Why is Apple getting a loan?

The title is self explanatory here. So we will just get on with the story then alright?

The Cash Conundrum

So Apple, is by far, one of the richest companies in the world. I mean these guys are sitting on a cash pile that’s bigger than anything you can ever imagine. We are talking about $210 Billion worth of cash and cash-like stuff in their bank accounts.

And so it clearly surprised a lot of people when Apple announced that it was going to borrow $7 Billion from elsewhere.

Like why?

Okay, so to fully appreciate this story we have to go back in time. So considering Apple was making tons of money back in the day they had to find a way to save on taxes. Although corporate taxes in the US aren’t as high as in India, it’s still a lot of money and Apple wanted to save every single penny.

So it decided to set up its corporate entity in Ireland where they didn’t have to pay any taxes because the Irish have a really weird taxation policy. Long story short, Apple made a lot of money and had to pay no taxes on most of the income they earned whatsoever.

However, there was one tiny problem. They couldn't get this money back to the US and smuggling it inside was not an option.

As the cash pile kept building, Apple slowly began to realize, they had a problem at hand. A problem of having too much money and not knowing what to do with it. This is what pundits referred to as the Cash Conundrum.

The only recourse available then was to return the money to shareholders. And since there was so much money tied up overseas, there was a lot of pressure from Apple’s shareholders and the government of the United States to bring back the money.

But then, the company knew that if it brought back the money it had to pay a repatriation tax amounting to a whopping 35%. So there was a lot of lobbying in the hope that the government would provide them concessions if they choose to bring back the cash pile.

And in 2018, the Trump government finally decided to provide a one-time relief to all major Multi-National Corporations willing to route money back to the US. The tax bar was reduced from 35% to 15% and Apple finally relented after having parted with about $34 Billion in taxes.

Apple lived up to its promise and paid back $90 Billion dollars to its shareholders. But that leaves us with an additional $210 Billion in idle cash. Now, why would a company borrow money if it still has so much money just lying around?

Well, in this particular case, Apple simply wants to pay an old loan off by borrowing a new one. The reason is rather straight forward. This loan has a lower interest rate than the old one. Folks, we are living in weird times when interest rate across most developed countries is tending to absolute zero. So this much should come as no surprise to you.

But that only answers part of the question. Why borrow at all in the first place?

Well, for one Apple carries about $100 Billion in debt. This is by no means a small amount and the interest paid on it allows Apple to save on taxes. Bet you never thought about that eh?

Also, it’s very likely that Apple is making more money on the cash as-is. It’s not like they’ve buried the cash underground. It’s still earning some interest. And if they're earning more here, then they are better off taking a loan any day.

Or maybe it’s because most companies like to have the flexibility of having a lot of money at hand. Paying back debt would simply render that flexibility null and void.

Honestly, I don't think we will never know for sure why Apple keeps borrowing. And we will just have to live with that I guess.🤷

Did somebody say Rate Cuts?

So there’s been a lot of chatter around a possible GST rate cut. Currently, you’d be expected to pay about 28% in GST if you’re thinking about buying a personal vehicle. However, automakers have been lobbying to get the tax rate down to 18% .

The government in turn has responded with a rather candid- “Maybe?”

Now clearly, this isn’t helping matters. In fact, automakers have been contesting that the anticipation of a future GST cut is putting off a lot of people from committing to a purchase right now. And they are in fact right.

This isn’t a phenomenon that is exclusive to automobile purchases. Instead, it’s something that’s pretty well documented in Academia.

For example, researchers have known that people who miss their plane by a few minutes experience more negative emotions than the people who miss the plane by a few hours.🤔

For the people who missed the plane by a mere few minutes, the emotional response is triggered by the knowledge of having been so close to boarding the plane, yet missing it. In the case of a prospective buyer looking to purchase a car, that regret is only amplified.

It’s like walking into a showroom and constantly thinking about an alternate reality where you could buy that nice Maruti Suzuki Ciaz for 7.5 lacs as opposed to 8.2 lacs if only you waited until that GST rate cut. And because most people think the tax cut is right around the corner, everybody’s on the path of minimizing regret by postponing their purchase decisions

Maybe it’s time for the government to come out and clear the air once and for all. Is there going to be a cut or not?

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