The Trouble the Profit Causes Apple

Apple had a big issue with the the first quarter of its fiscal year. True, it’s a problem most companies would love to have, but it’s still a problem: Apple has piled up far more profit than it can figure what to do with.

The profit of $18 billion, far more than the earnings of $13 billion in the same quarter of 2013, was more than any company had ever earned in a single quarter. One could go on for a long time with the superlatives about the Apple results, but none of these address the problem. And, unless Apple does something extraordinarily stupid, they won’t go away.

Global difficulty. The difficulty is Apple is a global company. One of the remarkable facts, just sort of mentioned in passing by CFO Luca Maestri, is profit was sharply reduced by the fall of other currencies, especially the Euro, against the US Dollar. But that decline is almost entirely an accounting phenomenon because Apple, like other U.S. based internationals, does everything it can to avoid bringing the money home. There’s an enormous tax savings in leaving the profits outside the U.S.

With no real need for the money, it makes no sense to bring it home. Apple is getting no pressure from stockholders beyond the 47 cents a share. One way to use a lot of cash would be to invest in acquisitions, but Apple doesn’t play that way. It did break its historical course last year in buying Beats for $3 billion, change it probably found under the cushions of Tim Cook’s couch. Its other acquisitions tend to be very small and favor specific reasons –technology, engineers, patents, and the like. ((A favorite suggestion of observers is Apple should buy Tesla. Only a few problems: Tesla is not for sale. Its owner, Elon Musk, says it is unlikely to show a profit for several years. Apple is brilliant at designing, making, and selling phones and Macs but knows nothing about automobiles.))

Beginning in March of last year, Apple returned $130 billion in cash to shareholders, including both cash payments and the repurchase of stock. But the cash on hand of of about $160 billion before that payout is back to $142 billion and still growing after the most recent quarter.

Mounting cash. The biggest reason for the cash accumulation is U.S. tax laws. The profits go untaxed as long as the money remains outside the county, but is subject to considerable taxes when it is returned to the U.S. The extra cash Apple paid to shareholders last year was done using a trick. The money was actually left overseas and the payment was made with cash raised by issuing bonds in the U.S. market. This allowed the money to be “returned” home without encountering taxes. But there is a limit to how much you can handle this was without, among other things, disrupting the financial system.

Apple is just the extreme case of U.S. corporations leaving their profits overseas.  A study by Audit Analytics showed last year that companies listed in the Russell 1000 have $2 trillion in profits outside the U.S. and that has surely grown further.

Tax experts agree that the law on taxation of foreign earnings, beyond the one-shot permission during the Bush administration in 2004, is needed. Proposals range all over the political field, from the liberal Citizens for Tax Justice to the conservative Bush Center. But the chaotic Congress looks like it is unlikely to take any serious tax action. The Republicans who have a majority in the House and Senate have no agreement among themselves. And they have no agreement at all with the Democrats, whose backing is needed in the Senate, or with President Obama.

So, while it is easy to say that reform is needed to create more reasonable rules for the taxation of foreign earning, don’t hold your breath. And Apple will continue filling up Uncle Scrooge’s vaults around the world.