Nexus

Apple and the Original Sin

Don’t Blame Companies for America’s Imperial Tax System That Respects No Boundaries

Apple Store

Recent congressional hearings focusing on Apple’s taxes provided a stark display of imperial hubris and arrogance. Not on the part of Apple, mind you—but on the part of Uncle Sam. The United States, in contrast to almost every other developed nation, feels entitled to tax economic activity beyond its shores, disregarding the boundaries that lesser nations feel they must observe.

It was striking that the Senate’s permanent subcommittee on investigations questioned Apple CEO Tim Cook on the same week that President Obama gave a speech suggesting the war on terror needed to be reined in, bowing to pressure from a left incensed by the never-ending “global war on terror.” This global war—like American tax policy—disregards boundaries that lesser nations feel they must observe.

Few liberal pundits (or conservative ones, for that matter) appreciated the narrative thread connecting these two subjects: American imperial overreach, a dismissively cavalier regard for the sovereignty of other nations.

Most other nations abide by a “territorial” tax system, meaning that profits are taxed where they are earned. The theory is that businesses benefit from public infrastructure and services that make economic activity possible, and so it’s only fair that companies pitch in to help fund that public infrastructure where they do business. Under this principle of territoriality, Apple should pay the French government taxes on profits made in France; pay China taxes on profits made in that country; and so on. By the same token, the U.S. Treasury expects foreign companies to pay taxes on their profits earned in the United States.

Uncle Sam, however, doesn’t limit itself to the principle of territoriality when it comes to its own companies: Companies like Apple theoretically owe the U.S. Treasury taxes on all global profits, regardless of where they are earned. I say “theoretically” because the IRS doesn’t deploy drones overseas to collect these taxes—not yet, at least—and so the rule is that the tax for overseas profits (from which you can deduct foreign taxes paid) comes due when companies bring the cash home. Hence all the talk of corporations “holding” billions of dollars overseas, not eager to “repatriate” them.

When Washington drafted its approach to global corporate taxes a half-century ago, overseas earnings were a rounding error for most U.S. companies. Today, depending on the industry, multinationals can earn well over half their earnings overseas. As Apple’s CEO testified before Congress, “Apple has substantial foreign cash because it sells the majority of its products outside the U.S.”

But taxing global enterprises doesn’t make sense in theory, and is always going to be a challenge in practice (allocating costs and profits to various jurisdictions wouldn’t be easy even if you weren’t gaming the system), facing countless accounting minefields. It was embarrassing to watch senators go after Apple the way they did, but you had to reserve your full sympathy for the Treasury and IRS officials who had to testify on the challenges of applying our antiquated (they’re talking to you, senators) and impractical tax system.

The reason for the hearing, according to Michigan’s Senator Carl Levin, the subcommittee chairman, was that Apple had engaged in a series of gimmicks “to avoid paying billions in U.S. taxes.” Yet as far as I could follow, whatever gimmicks (Cook flat-out rejected that characterization) the company engaged in lowered its tax bill elsewhere, not here. (On profits the company earned in the U.S., Apple says it paid $6 billion last year, an effective tax rate of 30 percent.) All the profits at issue still face a 35-percent U.S. tax if and when Apple decides to bring them home. Indeed, you could argue that the IRS stands to profit from Apple’s tax savings overseas, because it lowers the amount of foreign taxes it would be able to deduct when paying Uncle Sam if it brings those profits home.

At the risk of getting too far down in the weeds, Levin’s smoking gun was Apple’s Irish subsidiary, which shares Apple’s costs and returns on R&D and intellectual property. Cook explained that the amount of costs allocated to the Irish subsidiary is based on the share of revenue the company earned outside the Americas. The share attributable to this hemisphere remains with the American parent, and is accordingly taxed here, leading Floyd Norris of The New York Times to write one of the more refreshing columns off the hearings, citing tax experts calling Apple “conservative” for paying more in taxes than it needs to, and more than its competitors do, in how they allocate their R&D. (Many companies try to outsource, at least for accounting purposes, the lion’s share of all their intellectual property investment and profit).

The scent of gimmickry kicks in when you consider that the share of overseas profits allocated to Apple’s Irish subsidiary is hardly taxed in Ireland, because under Irish law foreign-controlled subsidiaries don’t have to pay taxes domestically (leading to the charge that Apple’s Irish entity is neither here nor there). But if this is an outrage beyond the ageless quest to legally minimize one’s taxes (which a public company has a fiduciary duty to do), it is an outrage for Europeans to take up with the Irish (it is their taxes that are being avoided, not ours).

Regardless of whether Apple pays Irish taxes or not on that income, it would still need to pay Uncle Sam the steep 35-percent rate (among the world’s highest) if it sought to bring those profits home. And so it doesn’t bring them home to reinvest here. Among the more self-defeating distortions caused by our Kafkaesque tax system is that despite sitting on tens of billions of dollars overseas, Apple recently borrowed billions of dollars in the United States to finance shareholder dividends.

I don’t pretend to do full justice to the complexity of arcane tax issues. Allocating costs and earnings along global supply chains is hard (the takeaway of government officials’ testimony at hearing). We cling to corporate taxes to a greater extent than other countries do because we are allergic to consumption, value-added taxes that are common elsewhere. The Apple debate is a strong case for those who argue that corporate taxes themselves are conceptually silly, since at the end of the day individuals pay the taxes (a case made persuasively by Matt Yglesias in Slate).

But it is disheartening how uninterested most pundits and politicians are to engage the real issues involved. Blinded by their anti-corporate bias, too many of the progressive voices usually offended by American unilateralism and disregard for the sovereignty of others prefer to clamor for Apple to pay more, rather than to recognize a familiar root cause to the underlying dysfunction. A more uniform global approach to corporate taxation would help minimize the ability of companies to game the system, but the first step toward such an approach is admitting that it’s our nation that is furthest out of step, by asserting that our writ applies everywhere.

During his testimony, Apple’s CEO sought to mollify his congressional audience by saying, “We are an American company, whether we are selling in China or Egypt or Saudi Arabia.” Setting aside the fact that plenty of other U.S.-based multinationals selling directly to consumers overseas expressly want to be perceived as local in every market they do business in, you have to wonder whether it makes any sense for the Apples of the world to want to remain American for long.

They can only look with envy at how well their foreign competitors are treated—not only by their own governments, but by Uncle Sam as well.



Andrés Martinez is the editorial director of Zócalo Public Square and a vice president at the New America Foundation.
Primary Editor: T.A. Frank. Secondary Editor: Sarah Rothbard.
*Photo courtesy of sushiesque.
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