The tax overhaul by the Republican controlled Congress that passed this week will give Apple Inc. the ability to return its more than $252.3 billion of its foreign cash without a big tax hit, which has been a long-standing goal of the company.
Other parts of the new measure, such as slashing the corporate tax rate to 21% from 35% are huge benefits to Apple.
But everything did not go Apple’s way. A big difference between the version from the Senate and the final version may actually raise the amount of taxes Apple pays on its profits from its patents that are held abroad, said tax experts.
The treatment of profits from foreign patents is of importance to Apple because shifting the profits overseas was the cornerstone to its tax practices over the past few decades.
The company in effect attributes a big portion of the value of its different products to its patents and the other intellectual property it has like trademarks.
The new measure has two provisions that are designed to make the maneuvering by Apple of its overseas profits related to patents less enticing. One of them creates a tax on income from foreign patents that is expected to be 13%
In addition, a tax break for U.S. held patents will lower the licensing income tax from the new standard rate for corporations of 21% to just 13.1% which is nearly the same as if those patents had been held abroad.
Apple CEO Tim Cook has spoken in the past that the company will bring some of its cash held overseas back home, but how much has never been discussed.
The new repatriation rules are going to change how Apple manages cash, say analysts. Companies will have to now pay a one-time tax of 15% on overseas cash to repatriate it.
After that, they would play 21% tax on profits in the U.S. and a tax of 10.5% on profits that were outside the U.S., but they could deduct foreign taxes that were paid already on the profits, so in most cases foreign profits would be able to be returned without additional taxes being paid.
At 15.5%, Apple would have a tax liability of approximately $39.1 billion on the $252.3 billion it holds overseas. Unlike most other big companies, Apple already has set aside more than $36 billion for the purpose of paying tax on repatriated funds.