AP Headline Jumps on the Apple-Bashing Train on Taxes ('Phantom Taxes Hide Billions in Profit')

Gosh, if Apple would only send the money it has parked overseas back to the United States and pay income taxes on it, the federal government's situation would be so much better, the budget would would balance, and ... no, not really. According to Peter Svensson at the Associated Press, the company has $74 billion in cash parked overseas, meaning that it would owe federal income taxes of about $26 billion at the maximum statutory rate of 35% if it brought it all back at once. That amount would cover the average daily deficit incurred during the past three and now going on four years for about a week.

Svensson's report isn't all that bad, but its headline is truly risible:

How Apple's phantom taxes hide billions in profit

On Tuesday, Apple is set to report financial results for the second quarter. Analysts are expecting net income of $9.8 billion. But whatever figure Apple reports won't reflect its true profit, because the company hides some of it with an unusual tax maneuver.

Apple Inc., already the world's most valuable company, understates its profits compared with other multinationals. It's building up an overlooked asset in the form of billions of dollars, tucked away for tax bills it may never pay.

... In 2004, Congress enacted a one-year "tax holiday" for overseas earnings, and multinationals are hoping for a repeat of that. Presidential candidate Mitt Romney wants to permanently eliminate federal taxes on overseas profits. President Barack Obama attacked that idea last week, saying it won't create U.S. jobs, like the Romney campaign contends.

Where Apple does differ from other companies is that it sets aside a portion of these overseas profits, marking them as subject to U.S. taxes sometime in the future. Essentially, it's saying "this is money that we'll likely have to pay U.S. federal income taxes on" because we intend to repatriate it, says Willens.

... The temporary tax amnesty enacted in 2004, resulted in hundreds of billions being brought home to the U.S. But according to the Congressional Research Service, it didn't create jobs or stimulate the economy, as had been hoped.

Tax experts say the company could easily eliminate these phantom tax obligations. That would boost Apple's profits for the past three years by as much $10.5 billion, according to calculations by The Associated Press.

Seriously, Mr. or Mrs. AP headline writer and Mr. Svensson, if the "billions in profit" were so well-hidden, why did you find them so easily?

What's going on is that Apple is using extraordinarily conservative accounting, recognizing expenses for taxes it might pay if the rate on money brought into the U.S. comes down to an acceptable instead of confiscatory level.

Usually, companies get in trouble for overstating their earnings. Apple's move is perhaps understating them, but any stock or financial analyst worth anything should be looking at cash flow and not earnings to evaluate a company's prospects and the outlook for its stock price.

As to the claim that the 2004 tax amnesty accomplished nothing, well, the unemployment rate dropped from 5.7 percent at the end of 2003 to 4.4 percent at the end of 2006. It's hard to understand how the Congressional Research Service can be so sure that the 2004 tax amnesty, of course along with the Bush tax cuts enacted in 2001 and 2003, didn't contribute to that happy circumstance we would all love to see return -- and won't until someone different is driving public policy in Washington.

Cross-posted at BizzyBlog.com.