Apple's (AAPL) Overseas Cash Hoard is a Lot Less Than You Think

November 4, 2016 10:45 AM EDT

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Apple's (NASDAQ: AAPL) stock, dead money for over a year, has perked back up recently amid a better-than-expected iPhone 7 launch and Samsung's Galaxy 7 Note woes. In addition, investors expect the company to repatriate its more than $216 billion in overseas cash next year.

Comments from CEO Tim Cook over the summer that he expects 2017 to be the year to repatriate has sparked investor excitement. In fact, noted Apple investor David Einhorn of Greenlight Capital said in his third quarter letter to investors that he believes part of Apple's outperformance "may be explained by increased speculation about a foreign cash repatriation deal sometime next year."

While the repatriation of this gargantuan amount of money seems on the surface to be a good reason to get excited, a closer look at Apple's overseas cash suggests much of this excitement may be misplaced.

For starters, Apple has two lumps of different overseas cash. One lump is $106 billion, which the company has taken a deferred tax liability of $31.4 billion on its books. The other lump is $109.8 billion - the company estimates an unrecognized deferred tax of $35.9 billion on this lump. This bring Apple's total unpaid tax liability to $67.3 billion.

The first lump, Apple is signaling it plans to bring back, explains Matthew Gardner, Executive Director of Institute of Taxation and Economic Policy (ITEP). The second lump, Apple is saying it never plans to bring back, unless of course it gets a tax holiday.

While it is unclear what exactly a tax holiday would look like, a 2004 tax holiday allowed repatriation at a 5.25% tax rate. Meanwhile, a bipartisan proposal from Senators Barbara Boxer (D) and Rand Paul (R) proposed a 6.5% rate. Republican presidential nominee Donald Trump proposed a 10% no-strings-attached tax on any overseas cash held by U.S. companies, regardless if they bring it back or not. President Obama has a 14% proposal. Gardner said any smartly-designed tax holiday legislation, however, would tax Apple's first lump of overseas cash at the current corporate tax rate.

In addition to the potential tax hit of repatriation, the company may be hit with an Irish tax bill of an estimated $19 billion (EUR 13B plus interest) if the European Commission has its way. It is also important to note that Apple has already taken on $75 billion in debt as a way to tap its overseas cash without repatriating it. The company used most of this money to fund its aggressive share repurchase plan.

So, if Apple repatriates in 2017, how much is really left to bring back?

If Apple brings back the first lump of $106 billion, it could be paying $31.4 billion in tax on that money. That would bring the total down to $74.6 billion. Given the company already borrowed $75 billion on this cash the net impact is essentially zero.

On the second lump, because of the estimated Irish EU tax and penalty of $19 billion, the company would likely at least leave this much overseas. This brings the total down to $90.8 billion. Under a best case scenario, the company can bring back the second lump with a 5.25% tax, or $4.8 billion. Under a more likely scenario the company will be paying closer to 10%, or $9.8 billion. So in realty, Apple's overseas cash hoard is really closer to $80 billion. While nothing to sneeze at, it is a far cry from the $216 billion being touted by some.



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