Tuesday, August 30, 2016

A Bite out of The Apple

Here’s how the largest market-cap company in the world minimizes its tax bite. First, Apple negotiated a really, really low effective corporate tax rate (1% or less?) with the Irish government in exchange for building significant backroom operations – lots of white collar jobs – in Ireland.
Second, it moved ownership and control of all (most) of its intellectual property – patents, trademarks and copyrights – to an Irish company controlled by Apple (let’s just call that company “Apple Ireland”).
Third, all of Apple’s operations in high tax countries have to pay Apple Ireland a pretty penny for the license to use that intellectual property in their Apple products. For those Apple companies, the cost of that Apple Ireland license is a fully deductible business expense in those high tax venues (like the United States) where they operate, which lowers their taxable income (or completely eliminates it).
The license revenues received by Apple Ireland generate lots of taxable income… in Ireland… but Apple already negotiated an exceptionally lower tax rate there. So effectively, Apple has transferred profits from high tax countries (U.S. federal corporate tax is roughly 35%), with this licensing scheme, to low tax Ireland. Legally.
Turns out that U.S. corporations with $10 million or more in gross annual revenues generally can use loopholes and off-shore structures to lower their effective U.S. federal corporate tax rate from 35% to an average 12.6%. Some of the biggest U.S. companies pay no tax at all. Wow! And with a Republican-controlled Congress, no matter what you hear, one of the cornerstones of their platform is leaving those loopholes very much intact.
Pressure then mounted from Apple shareholders for measurable current income, noting that Apple had transformed from a high-growth-no-dividends corporation into a mature company where dividends now mattered. So Apple had to figure out how to get all that low-taxed pile of cash in Ireland into the U.S. to pay dividends… without paying a tax for moving all that money into the U.S. How did they do it? They borrowed money in the U.S., secured by all that Irish cash, and paid the dividends. No tax on borrowed money, and you even get to deduct the interest you have to pay on the loan. Wooo hoooo! Apple is doing its happy dance.
Incoming fly in the ointment! Ireland is a member of the European Union. The EU’s European Commission has been looking at how multinational companies have taken advantage of their size and bargaining power to avoid taxes. Since Ireland is a member state, the Commission has examined their proclivity to negotiate favorable, single-company tax rates to attract business, both distorting the tax needs of other EU nations and creating an unfair advantage in attracting multinationals to set up shop in their countries. The Apple-Irish deal was an obvious place to begin.
Three years after that investigation started, the Commission announced that the special tax rate accorded by Ireland to Apple violated EU law, and that as a result Apple really owed an additional $14.5 billion (with a “b”) in taxes. The Commission was really clear: “‘Member states cannot give tax benefits to selected companies - this is illegal under EU state aid rules,’ said Commissioner Margrethe Vestager.
“‘The Commission's investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years,’ she added… The standard rate of Irish corporate tax is 12.5%. The Commissions' investigation concluded that Apple had effectively paid 1% tax on its European profits in 2003 and about 0.005% in 2014… Ms Vestager said that the tax agreement reached between Ireland and Apple meant that the company's taxable profits ‘did not correspond to economic reality.’” BBC.com, August 30th.
Apple’s happy dance stopped dead in its tracks. Its lawyers responded that there was no basis in fact or law for that EU assessment and that they would fight that ruling to the bitter end. “‘Apple said the decision would be harmful for jobs.
“‘The European Commission has launched an effort to rewrite Apple's history in Europe, ignore Ireland's tax laws and upend the international tax system in the process,’ the company said in a statement.
“‘The Commission's case is not about how much Apple pays in taxes, it's about which government collects the money. It will have a profound and harmful effect on investment and job creation in Europe.
“‘Apple follows the law and pays all of the taxes we owe wherever we operate. We will appeal and we are confident the decision will be overturned.’” BBC.com.
Of an estimated $200 billion of Apple’s cash reserves, about $180 billion are overseas with most of that purportedly in Ireland. Ireland’s Department of Financial Services (Ministry of Finance) responded that the EU’s ruling was “bizarre,” “confusing,” “over-reaching” and interfering with Ireland’s lawful sovereign rights. It is clear that Ireland will also appeal the ruling, notwithstanding that $14.5 billion of owed taxes would support the country’s entire healthcare system for a full year. They’re worried about job loss that might result.
Even the U.S. Internal Revenue Service chimed in, opposing the absorption of that tax revenue into European tax coffers (which Apple could then credit against U.S. taxes) when the IRS believes all (or most of) that money should accrue to the U.S. There are literally trillions of dollars from U.S. corporations sitting in tax-dodge accounts in foreign bank accounts, money that could generate taxes the United States needs to avoid growing its deficit even higher. But without Congressional action, there are only limited steps that the IRS can take to tax that mass of off-shore income. The Treasury Department has moved to prevent U.S. corporations from buying smaller foreign companies to shift their headquarters to lower-tax countries (called “inversions”), but that’s about all it can do without Congress’ help.
If you listen carefully to both Donald’s Trump’s tax plan and the GOP platform on taxes, their proposals are all about lowering taxes primarily to the wealthiest taxpayers in the land. They are going precisely in the other direction. They pretend they are releasing money to the “job creators” to create greater employment, but we already know that this phony supply-side/trickle-down theory has never worked. The most recent example of the failed application of theory: Governor Sam Brownback in Kansas plunged his state into massive budget deficits with no improvement in the job picture by cutting taxes for the wealthy. It just does not work!
To make matters worse, the move away from globalization – assuming it is implemented – pretty much guarantees that foreign governments will have little reason to cooperate with us to catch such corporate tax-avoiders and reform international practices that encourage tax havens to exist. We need a global effort, and we need a Congress willing to begin to fix income inequality with serious tax reform. Remember, under the U.S. Constitution, all federal appropriations legislation must begin within the House of Representatives. Think about it when you vote in November.
I’m Peter Dekom, and fairness requires that those at the top of the food chain pay their fair share under the same laws that should apply equally to all of us.

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