Apple Inc. (AAPL): The Simple Thing You Missed Today

It’s the overseas product sales that primarily get favorable tax treatment, although this is now the bulk of Apple’s business; 66% of revenue last quarter was international.

Out of sight, out of mind
The real problem is the U.S. corporate tax system, which is in desperate need of reform in order to get with the times. At times, lawmakers lost sight of this and instead focused on chastising Apple about its legal tax practices, many of which are employed by other American multinational corporations.

Apple Inc. (NASDAQ:AAPL) acknowledged that the current 35% tax that it would need to pay in order to repatriate cash provides a significant disincentive to do so, particularly when the cost of debt is so low. On average, Apple is paying less than 2% (which is tax deductible) for the $17 billion it just borrowed, far less than the 35% that comes off the top for bringing dollars home.

One senator pointed out that Apple’s overall effective tax rate, after including its minimization strategies, is very similar to Samsung’s. The South Korean conglomerate is easily Apple’s biggest competitor right now, and the American company has to jump through all sorts of loops just to pay a similar rate to foreign competitors. However, there’s still one big difference: Samsung is free to bring money home to South Korea if it wants to use those funds to invest in infrastructure, pay employees, or distribute dividends, among other uses. Apple is afforded no such luxury under current U.S. tax law.

Taking one for the team
A repatriation holiday isn’t a viable long-term solution, either. Cook maintains that such rare holidays aren’t predictable, something businesses prefer. It also perpetuates the idea of hoarding cash overseas in anticipation of the next holiday, since the precedent has been set. A rate in the “single-digits” would encourage free movement of capital, in Cook’s view.

Even though comprehensive corporate tax reform would very well likely result in Apple Inc. (NASDAQ:AAPL) paying more taxes, the Mac maker is all for it if the system becomes modernized and simpler.

The article The Biggest Takeaways From Apple’s Tax Grilling originally appeared on Fool.com and is written by Evan Niu, CFA.

Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.

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