A brief outlook on the impact of the U.S. tax code on Apple Inc

Analysts opine, the revised repatriation rules are likely to be the pivot in Apple’s cash strategy.

With the U.S. Congress passing the Republican-led tax overhaul bill, one of Apple’s long standing goal of repatriating $252.3 billion in foreign cash without a major tax hit is within reach.

Other provisions of the bill which will benefit Apple is the corporate tax rate of 21% from its earlier 35%.

However, according to tax experts, the critical difference between the Senate version of the U.S. tax overhaul bill and its final version could in fact see an increase in the amount of taxes that Apple will have to pay on its profits from patents held abroad.

The treatment of income from foreign patents is critical to Apple since for decades it was the cornerstone of its tax practices.

In the past, Apple has attributed a large portion of the value of its products on trademarks and patents and other intellectual properties, and have assigned values to them that are proportional to overseas sales in countries that have low tax rates. The tech giant also assesses significant patent royalties on sales, which are redirected to low tax countries, like Ireland.

The new U.S. tax bill has a pair of provisions that make such maneuvers less attractive. According to Gavin Ekins, a research economist with the Tax Foundation, one of the provisions of the tax bill creates a minimum tax on income from foreign patents to around 13%.

On the other hand, the bill provides a tax break from patents held in the U.S. and imposes a tax rate, on licensing income from the standard corporate rate, of 21% to 13.1% – more or less the same if the patents were held abroad.

The Republicans “don’t want the tax rate to be a consideration in where you put your intellectual property,” said Ekins. “The whole intention (of the measures) is to bring back that intellectual property to the United States.”

Parts of the U.S. tax code is similar to “patent boxes” employed in the U.K., for example, which are designed to to encourage firms to generate and keep their innovations at home.

Interestingly though, the final version of the bill, omits any explicit way for patents held overseas to be returned to the U.S. without being taxed.

Congress “screwed it up,” said Ed Kleinbard, a tax professor at the University of California and former chief of staff of the U.S. Congress’s Joint Committee on Taxation. “It’s kind of weird that they created the patent box, but didn’t give a pass to bring things back.”

For those patents that remain overseas, the minimum tax on foreign patent profits means Apple might actually face higher cash taxes abroad.

“I‘m willing to bet a dollar that 13.1 percent is higher than Apple’s actual non-U.S. tax rate,” said Kleinbard. “It’s entirely possible their cash tax bill going forward would go up based on this alone.”

While Tim Cook, Apple’s CEO, has said, the company intends to bring back a portion of its overseas cash back home, he has however declined to quantify the amount.

As per Gary Hufbauer, a fellow with the Peterson Institute for International Economics, the tax cut in the final version of the U.S. tax bill is unlikely to spur Apple to manufacture its iPhones in the U.S. However, its U.S. suppliers are set to gain from lower taxes.

Apple had earlier said it spent $50 billion on them in 2016.

According to Hufbauer, if Apple’s suppliers pass on their tax benefits to Apple, it could lower the prices of Apple’s products and make them more competitive against foreign rivals as well as entice Apple to spend more with them.

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Categories: Creativity, Economy & Finance, Entrepreneurship, HR & Organization, Regulations & Legal, Strategy

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