Some tech giants could get a big boost from Donald Trump’s tax reforms… but will it really happen?
The Trump tax plan specifically targets companies with huge cash stockpiles overseas. Oxfam America recently identified 50 of the largest U.S. corporations with such cash hoards, representing foreign profits that companies refuse to repatriate under current U.S. tax laws.
Here are four American technology corporations that would benefit from two of Trump’s proposed tax changes: A one-time opportunity to bring overseas money stores home at a special tax rate of 10% payable over 10 years and a reduced corporate tax rate of 15%.
Apple Inc. (NASDAQ:AAPL)
With more than $181 billion in overseas bank accounts, tech giant Apple heads the list of companies with the largest cash stockpiles. If the company brought that cash home, it could put it to good use in many ways, such as funding its current $250 billion capital return plan.
Even for a company with a $511 billion market capitalization, the latest capital return program is ambitious. Apple’s been borrowing money to satisfy its stockholders’ thirst for a share in the company’s wealth, and its debt now stands at nearly $80 billion.
With a debt-to-equity ratio of 1.28, Apple isn’t in financial trouble, and its earnings easily support its current dividend. It’s notable, however, that the company held no debt at all just four years ago, and its debt is rising fast. Last June, its total debt was about $45 billion.
Repatriated funds could also be put toward product research and development, an area that Apple has neglected over the past few years. Apple spent a paltry 3.5% of revenue on R&D in fiscal year 2015, compared with Google’s (NASDAQ:GOOG) 15%. While this practice may have served Apple in the past, the recent drop in revenue due to lagging iPhone sales may indicate a need for new product development.
Trump’s 15% income tax rate would help Apple with a big discount over its current effective tax rate of 25.9%.
Microsoft has been on a buying spree lately. Purchases include:
- Swedish video game company and creator of Minecraft Mojang.
- Keyboard app company SwiftKey.
- Mobile app developer Xamarin.
- Internet of Things service provider Solair.
More recently, analysts have named Microsoft as a potential suitor in the sale of cloud-based marketing software company Marketo.
In addition to its mergers and acquisitions binge, Microsoft both increased its dividend by 16% from $0.31 to $0.36 per share and spent close to $3.7 billion on stock repurchases late last year.
With Personal Computing revenue down 5% year over year and PC sales declining, how is Microsoft able to afford these expenditures? A clue lurks in the company’s corporate debt profile, which shows total debt of $47 billion and a debt-to-equity ratio of 2.90.
Another reason Microsoft is incurring debt is that the majority of its cash, cash equivalents, and short-term investments are held in foreign accounts. According to its most recent annual report, the company holds a whopping 98% of its cash overseas.
It’s easy to see how a one-time tax discount on offshore cash stockpiles would help Microsoft fund its many campaigns without further increasing its debt.
Much like Microsoft, IBM has made M&A news for the past few years and stepped up its acquisition of security and healthcare analytics companies, in addition to cloud-based video services providers.
As computing moves into the cloud, Big Blue has been left behind. Despite accumulating nearly $46 billion in debt, a recent analysis by Deutsche Bank opines that IBM is still a laggard in the cloud arena, and will never gain a meaningful foothold in that market.
Unfortunately, the majority of corporate chief information officers seem to agree. In a recent survey of 207 CIOs administered by JP Morgan analysts, IBM was named the biggest loser among IT companies in the cloud market by more than one-quarter of respondents.
With $61 billion in offshore accounts, taking advantage of Trump’s repatriation tax rate would keep Big Blue afloat as it contends with 15 consecutive quarters of diminishing sales and struggles to shift to the cloud economy.
Database product provider Oracle faces some of the same headwinds as IBM; namely, the movement of data to the cloud. Like Big Blue, Oracle has purchased cloud-based companies for several years. This year, the company acquired two cloud services companies, Textura (NYSE:TXTR) and Opower (NYSE:OPWR), and social-sharing site AddThis.
Still, Oracle has yet to gain traction in the cloud services market. The company was rated only slightly better as an IT services provider in the JP Morgan survey, and the company’s stock tumbled late last year after a revenue miss and a soft guidance announcement for the next two quarters.
Like other companies, Oracle has financed stock buybacks and dividend increases through debt offerings. The company now holds more than $40 billion in debt and currently has a high debt-to-equity ratio compared to prior years.
Oracle also pays an effective tax rate of 24%, so Trump’s proposed 15% would benefit the company greatly—in addition to the discounted tax it would pay if it brought home its $38 billion held offshore.
Better Economy With Trump?
Trump’s tax reforms would not only benefit corporations and their stockholders, but the greater economy, as well. Companies would be newly flush with cash they could use to create jobs, invest in R&D and pay off debt.
Trump asserts that his tax plan is “revenue neutral” and that his reforms will increase economic growth and encourage job formation, without adding to the national debt or deficit. Others disagree. The Tax Policy Center, for instance, notes that the plan will cut federal revenues by $9.5 trillion in the first 10 years. The Tax Foundation puts that number slightly higher at $10.14 trillion.
Trump recently backpedaled on some of the plan’s claims in response to criticism of its costs. If he wins the White House, time will tell if his proposed reforms will survive intact.