“That’s a nice gadget business you’ve got there, Apple shareholders,” the Senate seems to be saying. “It would be a shame if something were to happen to it.”
Indeed, Apple has been falling behind in its protection racket payments to Congress members: It reported only $9,000 in political contributions at the corporate level for 2012 – and that was only a grant to Cupertino-area schools serving the families of Apple headquarters employees.
Naturally, delinquency like that from a FORTUNE 500 company and the largest company in the world as measured by market capitalization is going to result in some Congressional scrutiny.
And so the heat is coming to Cupertino. The Democrat-led Senate Permanent Committee on Investigations is going after Apple for, apparently, complying with the law.
The United States currently has the highest statutory corporate tax rates in the developed world, with C-corporations paying up to 35 percent of their profits. Furthermore, any dividends paid to shareholders are subject to double-taxation; Corporations don’t get to deduct dividends paid to shareholders.
Naturally, other countries try to attract capital in a competitive global economy by offering a much more favorable tax environment. And U.S. corporations – acting generally rationally – respond to these incentives. Specifically, some of them station subsidiaries in Ireland, which has a top corporate income tax rate of 12 percent – and occasionally makes a better deal with some corporations, in exchange for their capital.
This, of course, helps their local economies: When a corporation deposits funds in an Irish bank, for example, the bank is able to then lend that money back out into the local economy several times over. The Irish use this to help fund ridiculous house prices in Galway.
This is an established part of the tax landscape in the United States. U.S. Corporations have a mountain of capital “parked” offshore. They’d love to bring it home, but as soon as they do, 35 percent of it disappears. It simply doesn’t make sense to repatriate this capital to a very sluggish U.S. growth rate and pay a punitive U.S. tax rate when they can keep it invested offshore, in economies with much faster growth rates (not you, Ireland!)
This occasionally results in some huffing and puffing from the very same members of Congress who wrote the U.S. tax code in the first place.
The Residency Question
According to the Senate committee, chaired by Michigan Democrat Carl Levin (with John McCain of Arizona as the ranking Republican), Apple’s practices go beyond simply parking assets in Ireland: The Senate report contends that Apple has actually gone as far as claiming that the assets in two of their subsidiaries are parked nowhere at all.
How does that work? Apple’s tax planners have discovered a quirk in the way the two countries define what corporations are subject to their tax codes. The U.S. asserts jurisdiction over any corporation formed within American borders; The Irish assert jurisdiction over funds and operations that take place within Ireland, regardless of where the company was formed.
Apple’s answer: Form a corporation in Ireland, but maintain bank accounts in the U.S. and hold board meetings in California. Voila! An instant tax orphan: The company does not fall under IRS jurisdiction because it’s an Irish company. It doesn’t fall under Irish jurisdiction because it doesn’t do anything in Ireland. This measure, according to Sen. Levin, allowed Apple’s subsidiaries, Apple Operations International, Apple Operations Europe and Apple Sales International to go years without filing a tax return in any jurisdiction, while shielding tens of billions of dollars from any kind of tax burden whatsoever.
Avoidance versus Evasion
The Senate report is extremely careful to use the term “avoidance” and its variations, rather than the terms “evade” or “evasion.” There is an important reason for this: Tax avoidance is perfectly legal. Indeed, it’s a fiduciary obligation of any CEO and CFO, acting on behalf of their shareholders, to minimize taxes paid out.
As far as we know, Apple has broken no U.S. laws in structuring its finances in this fashion. Even the Senate report concluded that what Apple was doing was not illegal.
That, however, did not stop Senator McCain from describing Apple as the country’s “most egregious offender,” among U.S. corporations seeking to minimize their tax liability.
Apple Bites Back
Apple isn’t taking the Senatorial assault lying down. CEO Tim Cook is testifying before the Senate Committee even as I write this. Apple’s prepared written testimony is here.
It its own defense, Apple points out that it employs tens of thousands of workers and pays billions of dollars annually into the Treasury – accounting for 1 of every 40 dollars in corporate income tax the Treasury collected in 2012.
Amusingly, Apple’s vigorous counterattack is also not-so-subtly throwing some of its competitors under the bus. From Apple’s testimony:
Apple does not use tax gimmicks. Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands.
The dig on intellectual property is a direct slap at Microsoft and Starbucks. The bit on revolving loans is a shot at competitor Hewlett-Packard, as well as the politically-connected General Electric. And the smack on bank accounts in the Cayman Islands puts crosshairs on many prominent Congressional representatives, as well as Treasury Secretary Jacob Lew.
What is unclear, of course, is by what measure the straightforward jurisdiction-shifting of intellectual property and licensing to push profits to lower-tax countries count as “gimmicks,” while Apple’s own creative use of inter-jurisdictional arbitrage to create tax orphan entities do not.
This Congressional hearing, however, has nothing to do with reasoned or rational inquiry. It’s a kangaroo court – and the legal truth of the matter is quite irrelevant to the Senate’s aims. These hearings are a political exercise, not a policy-making inquiry. Apple is simply there to serve as a whipping boy for Congressmen to pound their podiums at for more money for the Treasury, for them to bestow favor on their most generous or supportive constituencies.
This explains the attempts at conflating tax avoidance with evasion, and with characterizing Apple as an “offender,” even when the committee’s own inquiry concluded that they acted within the law.
Read More From NerdWallet: