Apple, Taxes, And Why Tim Cook Is Wrong - InformationWeek

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1/5/2016
01:06 PM
Charles Babcock
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Apple, Taxes, And Why Tim Cook Is Wrong

Apple has substituted bluster and brazen attacks on the tax system for good corporate citizenship. Why are we singling out Apple? For starters, it's No. 1 on a list of the top 30 companies with the most money held offshore, using loopholes that allow it to avoid paying US taxes on approximately $181 billion.

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On 60 Minutes Dec. 20, Apple CEO Tim Cook described allegations that Apple is avoiding taxes on its overseas holdings as "total political crap."

According to "Offshore Shell Games 2015," an October 2015 report from Citizens for Justice and the US Public Interest Research Group (PIRG), Apple is far from the only tech vendor with an alleged overseas tax dodge. The report cites Microsoft, IBM, Oracle, Cisco Systems, Google, Hewlett-Packard, Oracle, Qualcomm, and Intel among the top 30 companies with the most money held offshore. 

According to an April 2015 article in Wired, US companies overall are holding a total of $1.17 trillion offshore, and tech companies account for about half of that ($462 billion). Only 286 of the Fortune 500 companies even report their offshore holdings, according to the report.

So, why are we singling out Apple? Well, for starters, it's No. 1 on that list of the top 30 companies with the most money held offshore. Not the No. 1 tech company, the No. 1 company among all industries.

Beyond that, as a leading consumer brand, Apple has an opportunity to act as a role model for good corporate citizenship. Instead, in my opinion, the company's behavior is "total political crap."

Welcome to the Total Political Crap analysis column of InformationWeek.

According to "Offshore Shell Games 2015," Apple has booked $181.1 billion offshore -- more than any other company. The report said Apple would owe $59.2 billion in US taxes if these profits were not officially held offshore for tax purposes

The report goes on to note that a 2013 Senate investigation found that Apple has structured two Irish subsidiaries to be tax residents of neither the US, where they are managed and controlled, nor Ireland, where they are incorporated. "This arrangement ensures that they pay no tax to any government on the lion's share of their offshore profits," said the report.

In denouncing allegations of tax avoidance, Cook is resorting to the type of statement that I have come to associate with Apple whenever it feels challenged. The speaker doesn't answer the question. Instead he attacks it. Cook said the US tax code is outdated, Congress is dysfunctional, and anyway he couldn't bring those dollars "home" because the tax code would penalize Apple with a 40% tax rate.

Apple CEO Tim Cook
(Image: EdStock/iStockphoto)

Apple CEO Tim Cook

(Image: EdStock/iStockphoto)

How about we make a deal? Wouldn't it be nice if Apple paid the typical corporate tax? The statutory tax rate for corporations in the US is 35%, but the average effective rate paid by corporations after deductions and credits is 27.1%, according to Americans for Tax Fairness.

Further, a February 2014 report from Citizens for Tax Justice and the Institute on Taxation and Economic Policy included the results of a survey of 288 corporations. The survey, which covered most of the Fortune 500 corporations that were profitable each year from 2008 through 2012, found that the companies paid an average effective federal tax rate of 19.4% over that period.

A mere 19.4% of Apple's offshore dollars would go a long way toward helping the US economy, wouldn't it?

[Want to learn more about Apple versus Samsung? Read Apple Worked a Broken Patent System.]

Denial of responsibility and denunciation of the question at hand is a tactic that has served Apple well in many a battle. I sat through the Apple versus Samsung trial, noting evidence being submitted about how companies other than Apple had invented the touchscreen, the swipe motion, and many of the other features that Apple was suing Samsung for using. Apple creates stylish products, and deserves its profits for doing so, but it shouldn't get to wall off other makers because they're willing to copy those ideas too.

How did the jury decide that Apple owned the ideas? One Apple spokesman after another asserted from the witness stand, We're Apple. We invent things. That's what we do. And, We feel like we've been ripped off, echoing a statement once made by Steve Jobs about Windows.

Apple produces products that capture breakthroughs, and it profits from them handsomely. To say it owns all the rights to the breakthroughs is a closed-loop form of reasoning. Its response to the offshore tax questions seems to be following similar pretzel logic.

Apple's maneuvering on taxes is too complex to unravel in one sitting -- and that's been done ably by Citizens for Tax Justice. Apple's offshore practices were also the focus of a 2013 review by the Senate Permanent Subcommittee on Investigations. Cook responded to the Senate review by saying Apple is "one of the biggest U.S. taxpayers" and it "hadn't done anything illegal."

In Ireland, Apple has created Apple Operations International, which is responsible for Apple's overseas operations. The US doesn't tax overseas operations; the host country does. But AOI in Ireland is a shell company, according to the Senate Subcommittee review. Ireland taxes companies based on where they are managed, and AOI holds its board meetings in Cupertino, Calif., not in Ireland.

