Tax Cuts for Apple Stock (AAPL)
During the 2016 presidential campaign, Donald Trump repeatedly attacked Apple Inc. (NASDAQ:AAPL) for its business practices. But since the election, Trump has softened his tone on Apple stock (AAPL) and said the company will be “happy” about his plans.
As the populist candidate, Trump took aim at Apple’s outsourcing, saying he would “get Apple to start making their computers and their iPhones on our land, not in China.”
“How does it help us when they make it in China?” he asked at a campaign rally in March. (Source: “Trump says he talked to Apple CEO Tim Cook about a ‘very large tax cut’,” Business Insider, November 23, 2016.)
However, Trump was more than just the populist candidate; he was also the Republican nominee for President. His instincts are to lower corporate tax in such a way that America becomes an attractive spot for investment. Not just in Treasuries, but in manufacturing.
He often pointed out that companies like Apple store their cash overseas to avoid high U.S. taxation. Trump argued that lowering taxes might entice them to repatriate that cash. But amending the entire U.S. tax code would be a long-term project for the Trump administration.
As a short-term fix, Trump wants to implement a tax holiday whereby companies can bring their money back at a reduced tax rate. This would be amazing for AAPL stock. The company has $215.0 billion sitting in an Irish bank account at the moment, waiting to be brought home.
Apple stored that cash in Ireland because it pays virtually no tax there, but some analysts think that money would be better spent on Apple stock buybacks. President-elect Trump could simplify that decision with a 10% reduced tax rate for bringing cash back to U.S. shores.
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The tax holiday is a band-aid from Trump’s perspective, but one that has a high chance of passing a Republican Congress. His administration won’t take up residence in the White House till January 20, so we must wait several months before knowing whether it will become reality.
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Here are three signs that Trump will move forward with a tax holiday proposal:
- His phone call with Apple CEO Tim Cook. Trump recounted the phone conversation in an interview with The New York Times. “I got a call from Tim Cook at Apple,” Trump said. “I said, ‘Tim, you know one of the things that will be a real achievement for me is when I get Apple to build a big plant in the United States…instead of going to China’.” After Mr. Cook acknowledged that it was a priority, the President-elect assured him that the terms wouldn’t be harsh. In fact, he said that “We’ll create the incentives for you, and I think you’re going to do it. We’re going for a very large tax cut for corporations, which you’ll be happy about.” Everyone knows that Apple has $215.0 billion sitting in an Irish bank account. (Source: “Donald Trump’s New York Times Interview: Full Transcript,” The New York Times, November 23, 2016.)
- Other CEOs want the tax holiday as well. Meg Whitman, CEO of Hewlett Packard Enterprise, was on CNBC the other day. Time and again, she hammered it home that lower taxes would help bolster America’s place in the global economy, saying: “Corporate tax rate reductions to make us more competitive on a world stage would be helpful. A tax holiday on all the cash that we have overseas, bringing that back at a 10% rate, that would be helpful to us as well.” Republicans are the business-friendly party, which means that mounting pressure from the business community could bring this policy to life. (Source: “Meg Whitman likes Trump’s plans to chop taxes on offshore cash,” Business Insider, November 23, 2016.)
- Insiders already expect it to happen. If you needed a silver bullet in this argument, here it is: Goldman Sachs Group Inc is already factoring in gains from a tax holiday. These are the smartest guys in the room. They are always at the leading edge, and they believe that stock buybacks are going to surge next year from Trump’s plan. “A significant portion of returning funds will be directed to buybacks based on the pattern of the tax holiday in 2004,” wrote the team of Goldman Sachs analysts. They predict a 30% increase in buybacks, which is great news for anyone holding AAPL stock. (Source: “Overseas cash hoards repatriated under Trump would lead to huge share buybacks: Goldman,” Financial Post, November 21, 2016.)
Once the dust of this election has settled, there’s a strong likelihood that Trump will impose a tax holiday. The ability to bring back cash at a reduced tax rate is amazing for companies like Apple. But it’s even better for shareholders, who will see their AAPL stock soar as the company returns profits to its rightful owners.