Any accountants here?

IronWolf

I have a question relating to US repatriation tax and the income statement.

Companies like Apple are well known for shuffling profits off shore and keeping the money there to avoid US repatriation tax. But what Im not 100% sure on is how this is accounted for.

My understanding is that they will charge all tax (including repatriation) to the income statement, but not actually pay it and instead transfer the avoided tax to the 'deferred tax liability' on the balance sheet. Is that correct?

Does that mean the deferred tax liability on the balance sheet equals the gross amount they would pay if repatriating all their cash?

somethingcorporate

Deferred tax liability does need to be paid, so I am not sure your understanding is correct. My understanding was they were actually reducing profits that tax was due on - that is what companies such as Starbucks/Amazon do by various internal charging - less profit = less tax and it also means they can base their "charging" units in lower tax jurisdictions and profit accumulate there rather than where the products are sold.

Any

Deferred tax liability is a tax liability, just deferred into another period.
Often comes about because of different treatment in accounts and in law and stuff like that.

If they are running profits through offshore companies, there is never any tax liability arising, or lowere tax liabitity is arising.. so it would not be reported. The Net profit after interest and tax is the net profit. The tax is calculated on the basis of the country where it is operating - taxable. So if it is only 10%, they will only account for 10%, not for 23% as it is here and then hide the rest somewhere.

Edit: They are minimising the profits in the country with the highest tax, but showing them elsewhere where the tax is lower. For example. One of the ways.
Is this clearer now? Not sure I explained it properly.

antrobus

As I understand it, the issue with Apple is that it is a US company that makes a lot of profit in places other than the US. Where it to 'repatriate' these profits to the US in order (for example) to fund the payment of a dividend to its shareholders it would have extra US tax to pay. So Apple has decided not to 'repatriate' these profits to the US, rather it has decided to issue $17bn worth of bonds to fund the payment of a dividend.

lazer

Basically there are 2 or 3 main ways of doing it

1 - Although goods may be sold from an English or American website and the warehouse is located there etc, the Head Office of the company is in Ireland - so the invoice is raised from Ireland amd therefore the sale is effectively made from the Irish Apple company and the corporation tax rate in Ireland is 12.5% (ie: Lower than the UK)

2 - Transfer pricing - the Irish company is the European head office, and there may be subsidiary companies (ie: Apple Ireland owns them), the subsidiary companies (eg Apple UK) pay tax in the country they are based.
Lets say Apple computer retails at £500, Apple Ireland buy the computers from the manufacturer for £100, and then they sell the computer to Apple UK (Internal Sale) for £499 - meaning that £399 of the profit is taxable in Ireland and only £1 of the profit taxable in the UK.

3 - Management Fees - as Apple Ireland is the head Office, then the subsidiary company pay them management fees (In return for the "management services" they provide - ie: accounting, legal, trademark, recruitment or whatever they can claim they are for) so if Apple Ireland charge apple UK £20m in management fees that reduces Apple UK's taxable profit by £20m and increases Apple Ireland's taxable profit by £20m.

I've tried to keep this simple - so apologies for any over simplification.

Basically it is about routing the profit through the country with the lowest tax rate and I personally don't blame companies for taking advantage of it - its the governement that have to close the loopholes in International taxation

martinsurrey

antrobus wrote: »

As I understand it, the issue with Apple is that it is a US company that makes a lot of profit in places other than the US. Where it to 'repatriate' these profits to the US in order (for example) to fund the payment of a dividend to its shareholders it would have extra US tax to pay. So Apple has decided not to 'repatriate' these profits to the US, rather it has decided to issue $17bn worth of bonds to fund the payment of a dividend.

This is the closet to the complicated truth.

And yes, Apple holds its cash offshore to reduce US and other taxes.

It uses Ireland to incorporate companies as Irish tax law is on a “managed and controlled” basis (so a company is subject to Irish tax if it is managed in Ireland.)

While the US uses an incorporation basis, (so a company is subject to US tax if it was incorporated there).

A company incorporated in Ireland but managed from the US is not fully taxed in either, this means that apple has companies that are not resident for tax anywhere in the world and avoid HUGE amounts of tax in the process.

The US catches this out when money is sent back to the states, repatriation, but if the cash just sits in Europe, no tax is paid, but the deferred tax liability is real.

So in short, yes, the deferred tax liability will/should include the tax on the repatriation of none US cash, but it will also include a huge amount of other items, so don’t read too much in to a single number.

martinsurrey

lazer wrote: »

Basically it is about routing the profit through the country with the lowest tax rate and I personally don't blame companies for taking advantage of it - its the governement that have to close the loopholes in International taxation

It’s even cleverer than that.

