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<h1 id="hed" class="article-title copy-width">Americans Are Paying Apple Millions to Shelter Overseas Profits</h1>
<div class="bydek copy-width">
by <a class="dvz-t-hide" href="https://twitter.com/MsAndreaWong" alt="@MsAndreaWong" target="blank">Andrea
Wong</a><span class="dvz-t-show-inline">Andrea Wong</span>
<div>December 7, 2016</div>
</div>
</section>
<!-- Copy goes here -->
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<p>Over the years, Apple Inc. has become the poster child for U.S. multinationals accused of sheltering overseas
profits to avoid the IRS. Whats gone largely unnoticed is that its been paid more than half a billion dollars
by the U.S. government to do just that.</p>
<p>Taking advantage of an exemption tucked into Americas Byzantine tax code, Apple stashed much of its foreign
earnings—tax-free—right here in the U.S., in part by purchasing government bonds, according to people with
direct knowledge of the matter. In return, the Treasury Department paid Apple at least $600 million and possibly
much more over the past five years in the form of interest, a Bloomberg review of its regulatory filings shows.
</p>
</section>
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<div class="copyDiv" style="opacity: 1;">The interest payments flow back to Apples Irish accounts. The U.S.
Treasury Department has paid Apple roughly <span class="emphRed">$600 million</span> in the form of interest.
</div>
<div class="nav">
<div class="circle"></div>
<div class="circle"></div>
<div class="circle"></div>
<div class="circle"></div>
<div class="circle"></div>
<div class="circle active"></div>
</div>
</div>
<div class="mobile" id="mobile-graphic">
</div>
</section>
<section class="copy-block copy-width">
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<p>The untold story of Apple and its taxes wends its way from Cork, Ireland, to New York and then Reno, Nevada.
But according to tax experts interviewed by Bloomberg News, the maker of iPhones is hardly unique. Many of the
biggest U.S. multinationals have seized on the same exemption, which lets them avoid or delay repatriation taxes
by buying Treasuries with their overseas cash. (The top 10 alone hold over $100 billion of the bonds.) That, in
effect, enables the companies to turn billions of dollars in potential tax liabilities into millions of dollars
in taxpayer subsidies—all while they publicly bemoan the sky-high taxes that make it impossible for them to
bring the money home.</p>
<p>From the governments standpoint, “its as if you are paying someone to borrow a bike thats actually yours to
begin with,” said Reuven Avi-Yonah, a professor who specializes in corporate and international taxation at the
University of Michigan Law School. “The whole thing is full of uneasy compromises in order to dance around the
reality that most of the money isnt actually offshore—its really here.”</p>
<p></p>
<h3>Blurred Lines</h3>
<p></p>
<p>The maneuver is perfectly legal and no one is suggesting that its a big money maker for Apple or anyone else
at todays low interest rates. If the companies sold the bonds, the cash would still be considered foreign
earnings and subject to eventual taxation. Whats more, the interest they earn from buying U.S. debt—which helps
finance government spending—is taxable.</p>
<p>But if nothing else, the purchases reflect how the distinction between whats foreign and whats not for
multinationals often exists only in the world of accounting.</p>
<p>In response to requests for comment, Apple spokesman Josh Rosenstock referred Bloomberg to the companys annual
financial statements filed with the Securities and Exchange Commission, without elaborating further. In the most
recent filing, Apple said it paid $10.4 billion in worldwide income taxes for its last fiscal year.</p>
<p>The Internal Revenue Service declined to comment, as did the Treasury Department, which oversees the U.S.
government tax agency.</p>
<p></p>
<h3>Tax Exemption</h3>
<p></p>
<p>The issue of what to do with U.S. companies overseas earnings—which has vexed lawmakers for years—has become
more urgent with the election of Donald Trump. As a candidate, Trump promised to get companies to bring back
some of the $2.6 trillion they hold internationally by enacting a one-time repatriation tax of 10 percent (from
the 35 percent rate).</p>
<p>The current exemption, spelled out in Section 956(c)(2) of the U.S. tax code, has been in place since 1962. But
over the past two decades, global companies (particularly in technology and pharmaceuticals) began to use it
aggressively as one way to reduce the tax bill on their burgeoning overseas profits. It states companies can
repatriate income without paying a penny in taxes—as long as it is used to buy Treasuries or other U.S.
