May 23, 2013 at 6:37 p.m. PST
Apple CEO Tim Cook appeared before the Senate Permanent Subcommittee on Investigations. Along with Apple’s new Head of Tax Operations, Phillip Bullock, Cook is responding to accusations that Apple is avoiding taxes.
Like many corporations, Apple has billions of dollars in offshore capital. Apple pioneered an accounting technique which involves routing profits through an Irish subsidiary, then the Netherlands, and finally through the Caribbean. This practice is so successful, it has been imitated by several corporations. Beyond the issue of offshore capital, Apple is also in the process of appealing proposed tax adjustments by the IRS.
Cook and Bullock maintain that an overhaul of the corporate tax code is necessary. Apple is actually borrowing money for domestic use, as it is less expensive than repatriating their capital and paying a 35% tax rate. They contend that decreasing the corporate tax rate will allow them to move money onshore and stimulate the economy.
Cook feels that Apple is not doing anything illegal or corrupt. He said “we not only comply with the laws, but we comply with the spirit of the laws”. Apple paid $6 Billion in taxes in 2012, at a rate of 30.5%. This does not include all of their U.S. profits, however, since they are funneled overseas. According to Bloomberg journalist Jesse Drucker, their real tax rate is more like 14%.
Apple is not the most egregious tax dodger, by far. Dozens of Fortune 500 companies pay no corporate tax, due to loopholes that favor heavy industries with fixed capital assets. Apple may be a victim of their success or their lack of influence in Washington. They have deep pockets, and Uncle Sam needs money.
Not everyone in Washington is out to get Apple. Rand Paul, a Republican well-known for his libertarian views, claims that Congress is bullying Apple. He contends that Apple is one of the greatest American success stories. It is unclear what process resulted in Apple being scrutinized, while companies that pay no taxes are ignored.
Apple, a company that has long shied away from politics, is steadily increasing lobbying efforts. In 1999, Apple only spent $180,000 on lobbying. Today, they spend $2 million. This is only a fraction of what tech giants like Microsoft and Google spend to influence policy makers. Like many companies, Apple has found that a little investment in political influence goes a long way.
Offshore Capital
Corporations keep money offshore to avoid paying taxes in the United States. Apple sells products overseas and has brick and mortar stores throughout the world. Much of the money they hold overseas is obtained through international sales, although much of it is funneled overseas with their “Double Irish” and “Dutch Sandwich” arrangement.
Apple pays very little in overseas taxes. Ireland and the U.S. have different standards for determining the main location of a business. U.S. tax code considers business headquarters to be wherever the company is chartered. Ireland considers a corporation to be domiciled in the nation where management operates. The U.S. determines that Apple is chartered in Ireland, however the Irish consider it to be chartered in the U.S. Apple doesn’t really exist in any nation. It’s based in a tax-free limbo land.
Apple is not the biggest offender in terms of proportion of capital held offshore. Apple holds 67% of their cash overseas. HP holds a whopping 100% overseas, while Microsoft stashes 89%.
Unlike HP and Microsoft, there are Apple stores all over the world. While the other tech companies do have large amounts of international sales, they don’t maintain a chain of stores throughout the world.
There are rules and regulations for offshore capital. Apple is actually following the letter of the law. This tax code is convoluted and contains benefits specific to constituents. John F. Kennedy tried to reform the tax code decades ago. It’s very difficult, since the constituents (large corporations) want to keep their benefits.
Tax Reform
Tim Cook calls for reform of the corporate tax code. He mentions that it should be simplified, but there is not much talk of removing loopholes.
Accelerated depreciation is one of the most widely exploited tax loopholes. This accounting technique allows large industrial corporations to deduct depreciation upfront, instead of amortizing it over the lifespan of the fixed capital asset. For example, if a company builds a factory, they can write off much of the depreciation this year, instead of some of it over the span of years. Employed strategically, this allows many large corporations to avoid paying taxes entirely.
There is an active debate about corporate tax reform. The corporate world, represented by high-power lobbyists, is trying to convince Congress that lower corporate taxes will stimulate the economy. Lowering taxes will allow them to bring money onshore and expand, employing Americans in the process. It will also increase their profitability, to the advantage of their officers and major shareholders. There’s little mention of “simplifying away” all of the loopholes. Every discussion of tax code simplification tends to focus on the tax rate.
The macroeconomic benefits are theoretical. In practice, such tax breaks have not stimulated the economy. In 2004, there was a temporary break in corporate taxes which resulted in corporations shedding jobs. Historically, there is an inverse relationship between the corporate tax rate and unemployment. When corporate taxes are higher, unemployment is lower.
As a business owner, I am well aware of how this works. A corporation only pays taxes on profits. Hiring an employee is a cost. Businesses that increase revenues often expand in order to avoid paying taxes. Instead of paying tax, if the business expands, the costs of expansion will mitigate the tax burden. Would a business owner rather pay taxes or hire a new employee? The latter is the rational choice. When corporate taxes are higher, businesses have an incentive to increase employment.
If the corporate tax rate is lowered, there is less incentive to “dodge” taxation by bringing on new hires or purchasing new equipment. Large corporations can avoid paying taxes by using tactics such as accelerated depreciation. Small businesses, which employ the most people, cannot take advantage of such strategies.
Despite the lack of empirical evidence that lowering corporate taxes increases employment and stimulates the economy, both parties support this move. Barack Obama calls for a reduction in the corporate tax rate, down to 28%.
Senator John McCain points out that “we all know there are loopholes that are outrageous”. However, there is little talk of closing these loopholes, and an acknowledgement that grid-lock will prevent a massive overhaul of the tax code. The one thing both parties can agree upon — corporate taxation should be diminished.
Perhaps the point of dragging Apple into the spotlight is to bolster the desired policy. Both parties want to decrease the corporate tax rate. Tim Cook gives them a compelling reason as to why this should happen. It remains to be seen whether the average American will reap any benefit. History has shown that decreasing corporate tax rates can actually decrease employment. Large numbers of unemployed people makes for diminished labor costs. Products can always be sold to emerging markets overseas, and much of that money may end up staying offshore. A desperate workforce is good for the bottom line of major corporations.
Despite the brouhaha over Apple dodging taxes, don’t believe the hype. Apple does escape taxation, but there are far worse offenders. At least they pay taxes. They are the victims of their own success. Although they are not the most egregious tax dodgers, they are one of the biggest and most visible corporations in the world. By bringing Apple in to testify, the powers that be are manufacturing consent to lower the corporate tax rate. While the U.S. does have one of the highest corporate tax rates in the world, a plethora of loopholes allows most corporations to pay very little. Cook and Bullock are championing a cause that both Democrats and Republicans support — wealthy corporations should get a break, and the middle class should shoulder the bulk of the tax burden. The hype obscures the reality.