“As you likely know, about two-thirds of the $145 billion of cash on Apple’s books is held in overseas subsidiaries, and Apple would have to pay U.S. income tax if it used that money in the U.S.,” Allan Sloan writes for Fortune. “So instead of bringing in money from overseas to pay for its stepped-up stock buybacks and higher cash dividend, Apple will borrow money instead.”

“It’s a perfect tax arbitrage,” Sloan writes. “Let’s say Apple borrows money at an interest cost of 3% a year (which is more than it would likely pay), and uses it to buy back stock at the current price of about $410 a share. Each share that Apple buys back will reduce its annual dividend obligation by $12.20 a share, at the company’s current dividend rate. The interest on the borrowed money would be $12.30 a share — about the same as the dividend. But interest is tax deductible, and dividends aren’t.”

Sloan writes, “With tax rates at 35%, it’s considerably cheaper for Apple to borrow money in the U.S. than it would be for it to repatriate cash held in foreign subsidiaries. But even if the tax rate were only 25%, it would still be cheaper for it to borrow than to repatriate.”

Read more in the full article here.

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