Guess Who Else Wields Apple's Secret Weapon


When tech-industry analyst Katy Huberty of Morgan Stanley suggested that Apple (NAS: AAPL) should put its enormous cash pile to work, she also highlighted a seldom-discussed Apple fact. Unlike most American multinationals, Apple likes to set aside funds to prepay some of those pesky repatriation taxes. In other words, an Apple dollar in Tokyo is worth two Google (NAS: GOOG) dollars in Ireland. Metaphorically speaking, of course.

The spark
Huberty noticed that only $29 billion of Apple's $78 billion cash reserves are found on American soil. This makes sense, since less than 36% of Cupertino's trailing sales came from the Americas. But it's also an obstacle to employing Apple's cash in domestic investments like share buybacks, dividend payments, or constructing fancy new headquarters.

Apple is far from alone in this predicament. Fellow Fool Morgan Housel points out that tech giants from Microsoft (NAS: MSFT) to Cisco Systems (NAS: CSCO) and Oracle (NAS: ORCL) are in the same boat, and lobbying hard for a holiday on repatriation taxes.

But like I said, Apple has a secret weapon here. If that tax holiday on foreign profits never comes, well, at least this particular tech titan has prepared for a rainy day. According to Huberty's research, Apple actually pays U.S. income tax on about half of its overseas earnings. Hence, about half of the foreign-based cash, or $24 billion, is already liquid for all intents and purposes.

"U.S. companies rarely accrue U.S. tax expense for foreign income, and we believe Apple is the only company in our coverage to accrue such a significant portion," she says.

That tickled my curious bone. How unique is Apple's foreign tax policy among its peers? So it was time to dive into a pile of 10-K filings to find out more.

Get me out of this nut!
In a nutshell, here's what I found:


Total Tax Rate

Effective Domestic Tax Rate

Effective Foreign Tax Rate









Google (NAS: GOOG)












Procter & Gamble (NYS: PG)




Johnson & Johnson (NYS: JNJ)




Data taken from SEC filings, referring to results for each company's fiscal year 2010.

I threw in P&G and J&J as examples of global non-tech giants. These guys are sending smaller checks to the government than any of our proverbial Silicon Valley champions.

From 2008 to 2010, Apple collected a cool $24 billion in foreign pretax earnings. At the end of fiscal year 2010, $12.3 billion of foreign income had not had U.S. income taxes collected. Given these numbers, I think Huberty's assumption is in the right ballpark when she says that about half of Apple's repatriation issue has been headed off at the pass.

By contrast, Google has seen $14.4 billion of taxable overseas earnings in the past three years and sits on $17.5 billion of unresolved foreign tax issues. If Google covers any of these liabilities ahead of time, the covered portion is certainly much smaller than Apple's.

So how come Apple's domestic tax rate looks so plump and the foreign side so skimpy, if the company really pays more overseas levies than others? Because it ain't that easy, Jack.

What Apple does is allocate most of its foreign profits to extremely low-tax territories. Ireland is a popular locale, Bermuda another. And the repatriation prepayments show up as domestic payments, because the money goes to Uncle Sam.

Because of this process, a domestic rate far above the 35% American corporate income tax looks to me like some form of repatriation payments, particularly if coupled with a way-low foreign take.

To each his own
So it looks like Mr. Softy and Big G also dabble in prepayments, though not nearly as heavily as Apple. Oracle, on the other hand, seems happy with some of its profits landlocked on distant continents.

Cisco appears to prepay a fair amount of repatriation taxes in the light of its tax-rate splits. To be sure, the company does engage in some form of Double Irish or Dutch Sandwich operations: Subsidiaries with telltale names like Cisco Systems Finance International and Cisco Systems International Holdings are based in tax havens such as Ireland and Bermuda, respectively. Cisco Systems (Switzerland) Investments throws a curveball -- despite its Alpine name, the operation is actually another Bermudan holding.

Yet the company pays more U.S. income taxes than it collects in domestic pre-tax earnings. It's not the massive Apple-style paydown you'd expect, though: With $21.4 billion in pretax income from abroad in three years, Cisco ended 2010 with a massive $31.6 billion overhang.

Fast-forward to the end of 2011, and Cisco had gained another $6.6 billion in foreign pretax earnings while growing the unpaid repatriation-prone balance by $5.1 billion. So the company appears to have prepaid about 22% of its repatriation obligations -- greater than some peers but less than Apple.

Winners and losers
Foreign tax policies may sound academic, but these money flows have a direct bearing on down-home earnings and cash flows. Apple and Cisco are effectively juicing the quality of their earnings, and they're prepared for extraordinary events that would require extra cash back home. Oracle, on the other hand, is the polar opposite. How desperate is Larry Ellison to meet earnings estimates now at the expense of potential trouble later?

Food for thought, indeed. If all this tax talk is giving you a headache, you should check out the lighter side of the Fool for a while. In this free report, you'll find an easily understood and rambunctiously successful company on a consumer-friendly mission in Latin America. Grab your copy of "The Hottest IPO of 2011" right now -- it's 100% gratis.

At the time thisarticle was published Fool contributorAnders Bylundowns shares of Google, but he holds no other position in any company mentioned. The Motley Fool owns shares of Microsoft, Oracle, Apple, Google, Cisco, and Johnson & Johnson and has created a bull call spread position on Cisco.Motley Fool newsletter serviceshave recommended buying shares of Johnson & Johnson, Microsoft, Procter & Gamble, Apple, Cisco, and Google, creating a diagonal call position in Johnson & Johnson, and creating bull call spread positions in Apple and Microsoft. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. You can check outAnders' holdings and a concise bio, follow him onTwitterorGoogle+,or peruseour Foolish disclosure policy.

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