What The U.S. Tax Bill Means For Apple

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Apple (NASDAQ:AAPL) is likely to be a big beneficiary of the U.S. tax overhaul passed last week. The plan would lower the company’s effective tax rate on its U.S. earnings, while providing an opportunity to repatriate some of its massive international cash holdings. Below we take a brief look at how Apple could be impacted by the tax plan.

We have a $181 price estimate for Apple, which is slightly ahead of the market price.

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Lower Taxes On Repatriations, U.S. Earnings

The new tax plan will allow companies to bring funds stashed overseas back into the U.S. under a lower rate. At the end of September 2017, Apple held about 94% of its $269 billion in cash and cash equivalents in its overseas affiliates. Under the GOP plan, Apple would only face a 15.5% tax burden on all the cash upon return to the U.S, compared to a previous repatriation tax rate of roughly 40%. The tax rate on foreign profits will fall to 10.5% and companies will be able to deduct foreign taxes already paid on those profits, meaning that U.S. taxes on those earnings could be minimal. The tax bill will also lower taxes on U.S. profits from 35% to 21%.

Although Apple hasn’t outlined how much cash it would repatriate, under the new bill, the company would owe roughly $39.1 billion if it wanted to repatriate all of its $252.3 billion in overseas cash. The company has already set aside $36.3 billion for these payments, indicating that it could bring back a sizable chunk of its cash to the United States. It’s likely that Apple will use the funds primarily to increase its shareholder returns, improving dividends and share repurchases. The company could also use part of the proceeds to pay down its ~$97 billion in long-term debt. We think it’s unlikely that Apple will carry out any big-ticket acquisitions with its repatriated cash, as its acquisition strategy has typically focused on specific technologies tied to its future product cycles.

That said, there could be some disadvantages stemming from the tax plan as well. According to Reuters, Apple assigns some of its intellectual property to subsidiaries located in countries with lower tax rates and assesses substantial patent royalties on sales. Those royalties are then sent back to these low-tax locations. However, the new tax plan could impose a tax of about 13% on foreign patent income, while lowering taxes on licensing income for patents held in the U.S. from the standard corporate rate of 21% to 13.1%. This implies that irrespective of where Apple holds its patents, it will still have to pay U.S. taxes on revenue assigned to them.

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