Accounting for Income Taxes at Apple, Inc. Case Study

Accounting For Income Taxes at Apple, Inc Name Institution Date  Questions related to permanently reinvested earnings (PREs)1. How much cash, cash equivalents, and marketable securities did Apple shareholders really own, net of the IRS claims on this cash? In other words, if Apple liquidated these investments at the value on the balance sheet, repatriated the cash, and paid a one-time dividend, how much would shareholders receive? (Hint: Assume that all the income that Apple has earned in foreign subsidiaries has been converted into cash or investments. Also, when Apple says, “U.S. income taxes have not been provided,” it is not referring to the payment of taxes, but to the recognition of taxes from a financial reporting perspective.)Apple’s Cash and Cash Equivalents in 2017 was $20,289 million, while the short term investments were 53,892 million for a total of 74,181 million in cash equivalents, and marketable securities (Hopkins, 2017).  The cash and cash equivalent are the actual cash amount, which is illiquid and the short-term marketable securities are sold to raise cash or even reinvested and their maturity is less than one year.   The cash, cash equivalents and marketable securities held by foreign subsidiaries was $ 252.3 billion in 2017 and this would be added to the $ 20.289 million figure. The challenge for Apple is that some of the liquid assets are held overseas and if repatriated, the company would pay higher taxes. Even with the promise of a lower tax payment if the company brings some of their profits to the U.S. there is still reluctance to bring a large share of the reserves overseas.
2. What effect would this transaction from Question 1 have on Apple’s reported earnings? Would it differ between the US GAAP and IFRS?   Since the money is held offshore and permanently invested overseas, it has not been subject to U.S tax, but there have been suggestions that companies with huge offshore cash piles pay more taxes when new tax rules are introduced. Including income from the foreign subsidiaries would result in higher earnings in the U.S and more income tax payments based on the earnings level. At the moment as the ‘repatriation tax’ is to be adopted more companies with large offshore profits will have to pay the one-off charges this year and others 2019. Nonetheless, in the future, the tax rate will be low meaning that Apple and other corporations will still benefit for having exclude earnings from their foreign subsidiaries when calculating earnings and for tax purposes. The U.S. federal and state tax rate would be as high as 40% if Apple was to repatriate offshore cash. Henry, Lin & Yang (2009) reported higher net incomes under the use of IFRS than under U.S. GAAP and they investigated companies’ financial results for 2004 to 2006. Under GAAP , permanently invested overseas are not taxed in United States unless repatriated, while the US tax code requires that US residents and nationals pay taxes wherever they earn income. 3. Alternatively, instead of distributing a dividend, Apple chose to reinvest the foreign earnings by purchasing a company domiciled outside of the United States. How much cash (net of taxes) would Apple have at its disposal for such a purpose?  If Apple chose to reinvest the earnings would have $ 22.5 billion composed of $ 21.12 billion in cash and cash equivalents and deferred income tax expenses of $ 1.382 billion (Hopkins, 2017). The deferred taxes reflect expectation about the amount that the company would pay if it repatriated the taxes. Such amounts are deferred and reinvested until there is a tax holiday, when it is preferable to repatriate the amount when there are lower repatriation taxes.   Apple has set up corporations in the low tax jurisdictions and this is legal, but there are concerns that corporations with high earnings are using the tax avoidance strategies to avoid paying taxes in the US over the long-term (Holtzblatt, Geekie & Tschakert, 2016).4. What effect would the transaction in Question 3 have on reported earnings? Would it differ between the US GAAP and IFRS?The tax offshore profits affect the total earnings, which increase and since corporations must pay taxes on all their earned incomes, this affects the earnings rerecorded. The reported earnings would increase since the repatriated earnings would be used to make investment. Apple has undertaken effective tax planning, which has lowered the company’s taxes, and the IFRS profits from the foreign subsidiaries would incur the lower taxes so long as they are not repatriated and if the company derives income from US sources it will pay tax on this. Under the IFRS, the tax is recognized on the undistributed investment earnings except if “it is probable to control the timing of the reversal of the temporary difference and is probable that the temporary difference will not reverse in the foreseeable future” (IAS, 2018).5. Finally, assume that Congress designated a repatriation tax holiday and allowed U.S. corporations to repatriate foreign cash without paying any U.S. income taxes on them. How would this affect Apple’s net income if it repatriated all its foreign-based cash?  Typically, in worldwide corporate tax systems, the income earned abroad is taxed, but in the case of the US, the global profits are taxed when they are either repatriated or invested or in the US. Apple would pay lower tax than 35% that US corporations paid in the US so long as they brought the offshore holdings. The repatriation taxes would for liquid assets including cash and stock has been proposed to be 15.5% and that of profits in real estate being 8.5%.  Apple would pay lower taxes on the foreign profits compared to when they bring in the profits without the repatriation tax. However, as their net income would increase because of the foreign earned income they would pay more total taxes because of higher earnings than if the cash pile was left offshore.  Repatriating the profits would allow the company’s management to spend money as they wish including research, hiring more staff, increasing employee benefits, increasing dividends and share buybacks.A large share of Apple’s profits are sheltered overseas and sent to the company’s subsidiaries especially in Ireland. Apples’ investment firm also buys U.S. treasuries, and the investments are held in the U.S. in return the company receives interest payments because it holds government debt the interest payments are in turn sent to the Irish accounts. As the U.S has a worldwide tax system, when companies earn money anywhere, they are taxed if they bring the profits to the U.S. in the case of Apple, international profits in lower tax jurisdictions like Ireland have influenced decisions to leave the cash there, where additional taxes would be charged besides the Irish taxes. Bodle (2017) pointed out that the untaxed foreign earnings are an untouchable tax base since the huge cash held overseas will be taxed only when the earnings are brought back to the US.Questions related to Apple’s balance sheet:6. How much in deferred tax assets/liabilities are on Apple’s balance sheet as of 2015 and where do they appear? What is the single-largest component of these deferred taxes and from what does it result?The deferred tax arises from the existence of temporary differences, which generate deferred assets and liabilities. Thus, temporary differences will generate liabilities and deferred tax assets, depending on whether the difference between the accounting result, and the tax base results in higher or lower payment of the income tax in the future. The deferred tax assets are under the current assets in the balance sheets and the deferred revenue under the current liabilities.  In 2015, the deferred tax assets were $10. 911 billion, while the deferred tax liabilities were ($27.171) billion (Hopkins, 2017). Deferred revenue is listed under the liabilities on the balance sheet, since a company receives unearned revenue when Apple has already received payment. In 2015, the deferred income tax expense was $1. 382 billion, which was composed of 3, 408 million for federal deferred income taxes the largest component of the deferred taxes ($220) million...