securities like stocks and corporate bonds.</p>
<p>If a company decides to use the money for any other purpose, like capital spending, it would still be subject
to a 35 percent tax. And the money reverts back to accounts designated for foreign cash if the securities are
sold. (Part of the reason companies still earmark the cash as “held overseas” for accounting purposes.)</p>
<p></p>
<h3>Honor System</h3>
<p></p>
<p>“Its an honor system, a self-assessment system,” said J. Richard Harvey, a former top tax official at the IRS
and Treasury Department, who now teaches law at Villanova University. “Many companies like Apple are very
aggressive in taking advantage of arguably, loopholes in the law.”</p>
<p>Its impossible to know precisely how much taxpayer money has been paid out to companies that have parked their
cash in U.S. government debt, simply because the multinationals arent required to provide detailed breakdowns.
However, based on a Bloomberg review of annual financial statements filed with the SEC, conservative estimates
suggest the 10 U.S. companies with the most reported cash abroad have received at least $1.4 billion in interest
payments over the past five years.</p>
</section>
<section class="copy-block copy-width">
<div class="chartHed">Taypayer Contributions</div>
<div class="chartDek">Treasury has paid at least $1.4 billion in interest to big multinationals since 2012</div>
<div class="desktop">
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<g>
<text transform="matrix(1 0 0 1 1.1231 298.8179)"
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</g>
<rect x="1" y="249" style="fill:#1DCC92;" width="63" height="20"></rect>
<g>
<text transform="matrix(1 0 0 1 1.1231 244.1587)"
style="fill:#262626; font-family:'BWHaasText-65Medium'; font-size:18px;">Amgen</text>
</g>
<rect x="1" y="194" style="fill:#1DCC92;" width="188" height="20"></rect>
<g>
<text transform="matrix(1 0 0 1 1.1231 188.9395)"
style="fill:#262626; font-family:'BWHaasText-65Medium'; font-size:18px;">Google</text>
</g>
<rect x="1" y="140" style="fill:#1DCC92;" width="200" height="20"></rect>
<g>
<text transform="matrix(1 0 0 1 1.1231 134.6982)"
style="fill:#262626; font-family:'BWHaasText-65Medium'; font-size:18px;">Johnson &amp; Johnson</text>
</g>
<rect x="1" y="85" style="fill:#1DCC92;" width="532" height="20"></rect>
<g>
<text transform="matrix(1 0 0 1 1.1231 80.2129)"
style="fill:#262626; font-family:'BWHaasText-65Medium'; font-size:18px;">Cisco</text>
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<g>
<text transform="matrix(1 0 0 1 1.1231 26.1075)"
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</g>
<g>
<text transform="matrix(1 0 0 1 30.9998 319.8176)"
style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$20M</text>
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<g>
<text transform="matrix(1 0 0 1 68.9998 265.1586)"
style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$50M</text>
</g>
<g>
<text transform="matrix(0.9933 0 0 1 193.9999 210.1191)"
style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$150M</text>
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<g>
<text transform="matrix(1 0 0 1 205.9998 155.6987)"
style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$160M</text>
</g>
<g>
<text transform="matrix(1 0 0 1 537.9998 101.3931)"
style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$430M</text>
</g>
<text transform="matrix(1 0 0 1 737.6668 47.1074)"
style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$590M</text>
</svg>
</div>
<div class="mobile">
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</tspan>
<tspan x="59.2" y="0" style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$20M
</tspan>
</text>
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<g>
<text transform="matrix(1 0 0 1 0.123 248.611)">
<tspan x="0" y="0" style="fill:#262626; font-family:'BWHaasText-65Medium'; font-size:18px;">Amgen
</tspan>
<tspan x="65.4" y="0" style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$50M
</tspan>
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<rect y="199" style="fill:#1DCC92;" width="90" height="20"></rect>
<g>
<text transform="matrix(1 0 0 1 0.123 193.185)"
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<text transform="matrix(0.9933 0 0 1 66.4878 193.185)"
style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$150M</text>
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<rect y="144" style="fill:#1DCC92;" width="96" height="20"></rect>
<g>
<text transform="matrix(1 0 0 1 0.123 138.5182)">
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&amp; Johnson </tspan>
<tspan x="172.7" y="0" style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$160M
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<g>
<text transform="matrix(1 0 0 1 0.123 83.3655)">
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</tspan>
<tspan x="53.2" y="0" style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$430M
</tspan>
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</tspan>
<tspan x="54.5" y="0" style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$590M
</tspan>
</text>
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</g>
</svg>
</div>
<div class="chartNote">Estimated figures. See methodology <a href="#methodology">below</a>.</div>
</section>
<section class="copy-block copy-width">
<!-- This is how you would load some paragraphs from `story-copy.aml` but feel free to modify to your wishes -->
<p>Apple, which has more than doubled those holdings of Treasuries to $42 billion since 2012, received the most in
interest payments over that time, the data show. In the same span, the Treasury has paid Cisco Systems Inc.
