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Tim Cook's US$181b headache: Apple's cash held overseas

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Apple CEO Tim Cook delivers the keynote address during Apple WWDC on June 8, 2015, in San Francisco, California.

[SAN FRANCISCO] Apple Inc's cash topped US$200 billion for the first time as the portion of money held abroad rose to almost 90 per cent, putting more pressure on Chief Executive Officer Tim Cook to find a way to use the funds without incurring US taxes.

Booming iPhone sales overseas are adding to Apple's cash pile, pushing the company to embrace offshore affiliates to preserve and invest the money. Mr Cook, who was called before US Congress in 2013 to defend Apple against allegations of dodging taxes, is facing questions on what Apple will do with its cash pile and fielding calls from investors, such as billionaire activist Carl Icahn, to return shareholder capital.

"They don't really have that much on-shore cash," said Tim Arcuri, an analyst at Cowen & Co. "They're still sort of hamstrung on what they can do, barring the ability to repatriate a bunch of off-shore cash." Mr Cook has been vocal about his desire for US lawmakers to amend the country's tax laws so that companies can repatriate more cash. Apple's overseas cash has climbed 70 per cent since Mr Cook spoke to Congress, and now makes up 89 percent of Apple's US$202.8 billion in cash and investments at the end of June, the company said Tuesday, up from 72 per cent of US$146.6 billion in cash two years ago.

Driving that is Apple's booming global revenue. Sales in greater China, for example, more than doubled to US$13.2 billion in the latest quarter from a year earlier.

At the same time, Apple's US federal lobbying spending has been climbing, and reached a record US$4.1 million last year as it advocated on a wide range of issues. The company's lobbying climbed 46 per cent in the second quarter from a year earlier. The iPhone maker added three lobbyists on the issues of taxes in the past year, and is addressing concerns a such as corporate and international "tax reform," according to records filed with the US Senate this week.

Under current law, US companies owe the full 35 per cent corporate tax rate - the highest of any industrialized nation - on income they earn around the world. They receive tax credits for payments to foreign governments, and have to pay the US the difference only when they bring the money home.

That system encourages companies to shift profits to low- tax foreign countries and leave the money there. As a result, more than US$2 trillion is being stockpiled overseas by US companies.

US President Barack Obama and House Ways and Means Chairman Paul Ryan, R-Wisconsin, are trying to find a way to impose a one-time tax on the stockpiled money to encourage cash repatriation, change the underlying system and plow the proceeds into highways.

Apple is also seeking to return more of its growing cash hoard to investors. In April, the company unveiled plans to boost capital return program by US$70 billion, increasing a share- buyback authorization by US$50 billion and increasing dividends by 11 per cent. At the end of June quarter, the company had returned US$126 billion of its US$200 billion programme, including US$90 billion in share repurchases, Chief Financial officer Luca Maestri told analysts on Tuesday.

To pay investors, Apple has issued almost US$50 billion in debt around the world, including bonds denominated in yen and Swiss francs. Apple also used US$10 billion in cash to pay US taxes last year, according to a regulatory filing.

On top of this, Apple has already assumed for accounting purposes that a lot of the cash has come home, suggesting that the impact of cash repatriation on future earnings would be minimal. At the end of its latest fiscal year, Apple estimated that bringing home the US$69.7 billion in earnings on which it hasn't taken a charge would cost about US$23.3 billion in US taxes.

Mr Cook has said that Apple is already the largest taxpayer in the US and reiterated a need for "comprehensive" tax reform. A representative for Apple declined to comment.

"It's not smart for all of these companies, including us, to have all this money offshore, which can't be invested in the United States," the CEO said at a tech conference held by the Wall Street Journal last year. "It would be reasonable to, say, force a tax on the offshore piece but let it all flow free - let the capital have a free flow."

BLOOMBERG