Offshore Tax Plan May Mean Perk for Apple and Other American Companies

Multinationals are in line for a windfall from President Donald Trump’s call to cut the tax rate on U.S. companies’ stockpiled overseas earnings, but a select few would do better than others, according to Bloomberg.

Apple and Pfizer may enjoy an extra earnings bump because of their previous accounting maneuvers, while companies including Microsoft, Merck & Co. and Exxon Mobil might have to log a one-time earnings hit, data recorded in their public filings suggest. The difference, which could mean a bookkeeping boost of as much as $7.9 billion for Apple and $5.3 billion for Pfizer, can be found on both companies’ balance sheets. Both have created multibillion-dollar “deferred tax liabilities“ to reflect the U.S. taxes they expect to owe on their accumulated offshore income.

Those liabilities are based on the current U.S. corporate income tax rate of 35 percent, but Trump and congressional Republicans have proposed slashing the rate on accumulated foreign earnings to just 10 percent or lower. If they succeed, Apple and Pfizer would be able to pay their lower-than-anticipated tax bills and then adjust their balance sheets, with one-time additions to their earnings worth billions, tax experts say.

It’s impossible to discern the precise effect on companies since they generally disclose only portions of their tax planning to shareholders every year. Also, it’s unclear how extensively companies could lower their U.S. repatriation taxes further by claiming credits for foreign taxes they’ve already paid on overseas income, the congressional plan and Trump’s plan have been silent on that question.

Microsoft created a relatively small deferred tax liability for its offshore income, so it may have to take a one-time earnings hit of as much as $11.7 billion for its repatriation tax bill. For Merck, the tab could be as much as $5.1 billion, and Exxon’s could be as much as $5.4 billion. The deferral provision has incentivized U.S. companies to amass more than $2.6 trillion in untaxed profit overseas. That’s more than the annual gross domestic product of California, the world’s sixth-largest economy.

Apple Chief Executive Officer Tim Cook said during an exclusive interview with Bloomberg Television last week that he supports the deemed-repatriation approach, and he thinks the resulting tax revenue should be spent on upgrading U.S. infrastructure. Apple had $109.8 billion of “permanently reinvested“ offshore earnings at the end of its 2016 fiscal year. The company also booked a gross deferred tax liability of $31.4 billion, almost all of it attached to a separate pot of untaxed foreign income, according to regulatory filings.

At a 25 percent rate, Apple’s DTL would cover earnings worth $125.6 billion. Combining that total with the company’s permanently reinvested earnings yields a total estimate of $235.4 billion that would be subject to a deemed repatriation tax. Applying a 10 percent tax rate to that amount leads to a tax bill of $23.5 billion, about $7.9 billion less than the deferred tax liability on Apple’s books.