roughly $430 million, while Alphabet Inc. (Googles parent) has gotten about $160 million. (The tally excludes
Microsoft Corp., Qualcomm Inc., and Coca-Cola Co., which are in the top 10 but dont provide a detailed
accounting of their investments.)</p>
<p></p>
<h3>Ballooning Interest</h3>
<p></p>
<p>The companies in the Bloomberg review, which also include Johnson &amp; Johnson, Amgen Inc., Gilead Science
Inc. and Oracle Corp., either declined to comment or didnt respond to requests seeking comment.</p>
<p>The interest payments have ballooned as theyve amassed more and more Treasuries with their overseas profits.
Together, these 10 multinationals, which control almost 20 percent of all the cash held abroad by American
corporations, have boosted their investments in government bonds to $113 billion from $67 billion over the past
five years, data compiled by Bloomberg show.</p>
<p>Blaming U.S. companies for following the tax code, however complex or flawed, is misguided, says Richard Lane,
a senior analyst at Moodys Investors Service.</p>
<p>“If these companies dont need the money in the U.S., theres no incentive to give Uncle Sam” that money in
taxes, he said. “What sane chief financial officer, whos doing their fiduciary duties to shareholders, would
pay money to some entity for no good reason? If theres a moral issue, Im not sure whether theres immorality
to that.”</p>
</section>
<section class="copy-block copy-width">
<div class="chartHed">Treasured Assets</div>
<div class="chartDek">The top corporate holders of U.S. government bonds</div>
<div class="desktop">
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<g>
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<g>
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style="fill:#262626; font-family:'BWHaasText-65Medium'; font-size:18px;">Apple</text>
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<div class="mobile">
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Johnson </tspan>
<tspan x="172.7" y="0" style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$14.6B
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<tspan x="66.4" y="0" style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$20.9B
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<text transform="matrix(1 0 0 1 3.662109e-04 27.1075)">
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<tspan x="54.5" y="0" style="fill:#1DCC92; font-family:'BWHaasText-55Roman'; font-size:18px;">$41.7B
</tspan>
</text>
</g>
</svg>
</div>
</section>
<section class="copy-block copy-width">
<!-- This is how you would load some paragraphs from `story-copy.aml` but feel free to modify to your wishes -->
<p>Nevertheless, the purchases shed light on how multinationals have blurred the definitions of onshore and
offshore earnings.</p>
<p>In Apples case, more than 90 percent of its $238 billion cash hoard is considered “overseas” in its accounting
statements. Most of it belongs to the Cupertino, California-based companys Ireland units. But like many
multinationals, Apples cash sits in custodial accounts with U.S.-based banks such as JPMorgan Chase &amp; Co.
