H. Jacob Lager

Posts Tagged ‘foreign income’

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Fiscal cliff fallout: Did you survive?

In Business entities, Fiscal cliff, Foreign taxes on January 9, 2013 at 4:39 pm

Fiscal cliff: did you survive?

For roughly 24 hours we dangled – no, fell – off the dreaded “Fiscal Cliff.”  Then Congress saved us.  Well, saved us from uncertainty at any rate.

While Cliff coverage focused primarily on individual tax rates, two very important tax provisions for multinational firms were extended for another year.

First, the “active financing exception,” which allows domestic corporations to exclude foreign  interest income earned by their active foreign subsidiaries was, again, extended until 2014.  This rule was created in 1997 as a temporary measure to help U.S. banks and manufacturers compete internationally.  It has been annually renewed every year since.  We examined it here a few months ago.  So Morgan Stanley, Ford, and GE can rest easy for another twelve months.

Second, Congress also extended the “look-through” treatment of certain payments between related foreign subsidiaries (known as “controlled foreign corporations” or “CFCs”) for one more year.   With this rule, passive income (namely dividends, interest, rents, and royalties) received by one CFC from a related CFC will not be subject to the Subpart F rules.  The Subpart F regime would otherwise force the CFCs’ common U.S. parent to recognize a taxable dividend on such inter-company income.  The key to this exemption is that the character of the income in the hands of the payor CFC must not be Subpart F income itself.  In other words, once one foreign sub earns foreign income from an active trade or business, the multinational family is free to move it around with no U.S. tax consequences.

For another year, at least.

Photo by mith_y.

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Apple: Just your average Joe when it comes to taxes

In deferred income, Foreign taxes on March 26, 2012 at 7:58 am

I have a few rich friends who love to complain about money.  One of them, Joe, has a $2 million mountainside view.  But he’ll swear up and down that he doesn’t know how he’s going to heat his pool, that he’s underwater on his investment properties, and that he’s got cash flow “issues.”

When it comes to taxes, Apple Inc. is like Joe, but with enormous market capitalization.

Unlike most publicly-traded multi-nationals, Apple’s financial statements actually report deferred taxes on its foreign income.  Even though generally accepted accounting principles would allow Apple to not book US tax expenses on its foreign profits if they were deemed permanently invested overseas, Apple nevertheless volunteers this expense.  This allows Apple to publicly claim a worldwide effective tax rate of 24.2 percent.

Of course, Apple doesn’t actually pay that tax unless it repatriates those foreign profits. Which it doesn’t.  Nor does it seem likely to do so in the near future.

On a March 19 conference call with investors, Apple CFO Peter Oppenheimer specifically noted that the potential tax consequences of repatriation deter any such domestic investment.  According to him, U.S. tax laws provide a “considerable economic disincentive to U.S. companies that might otherwise repatriate the substantial amount of foreign cash that they have.” (Of course it helps that Apple’s domestic revenues are strong enough to invest in its business, and to fund its recently-announced dividend and share repurchase program.)

So why does Apple elect to report a larger effective tax rate than required?  Nobody outside the company really knows.  It may be that Apple is simply saving some current profits for future lean times.  If it later decides to permanently not repatriate those foreign profits, Apple could then reverse the tax expense and report those past profits in that future period.   Or Apple could simply be avoiding the negative publicity other multinationals experience their international tax structuring is scrutinized (*cough* GE *cough*).

Or, like Joe, they just like complaining about their bills.