The corrosive effect of Apple’s tax avoidance
By Floyd Norris New York Times
The shameful thing about Apple Inc.’s ability to structure its business to avoid United States taxes was not that it did it. In fact, as Apple executives tried to point out at the Senate hearing at which their tax strategies were detailed, they could have chosen to pay much less in American taxes than they did.
The shameful thing is that we have a tax system that seems to allow multinational companies to choose what they want to pay.
The fact that this costs the government money is important, but that is not the critical element. Revelations about the ability of the rich and well connected to duck taxes can have a corrosive effect on the attitudes of the rest of us. If others who are better off than you can get away with not paying taxes, why shouldn’t you look for a way to cheat on your taxes?
The news in the Senate report about Apple was not that the company had found ways to shift income to low-tax jurisdictions. Lots of multinational companies do that. The news was that Apple had found a way to move a large part of its income to subsidiaries that claimed to not exist anywhere, at least when it came to paying taxes.
Carl Levin, the Michigan Democrat who heads the Senate Permanent Subcommittee on Investigations, had good reason to call that the holy grail of tax avoidance.
In that way, the Apple hearing filled a similar role to the one played by disclosures about Bain Capital, the private equity firm founded by Mitt Romney, during the last presidential campaign. It had been common knowledge that private equity firms had found ways to have most of the money earned by partners taxed at low capital gains tax rates, through what is known as carried interest. What came out last year was that some had found a way to treat all of their compensation that way.
Senator Levin, and the ranking Republican on the subcommittee, John McCain, tried to make the point, again and again, about how unfair the current system is to domestic companies, which cannot hide profits overseas, and to ordinary taxpayers, whose income is derived from salaries and investments that are automatically reported to the Internal Revenue Service.
“The general American public should not have to make up the balance as corporations avoid paying billions in U.S. taxes,” Senator McCain said.
But no other Republican senator seemed interested in that analysis. They praised Apple for avoiding taxes, saying that benefited its shareholders. Senator Rand Paul of Kentucky, a physician, suggested it would “probably be malpractice” for a chief financial officer not to do everything possible to minimize the corporate tax bill.
If that is the standard, perhaps Senator Paul, instead of apologizing to Apple for the fact that the hearing was being held, should have joined in what he called the “vilification” of the company, but for an entirely different reason. As Tim Cook, Apple’s chief executive, testified, there is a whole range of tactics Apple has chosen not to use.
“Apple does not hold money on a Caribbean Island, does not have a bank account in the Cayman Islands, and does not move any taxable revenue from sales to U.S. customers to other jurisdictions in order to avoid U.S. taxation,” he said.
I asked Jeffrey M. Kadet, who spent a career with large accounting firms helping companies to minimize their international tax payments — working in places like China, Japan, Hong Kong, Singapore and Russia — and now teaches tax law at the University of Washington, to review the subcommittee’s report on Apple.
“Apple’s basic structure and planning described in the memorandum appears to be appropriate corporate tax planning in today’s environment and is consistent with what I review with my students in class,” he said in an e-mail. “The company appears to be almost conservative in its approach of not trying to move any portion of profits on sales to U.S. customers into its overseas structure as some other groups have done.”
One such company, as the Senate subcommittee documented last year, is Apple’s archrival, Microsoft.
What Apple did was transfer rights to its intellectual property to a subsidiary that was incorporated in Ireland — and therefore not subject to immediate United States taxation — but managed in California. Under Irish law, that freed the subsidiary from Irish taxation.
How is that “almost conservative”? The Irish subsidiary has rights to the company’s patents and trademarks in Asia, Africa and Europe, but not in North or South America. Apple kept those rights in its United States operation. It thus appears to pay more United States taxes than it could have.
If you look at taxes as Senator McCain seems to do, one person finding a way around taxes means the rest of us have to pay more. After all, the government must raise enough money to meet its obligations. But that is not the way a lot of Republicans look at it now. They have denounced taxes for so long that some of them seem to view those who manage to legally avoid paying taxes as heroes. Some of them also seem to think that the government they help to run is evil and that depriving it of revenue is therefore a good thing.
In theory, under the current law, American multinationals will pay American taxes on all profits — less whatever foreign taxes they paid — when they bring the profits home. That is known as “deferred” taxation. But they try to avoid doing that, and hope they can persuade the government to let them pay a minimal tax on such repatriated profits, rather than the full rate.
Mr. Cook, Apple’s chief executive, endorsed that idea in his testimony. Asked what the rate should be, he replied, “To incent a huge number of companies” to bring back money, the new rate “would have to be a single-digit number.”
In other words, he took for granted that paying American taxes was voluntary for multinationals.
Everyone seems to agree that corporate income taxes need to be reformed and that a base rate well below the current 35 percent should be part of that. But beyond that, there is widespread disagreement. Multinational corporations have been campaigning for a “territorial” tax system, in which the United States would tax only profits generated in this country.
Doing that without finding a way to close down the loopholes that allow companies to move taxes around would simply ratify the current situation, with the difference that companies would no longer face the possibility of paying American taxes when they brought the money home.
And as the hearing made clear, at least to those who studied the documents, closing those loopholes may be impossible under the current system. Companies can have one subsidiary pay any price they want to another subsidiary, so long as it is reasonably close to what an arm’s-length negotiation would produce. The I.R.S. is overmatched when it tries to challenge such pricing, particularly because there are often no comparable deals struck by companies that are not affiliates.
It would be nice if the leading developed countries could agree to cooperate in the taxing of multinationals, and the Organization for Economic Cooperation and Development is working on a report with ideas for how that could be accomplished. Don’t hold your breath.
If that is not going to happen, the United States could simply end the deferral system and put in some kind of minimum tax based on global profits. If an American company paid less than, say, 15 percent, in total taxes, then it would owe the difference to Uncle Sam immediately, whether or not it brought the profits home.
To get anything done, Congress will have to agree that Senator McCain’s way of looking at taxes is correct, and accept that giving a tax break to one person or company must mean forcing others to pay more than they otherwise would.
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