Its the holy grail in tax avoidance, making a company subject to tax nowhere in the world, they’ve managed it to an extent by playing the whole basis of various tax jurisdictions against each other to make themselves liable to tax nowhere (or very little), until its repatriated to the US, which they dont do, as they dont need to as they can access cash cheaper at home through the bond market.

IronWolf

martinsurrey wrote: »

This is the closet to the complicated truth.

And yes, Apple holds its cash offshore to reduce US and other taxes.

It uses Ireland to incorporate companies as Irish tax law is on a “managed and controlled” basis (so a company is subject to Irish tax if it is managed in Ireland.)

While the US uses an incorporation basis, (so a company is subject to US tax if it was incorporated there).

A company incorporated in Ireland but managed from the US is not fully taxed in either, this means that apple has companies that are not resident for tax anywhere in the world and avoid HUGE amounts of tax in the process.

The US catches this out when money is sent back to the states, repatriation, but if the cash just sits in Europe, no tax is paid, but the deferred tax liability is real.

So in short, yes, the deferred tax liability will/should include the tax on the repatriation of none US cash, but it will also include a huge amount of other items, so don’t read too much in to a single number.

Thanks, I was just interested to know if the repatriation tax is included in the accounts, or if it was completely outside (therefore their earnings are actually overstated). If it gets put in the tax liability then their reported earnings should be ok.

antrobus

And to answer the actual question;

IronWolf wrote: »

....
My understanding is that they will charge all tax (including repatriation) to the income statement, but not actually pay it and instead transfer the avoided tax to the 'deferred tax liability' on the balance sheet. Is that correct?

No, because the tax liability only arises on repatriation. Until that happens, no tax is payable, and there is nothing to be deferred.

IronWolf wrote: »

...
Does that mean the deferred tax liability on the balance sheet equals the gross amount they would pay if repatriating all their cash?

No, see above. The deferred tax liability is an accountant's best guess at what tax will actually be payable in the immediate future as a result of the company's activities as at the balance sheet date. There may well be an additional contingent tax liability that would arise were the company to do something radically different in the future. (Such as, bring all its profits back home to the USA.)

martinsurrey

antrobus wrote: »

And to answer the actual question;



No, because the tax liability only arises on repatriation. Until that happens, no tax is payable, and there is nothing to be deferred.



No, see above. The deferred tax liability is an accountant's best guess at what tax will actually be payable in the immediate future as a result of the company's activities as at the balance sheet date. There may well be an additional contingent tax liability that would arise were the company to do something radically different in the future. (Such as, bring all its profits back home to the USA.)

not correct.

Apple does provide for repatriation tax on its none US earnings, these are over 70% of its reported income statement tax charge.

And no, deferred tax is not an estimate of immediate future; it is an estimate of all tax liabilities which will arise as a result of past events. The earning of a profit is the past event, and the logical conclusion of that is a dividend, some time down the line, and that will result in a tax charge.

The only other way out, without repatriation, is a loss (in simple terms, but it’s a complex matter), and if the execs used that as an accounting policy they would be shot out of a canon.

antrobus

martinsurrey wrote: »

not correct.

Apple does provide for repatriation tax on its non US earnings, these are over 70% of its reported income statement tax charge.

Ah, apparently you're right. (Should have really looked it up first)

Where Apple does differ from other companies is that it sets aside a portion of these overseas profits, marking them as subject to U.S. taxes sometime in the future.
http://usatoday30.usatoday.com/tech/news/story/2012-07-23/apple-phantom-taxes/56441134/1

However even Apple doesn't account for the whole potential charge; from their last 10-k

The Company’s consolidated financial statements provide for any related tax liability on amounts that may be repatriated, aside from undistributed earnings of certain of the Company’s foreign subsidiaries that are intended to be indefinitely reinvested in operations outside the U.S. As of September 29, 2012, U.S. income taxes have not been provided on a cumulative total of $40.4 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be approximately $13.8 billion.

http://investor.apple.com/secfiling.cfm?filingID=1193125-12-444068

martinsurrey wrote: »

And no, deferred tax is not an estimate of immediate future; it is an estimate of all tax liabilities which will arise as a result of past events...

Well, that's what I said. Or at least that's what I intended the words I wrote to mean. And what they do mean is that any current estimate of future liabilities will be based on what you think is likely to happen in the future.