What's going on?
Apple CEO Tim Cook unloaded on the US tax system in an interview with CBS’s 60 Minutes that aired on Sunday night. As the head of the world’s largest company, his criticism of the US tax code is certainly thought-provoking.
What does this mean?
Apple routinely faces criticism for the amount of tax that it pays with many arguing that it unfairly optimizes its operations to pay as little tax as possible. In his interview, Cook calls tax evasion claims “total political crap” (you can see a transcript of the interview here). Cook makes the point that Apple would have to pay a 40% tax on any cash that it brings back to the US – he calls that “backward” and “awful for America.” US companies that make profits overseas (e.g. when Apple sells an iPhone in London) tend not to move the resulting profit to its core US company (it stays in Apple Europe, for example). That makes it impossible to use that cash for things in the US, like paying shareholders a dividend or buying smaller American companies. The tax issue is one reason why many companies have relocated overseas in recent years, including most recently, America’s biggest drug company (read our story on Pfizer).
Why should I care?
The bigger picture: Politicians might address corporate tax reform – after the 2016 Presidential election. It’s unlikely that such a contentious issue would be addressed by Congress in the year of a presidential election. Most agree that reform of some sort would be good for the US economy because that money can then be “put to work” in America rather than remain trapped overseas.
For the stock: Apple stock has struggled recently. It has nothing to do with the long-standing tax issue, but the stock is down 13% since a recent high in November. Concerns over future iPhone sale have weighed on it. Apple has been hugely reliant on iPhone sales in past years, but it will probably have to develop new business lines to maintain its extraordinary profits going forward.