Many factors likely influenced Apple’s innovative strategy to avoid taxes by borrowing money.
It is even possible they realized they were not avoiding taxes, only postponing them.
I have noticed that most people look for ways to postpone taxes. They assume they can do this indefinitely.
Therefore, it is reasonable to assume this was Apple’s only goal.
However, based on the mainstream media articles and based on behavior I have witnessed in thirty plus years of preparing taxes, I suspect something else is going on here.
By “unwise,” I mean we make decisions that reduce the amount of money we keep by spending more than is necessary.
Obviously, if someone is being generous, giving to humanity, and serving from a heart of love, this is not “unwise.”
However, if the goal is to acquire assets and reduce expenses, increasing overall expenses in an effort to reduce taxes is unwise.
More than once, a client has walked into my office and announced an unwise financial decision under the guise of receiving the reward of a tax deduction.
He is surprised when the barely affordable ten-thousand dollar expenditure only results in a tax savings of a couple thousand dollars.
My explanations about tax rates usually fall on deaf ears.
A few years later, he repeats the behavior.
He continuously does the opposite of what he claims he is attempting to do.
He has bought into the marketing that says avoid taxes at all costs.
Apple’s strategy may have come from the influence of this type of marketing.
The conversation between the decision makers, brain-washed by such ideas, could have gone like this.
“We need funds to buy back stock. We have it in the accounts of our overseas subsidiaries. Is there any reason we can’t use it?
“Well, you’d have to pay a 35% tax to bring it into the country.”
“Ouch! We can’t do that. Are there other options?”
“Let’s see… If you used the overseas funds as collateral, you could likely borrow the money at a low percentage rate, probably less than 3%.”
“That’s a great idea. Paying 3% interest sure beats paying 35% taxes. Let’s do it.”
No one asked questions about the effects of reducing annual cash flow by more than three hundred million dollars.
No one considered the net cost of borrowing that would total more than two hundred million a year.
No one said the amount of tax on the income earned to pay back the loan would be the same as the tax to bring the funds into the country.
After the fact, someone may have asked questions – in private.
Before those questions could work their way to the surface, someone issued a press release praising the strategy.
The marketers saw this as an opportunity to fulfill their agenda.
“Apple, haven of the geniuses and supercool company of the past three decades, was practicing innovative tax strategies.”
It was perfect.
The marketers proclaimed the wisdom of avoiding taxes, figuring that if someone realized the strategy didn’t avoid taxes, it only postponed them, they could still portray this as a wise decision.
They lauded the wisdom of paying interest on borrowed money as another great way to avoid paying taxes. They pointed out the 308-million interest payment and praised it as a 100-million tax reduction.
Then, because double meanings and humor are great marketing tools, they got a senior vice president of Moody’s to say this decision was a “no-brainer.”
I couldn’t have said it better myself.