Apple Has a Serious Money Problem (& Why It Won’t Buy Netflix)

Every second, Apple makes $1,444 of profit. That’s more than any other company and almost as much as Alphabet, Microsoft and Facebook combined.

A bank account of $285 billion makes it more a country, than a company. Anyone else would kill for pockets so deep. But Apple is wary. And while most companies beg not to be taxed, countries beg not to tax Apple. The strange story about Apple’s finances explains how it got so wealthy, why this is a problem, and what they’ll buy next.

Companies pay taxes to the country in which their money is made. A toy might be invented and manufactured in Antarctica but if it’s sold in Germany, that’s where it pays taxes. And because these taxes vary by country, so do the costs of products.

The iPhone X is $1000 in America but $1368 in India and $1455 in Hungary. In fact, if it weren’t for import taxes, it’d be cheaper to fly to the US, buy an iPhone and fly back. But there’s an exception to every rule. And that exception is always America. It’s the only country that taxes based on citizenship. That means a US citizen living and working abroad still owes taxes back to the US. You could renounce your citizenship, but you’d be taxed for that too. And for American companies, this means paying the highest tax in the world on profit made everywhere. So this won’t fly. When Apple pays tax overseas, America subtracts that amount from its tax rate, and then reaches out its hand.

This is where Apple, Google, almost every major company says, “Hmm…” “Actually, I think we’re gonna keep our money out here for now.”

That money goes into a subsidiary: a company that is legally different, but really just a foreign bank account. These are located in countries like Ireland and Jersey. Not for the cows, but the very generous tax code. And Ireland’s economy runs not despite being a tax shelter but because of it. What they lose in taxes, they make back from the jobs these companies bring.

So when the European Union stepped in and said, “Hey Apple, you’ve been getting far too fair a deal.” “Time to pay your dues,” Ireland rolled its eyes and shook its head, passing up on 5% of its entire GDP.

But what about the 30% of revenue Apple makes in the US? Well, one way to pay fewer taxes is to make less money. At least on paper. All of Apple’s products depend on patents. And unlike people, places, and things, patents have no precise value, making them a handy way to move money.

So they give their patents to the Irish subsidiary, who then “rents” them back to Apple for a “fee.” When Apple makes money in the US, it can wink at the IRS and say “This isn’t profit, we owe it to the owner of the patent in Ireland.” “Sorry, America. It’s just not our money to give.”

This is how profit escapes its country whether it’s made in Spain or Maine, and technically Ireland taxes that money whether it stays in the country or moves offshore. But where there are a will and $285 billion, there’s a way. If money is transferred to the Netherlands, a handy loophole makes it nearly tax-free. So it briefly flashes in a Dutch bank account owned by a non-existent company, with no employees to check a legal box. And then it returns back to Ireland, this time a subsidiary located in the country but legally a resident of Jersey, where it can finally retire to the cows and castles in peace.

The richest meal for a corporation isn’t gold covered chocolate or expensive caviar, but an Irish and Dutch subsidiary sandwich. All of this is 100% legal and 100% common.

But because Apple makes so much more money, it’s in an unusual position. No matter how big the pile grows, it’s all frozen just out of reach. It’s like being given the world’s largest bank account with no ATMs to withdraw from. And the problem is actually much deeper than that.

To pay American bills, Apple takes American loans, money for which it already has, just not as far as the US is concerned. But it can’t keep up with how fast the pile is growing. To you and I this would be the opposite of a problem. Because it’s easy to imagine Apple as a giant fat cat, swimming in money and worrying only about how to spend it all. Giving away billions would be mere pocket change to someone that wealthy. And maybe it should pay higher taxes. But there is no singular Apple. The CEOs of the CEO are shareholders, who are eager to see their money invested in a good way.

The desire to minimize taxes kept money offshore. But that made it useless for what they care about most: investing back in the business. But everything is about to change. When the US lowers its corporate tax, Apple can finally bring back its money. The question now is how to spend it all?

It may research future products, acquire small companies, and buy back shares. But why not acquire something big? Articles like this one suggest Apple buy Tesla, Activision, and Netflix. And to an investor, this makes perfect sense. Diversifying a business so dependent on just one product, and without making too big a dent in its wallet. But implied in this argument is another. If Microsoft and Google successfully acquire companies left and right, but Apple rarely does, they must be sleeping on the job. Microsoft just bought LinkedIn for eight times more than Apple’s ever paid for a single company, but never assumed the world’s most profitable company is bad with money!

Apple’s strategy is to shop for talent and technologies, never trying to make a quick buck. When it needed Touch ID it bought Authentec when it needed a voice assistant it bought Siri, and when it needed Steve Jobs, it bought NeXT. Suggesting they buy Activision or Netflix is suggesting that Apple stop being Apple. Because absorbing a company also means absorbing its culture. And forever changing its most valuable asset: extreme focus. It’s the same reason they make so few products and design them so minimally. Saying no to what every other company would say yes to is exactly what makes Apple so successful.

However, Apple has reportedly been working on an electric car project for years. Some reports suggested that Apple might acquire Tesla rather than building a project from scratch. Given the similarities that both companies have in common and the shared vision, it might be a deal.

All Rights Reserved for Jawad Bahoum

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