Apple’s Offshore Cash targeted by recent SEC comments, showing a renewed focus by U.S. government to target offshore tax shelter strategies.

Apple CEO Tim Cook testified before the Senate regarding tax avoidance strategies. In particular, Apple uses Irish subsidiaries to shelter some income from higher tax rates in the U.S.

Congressmen and political activists love to use the SEC to further their ends. It is no surprise that the SEC gets involved with issues surrounding such fun sounding strategies as the Double Irish and the Dutch Sandwich.

Following a series of correspondence with the SEC (see here and here), we can expect some additional disclosure from Apple about their intentions with their international cash horde.

In Apple’s upcoming Form 10-K, there will be some specific references to Ireland in Apple’s disclosure. This includes statements that substantially all of its undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. was generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. In addition, Apple will continue to “evaluate the appropriateness of the disclosure” as Ireland continues to be pressured by the U.S. and EU to stop making them look bad by having lower tax rates.

In addition, we can expect additional information about how Apple justifies keeping its cash overseas. In its response to the SEC, Apple justified its treatment of domestic and offshore income by noting that it has substantial offshore business and uses offshore cash to support international business. Apple also has substantial U.S. resources for its U.S. business.

Furthermore, Apple explained that it is paying dividends and repurchasing shares, but it is using debt, which is cheaper than the tax consequences of bringing offshore cash to the U.S.

As Apple put it,

“These and other financial requirements outside of the U.S. have led the Company to determine the amount of undistributed earnings of its international subsidiaries to be indefinitely reinvested outside of the U.S. This determination is consistent with the Company’s historical practice of not repatriating amounts it has deemed indefinitely reinvested, with the exception of repatriation in 2006 under provisions of the American Jobs Creation Act of 2004.”

In other words, the U.S. tax policy is so messed up that it makes sense to leave the money overseas and outside the reach of the IRS while borrowing money to pay dividends.

