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