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Op-Ed: The fact that Apple has to issue bonds is a reminder of why urgent tax reform is needed

  • Apple has borrowed more than $98 billion despite having more than $250 billion in cash, a situation Tim Cook called "bizarre."
  • The reason: like most cash-rich multinationals, it stores most of its money outside the U.S. to avoid paying double taxes.
  • Trump and Republicans have proposed a one-time repatriation "holiday" with much lower taxes on repatriated holdings.
Tim Cook
Sally Shin | CNBC
Tim Cook

On Thursday afternoon, Apple noted in an SEC filing that it was issuing $7 billion worth of new bonds -- floating rate notes with various maturity dates between 2020 and 2027.

This isn't particularly newsworthy in itself. Apple issues bonds all the time. In fact, according to FactSet, as of the end of the first quarter of 2017, Apple has taken on more than $98 billion in debt. More generally, it's cheap to borrow money because of persistent low interest rates, and lots of companies borrow to help fund ongoing day-to-day operations.

But there's a deeper irony here. Apple generates cash flows of nearly $40 billion every six months. It's the richest company in the world, with more than $256.8 billion in cash and marketable securities sitting on its books.

Why does such a rich company have to borrow money?

CEO Tim Cook gave a clue in his interview with CNBC "Mad Money" host Jim Cramer last week, when he announced Apple's intention to invest $1 billion into new U.S. manufacturing initiatives.

Cramer asked, "But this is $1 billion of Apple's $256 billion?"

"It's $1 billion of our U.S. money, which we have to borrow to get. That's another whole topic."

The topic he's alluding to? Taxation.

As of the end of 2016, Apple had more than $230 billion stored overseas. That's because, when Apple earns money from sales outside the U.S., it's taxed once by the country where it makes those sales, then taxed again by the U.S. when it brings the money back home. As a result, Apple doesn't bring that money home.

Which leads to the absurdity Cook described later in his interview with Cramer:

If you sell globally, you earn money globally. If you earn money globally, you can't bring it back into the United States unless you pay 35 percent plus your state tax. And you look at this and you go, 'This is kind of bizarre.' You want people to use this money in the United States to invest more. We are in a good position, but an unusual one. Our good position is we can borrow. And so to invest in the United States, we have to borrow. This doesn't make sense on a broad basis...

Changing the tax policy on repatriated funds is one of the areas that President Trump and congressional Republicans have talked about fixing. In a one-page outline issued earlier this month, Trump suggested a one-time tax at a lower rate (perhaps 10 percent) on repatriated funds -- a so-called "repatriation holiday."

President Obama proposed a similar repatriation holiday but it never got through Congress, and the results of a 2004 holiday under President George W. Bush did not lead to substantial job growth, according to a 2011 Senate report.

Even so, the spectacle of a cash-rich company issuing bonds to fund domestic operations is a great argument for why this kind of tax reform makes sense.