and State Street Corp., said people with direct knowledge of the matter, who asked not to be identified because
theyre not authorized to speak on the issue.</p>
<p>Apple typically directs Wall Street bond dealers and big money managers like BlackRock Inc. and Pimco to buy
Treasuries at debt auctions and in the secondary market on behalf of its Irish subsidiaries, all from a
nondescript, three-story building in Reno, Nevada—a state with no corporate taxes, the people said. Thats where
its internal investment firm, Braeburn Capital, is housed. Apple established the unit in 2005 to manage its cash
and short-term investments.</p>
<p></p>
<h3>Tax Haven</h3>
<p></p>
<p>As for Ireland, Apple isnt alone. Nine of the 10 U.S. companies with the most cash abroad have foreign
subsidiaries there.</p>
<p>Over the years, lax Irish regulations have encouraged multinationals to pursue aggressive accounting practices
that enabled them to shift much of their profits to those subsidiaries and minimize U.S. tax liabilities,
according to tax experts.</p>
<p>In one of the more notable examples thats drawn particular scrutiny, companies will book a disproportionate
amount of revenue as “offshore” by claiming the underlying technologies are owned by their Irish units—even if
the intellectual property originated in the U.S.</p>
<p>Apple went even further. According to a 2013 report by the U.S. Senate Permanent Subcommittee on
Investigations, it exploited gaps in U.S. and Irish laws so that it didnt have a tax home anywhere.</p>
<p>The company is already in hot water with the European Union. Regulators ordered Apple to pay $14.5 billion in
back taxes in August after concluding it paid an effective tax rate of 0.005 percent in 2014 because of
preferential Irish treatment. Last week, Apple called the EU decision “seriously flawed.”</p>
<p></p>
<h3>Fundamental Disagreement</h3>
<p></p>
<p>In November, Ireland filed an appeal against the ruling after repeatedly saying the country “fundamentally
disagrees” with the analysis.</p>
<p>“They dont want to pay taxes, but theyre using the U.S. financial system to benefit from our laws, security,
productivity and all the rest of it,” said Elise Bean, the former chief counsel who led the Senate probe into
Apples tax practices. “Theyre using the money to buy U.S. Treasuries, which is so ironic.”</p>
<p>Using Irish subsidiaries to funnel all that cash into Treasuries may help explain a bond-market curiosity
thats emerged in recent years: how Ireland, a nation of less than five million, managed to amass $271 billion
of U.S. government bonds, based on data compiled by the Treasury, and become Americas largest foreign creditor,
after China and Japan.</p>
<p>Whatever the case, the need to address companies untaxed profits may be one of the few things Republicans and
Democrats can agree on. During the campaign, both Trump and opponent Hillary Clinton proposed one-time tax
breaks on overseas earnings (a so-called repatriation tax holiday) to help fund competing infrastructure plans.
</p>
<p></p>
<h3>Really Foolish</h3>
<p></p>
<p>Yet absent a wholesale tax overhaul to close the repatriation loophole, such one-offs are Band-Aids that will
only make things worse over time, according to H. David Rosenbloom, an attorney at Caplin &amp; Drysdale and the
director of the international tax program at New York University School of Law.</p>
<p>He pointed to a similar 2004 tax holiday under President George W. Bush, which ultimately led companies to
accumulate more profits abroad after it expired. Almost all the repatriated cash during that time was used for
shareholder rewards and executive bonuses—rather than investment and hiring in the U.S. that many companies
promised.</p>
<p>Last time, “it just encouraged companies to send more money abroad and wait for the next amnesty,” he said. “It
would be really foolish to do.”</p>
</section>
<section class="footer copy-width" id="methodology">
<br>
<p class="source">With assistance from Yun Li and David Kocieniewski</p><br>
<p class="source">
Graphics by:
<a class="dvz-t-hide" href="https://twitter.com/BlackiLi" alt="@BlackiLi" target="blank">Blacki
Migliozzi</a><span class="dvz-t-show-inline">Blacki Migliozzi</span>
and
<a class="dvz-t-hide" href="https://twitter.com/homiedonttweet" alt="@homiedonttweet" target="blank">Christopher
Cannon</a><span class="dvz-t-show-inline">Christopher Cannon</span>
</p>
<br>
<p class="source">Edited by: Michael Tsang</p>
<br>
<p class="source">Source: U.S. Securities and Exchange Commission, Bloomberg reporting</p>
<br>
<p class="source">Methodology: Based on conversations with people with direct knowledge of the matter, estimates
for the interest paid by the top 10 multinationals were made by taking the amount of Treasuries they held with
their overseas cash during each fiscal year, and then taking the average interest rate on two-year U.S. notes
sold at auction in each of those periods. The calculations assume the securities are held to maturity. The data
exclude Microsoft, Qualcomm and Coca-Cola, which are among the top 10, but dont provide a detailed accounting
of their investments. Oracle, which holds $48 billion in cash abroad, has minimal investments in U.S. government
debt.</p>
<br>
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