, based on a Bloomberg review of annual financial statements filed with the SEC, conservative estimates suggest the 10 U.S. companies with the most reported cash abroad have received at least $1.4 billion in interest payments over the past five years.