Explaining Apple’s Low Effective Tax Rate And Cash Taxes

The recent decision by the European Commission asking Ireland to recover roughly €13 billion ($14.5 billion) in back taxes from Apple (NASDAQ:AAPL) has brought the spotlight back on the tech titan’s sometimes controversial tax strategies. Below we take a look at how Apple manages to keep its tax expenses low by reconciling the U.S. corporate tax rate, the effective tax rate that Apple recognizes in its income statement and the amount that it actually pays in cash taxes.

We have a $120 price estimate for Apple, which is about 15% ahead of the current market price.

See Our Complete Analysis For Apple Here

International Profits Routed Via Irish Subsidiaries 

Although Apple’s statutory tax rate stands at 35%, the firm’s effective tax rate for fiscal 2015 stood at just 26.4%. This is because a bulk of Apple’s business – 65% of total revenue in FY’15 – comes from outside the United States and much of these earnings are generated through subsidiaries organized in Ireland, which are taxed at very low rates (1% or lower over the last 10+ years, per the European Commission). Apple routes most of its international profits through its Irish subsidiaries by licensing intellectual property rights for technologies that it develops in the U.S. to these entities, which in turn enlist contract manufacturers to produce devices that are then sold across Europe and Asia.

Low Tax Rates On Foreign Earnings, Indefinite Reinvestment 

Being a U.S.-based company,  Apple owes the IRS the difference between taxes paid on earnings abroad and the U.S. tax rate. However, the company only needs to make provisions for the funds that it intends to repatriate; it does not need to provide for U.S. taxes when these earnings are intended to be reinvested outside the U.S. According to data from Apple’s SEC filings, the firm’s tax rate was reduced by about 8.9% in 2015 on account of the indefinitely reinvested earnings from foreign subsidiaries. For instance, as of the end FY’15, Apple’s overseas subsidiaries held $186.9 billion in cash and cash equivalents, of which $91.5 billion was classified as indefinitely reinvested.

Apple’s cash taxes are also significantly lower, standing at about $13.5 billion in 2015 or just 18% of earnings before taxes. While there are many moving parts in reconciling cash taxes and effective taxes, a large portion is likely to stem from deferred payments on foreign earnings. While these taxes are factored into Apple’s effective tax rate, the company only pays the IRS when the sum is repatriated to the U.S.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research