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Crack cocaine is to junkies what foreign tax reserves are to corporations seeking numbers

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May 01, 2013 – Comments (0)

http://www.forbes.com/sites/danielfisher/2012/10/25/foreign-tax-reserves-are-crack-cocaine-for-earnings-manipulation-study-says/ The Internal Revenue Service code allows companies to shield foreign earnings from U.S. corporate taxes as long as they don’t repatriate them as dividends to the parent. Accounting rules allow companies to avoid reporting a tax liability for these earnings if they plan to leave them overseas indefinitely.

The study in the current issue of the journal of the American Accounting Association’s Accounting Review concludes that companies with what the authors call a “high sensitivity to capital markets,” such as a need to meet or beat analysts’ expectations, repatriate  17% to 21% less in foreign earnings than their private counterparts. The accounting rules allow public-company executives to fine-tune their earnings to meet expectations ~  something  that  anyone  familiar  with  APPLE  knows all too well as  they always  manage to find a  way  to produce  outstanding  numbers ~  almost  too good to  be  true  numbers ?

But  what  if  such  numbers  are  for  a  lack  of a  better word ?  timmy  cooked  on the  books.

“Our study suggests that companies would repatriate about 20% more than they currently do if they didn’t have this accounting tool that enables them to put a gloss on their financial statements,”said Robinson.

GE, for example, reported $102 billion of indefinitely reinvested overseas earnings in 2011, up from $96 billion the year before. The company also reported a $700 million tax benefit last year after it shifted $2 billion of earnings from an offshore financial subsidiary to the indefinite reinvestment category after previously recording a potential U.S. tax liability. GE reported net income of $14 billion in 2011.

The accounting standard in question, known as APB 23, was criticized in a Sept. 20 Senate hearing chaired by Sen. Carl Levin of Michigan. Witness  Jack T. Ciesielski, president R.G. Associates, called PRE ” a malleable pool of earnings to be sliced as finely as needed to meet earnings estimates with pinpoint precision.” The Accounting Association said a tax director of a Fortune 500 company has compared it to crack cocaine, saying that “ once you start using it, it’s hard to stop.”

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A JPMorgan Securities report released last year with the fetching title “Show Us the Foreign Cash!” found 11 companies with overseas cash balances of more than $10 billion, including Apple with $47.6 billion, Microsoft with $45 billion, and Cisco Systems with nearly $39 billion. JPMorgan calculated the cash was equal to about 68% of the total foreign earnings, the rest of which is invested in overseas operations. It also equaled half the total cash and short-term investments on those companies books.

Many economists say the corporate income tax makes little sense, since the government can more efficiently raise the same amount of revenue by taxing dividends, salaries and other business expenditures when they hit the accounts of individual taxpayers. Even President Obama has discussed lowering the corporate tax from 35%, among the highest rates in the world, to 28%. That might encourage companies to repatriate their profits and invest more in the U.S., since their return on investment would be higher.

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Interesting  that lowering  a  tax  rate  might  actually  increase  the  $$$  in  tax coffers.

Instead  a  lot of  this  money is  simply  dormant  hopefully  safe somewhere ?

Now  apparently  Apple  has  gotten  on  board  with  the  borrow  to  pay off   shareholders  with  dividends  and  buy backs  and  a  case  has  been  made  suggesting  that   by  increasing   interest  expenses  will be beneficial  as it  will  reduce  tax  levels  and  provide  a  tax  benefit.

But  how  will this  money  be  spent ?  it would  be  far  wiser  for  Apple  to  invest   the  newly borrowed  50 billion  into  businesses  that  would  provide future  profits and  revenues  for  Apple ~  but  instead  this  money  will  go  towards  consumption  ~  go  towards  financial engineering  to  reduce  the number of  shares  outstanding  and  to provide  for  operations  and  pay for  13 billion  annually  in  dividends as well  as  help  pay  for   a  newly  created  additional billion  plus  in  new  interest  expenses.

Now  granted yes  as  long as  Apple  remains  profitable  they will get  the benefit  of  a  reduction  in  federal  taxations  ~  but  they will  also  see  a  reduction  in  cash  not  banked  and  so long  as  things  go  well this will go well,  but  lets not  forget that  in  addition  to  the newly  created  expenses  that  didn't  exist before   Apple  will  be  responsible  for  principal  repayment  of   the  50  billion  along  with many  billions of  additional  interest to  satisfy  the  interest demands of the bonds.

Ever  wonder  how  successful  businesses  go  under  ?   businesses  like  General  Motors ?  they  made  a  ton  of  cash ?  so  how  did  they  go  bankrupt ?    well  the  simple  and  short  answer  is that  they  borrowed  their  way  into bankruptcy.

Lets  say  that  Apple  runs  into  a  few lean  and  rough  quarters,  lets say  that  their  profit  margins  dwindle  and  disapear  now  all  the sudden  where  once  they  had  a  tax  benefit  from  additional interest  expenses   ~  this  now  acts  as  an  anchor  that weighs  them  down.

Many  would  agree  that  Steve Jobs  would  have  not  agreed to dividends  and  borrowing,  was  Steve  wrong  all  along ?  or   is  Apple  unable  to  unlock  shareholder  value  and  now  should  concentrate  more  intently  on  financial engineering  as  opposed to technological  engineering ?

Companies that run  into  trouble that  have  debt  are  dependant  upon  more debt  to  keep them afloat  just  look  at  JCP...

If  that  spikut  of  money  ever  gets  cut off  or  runs  dry,  things  like  going  concern  pop up.

Who's  to say  that  next year  let  alone 30 years  from  now  Apple  will  be  around  and  yet  they managed  to   secure  30 year  bonds  near  what  the  US  Gov-ment  pays  in interest,   hopefully  these  bond  holders won't  become  like  the  bond  holders  of  bankrupt  companies  IE  Gov-ment  motors ~  Lehman  Brothers ~  Bears  Sterns ~  etc.

But  for  now  crack  is  king  for  those seeking  to manipulate and  obtain  analyst  numbers.

 

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