According to a Business Insider summary of the report, three people, all Apple executives, make up the board, one of them being Irish and two California residents. "Its purpose is to serve as a cash consolidator for most of Apple's offshore affiliates," Business Insider stated in a May 21, 2013, article about the results of the Senate Subcommittee hearings.

Although Apple reportedly employed 4,000 people in Ireland as of 2013, AOI itself hadn't had any employees in 33 years, other than its three board members. It paid no taxes in either the US or Ireland, despite earning a total of $30 billion in income during the years 2009-2012, according to the Business Insider summary of the Senate Subcommittee report.

Still, as Cook has maintained, Apple isn't doing anything illegal. That's because, in my opinion, it's difficult for lawmakers writing a tax code to foresee all the maneuvers that a well paid corporate lawyer can find to evade it. If Apple hasn't violated the letter of the law, it's certainly acted contrary to its spirit and intent.

The second thing that Apple did in Ireland is even more contrary to the spirit of US tax laws. It has stored key intellectual property, which I think means designs and development specs leading to important products, with another subsidiary, Apple Sales International.

Tax laws recognize the place where the IP is produced as a standard for where taxes may be levied. Apple may do some product development in Ireland, but I doubt it is a significant part of it. By my reckoning, a strict accounting would likely show that Apple does most of its development in the US and a negligible amount overseas. 

If it's correct to state that Apple isn't breaking any law, then it would also be correct to say no one thought of the necessity of writing a law to prevent maneuvers like the ones Apple has undertaken. At the time the tax code was written, companies routinely accounted for their core IP within the borders of the country of its origin. The main reason to do otherwise, in my opinion, is to evade US taxes on the sale of products that pass through the books of ASI. Cook is right, the tax code is outdated. But that's not because the world has entered the digital age. It's outdated because Apple's maneuvers have made it outdated.

At the time of the Subcommittee investigation, ASI, like AOI, had no employees and paid no taxes to either Ireland or the US, but brought in a total of $38 billion in income in the years from 2009 to 2012, according to the Business Insider article.

By attributing the cost of the IP stored in Ireland to the jurisdiction of Ireland, Apple was able to evade US taxes. "Apple's cost-sharing arrangement facilitated the shift of $74 billion in worldwide profits away from the United States from 2009 to 2012," concluded the Business Insider summary of the Subcommittee report.

Apple has substituted bluster and brazen attacks on the tax system for good corporate citizenship. While defying the intent of US tax law, Apple enjoys the protections and benefits of the US economic system. That is, it is one of the giants of the digital age. It is benefitting from the rule of law and entrepreneurial spirt of this society, while opting out of its responsibility to give back to it.

In the European Union at least, the winds may be shifting. According to Reuters, an EU tax ruling regarding the Ireland tax shelter is expected. Apple will also pay Italy $348 million to settle six years' worth of tax disputes, and enter into an accord regarding its tax liabilities from 2015 forward.

Which do you think Apple will do? Will the company pay up, or play the odds that a dysfunctional Congress and vote-seeking politicians won't have the nerve to face down a misguided but popular company?

**Elite 100 2016: DEADLINE EXTENDED TO JAN. 15, 2016** There's still time to be a part of the prestigious InformationWeek Elite 100! Submit your company's application by Jan. 15, 2016. You'll find instructions and a submission form here: InformationWeek's Elite 100 2016.

Charles Babcock is an editor-at-large for InformationWeek and author of Management Strategies for the Cloud Revolution, a McGraw-Hill book. He is the former editor-in-chief of Digital News, former software editor of Computerworld and former technology editor of Interactive ... View Full Bio
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Technocrati
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Technocrati,
User Rank: Ninja
1/7/2016 | 8:56:28 PM
Re: 'Charlie, stay away from tax politics.' Good advice but...

@Charlie    Good for you !  Hold your ground.   I loved the piece !

Charlie Babcock
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Charlie Babcock,
User Rank: Author
1/7/2016 | 8:47:32 PM
'Charlie, stay away from tax politics.' Good advice but...
Rradina, on page 2 of the comments, is advising me to stay away from topics I don't know much about. That's good advice. Unfortunately, I've never been able to follow it.
vnewman2
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vnewman2,
User Rank: Ninja
1/7/2016 | 4:52:01 PM
Re: Tim Cook attacks critics without merit
@mejiac: "We can't blame US companies for seeking tax shelters as it's simply a way of maximizing resources that can later be used for future investments and growth. Many individuals do this for the exact same reason." Well said. The ones who do blame, I suspect, are the ones who are playing by the rules and feel cheated as such.
mejiac
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mejiac,
User Rank: Ninja
1/7/2016 | 4:06:34 PM
Re: Tim Cook attacks critics without merit
@vnewman2,

I don't think the sole purpose of obtaining a tax shelter (althought it's a prime motivator), but for international transactions that require currency exchange and fees, it does make it much more less of a headache.

Apple has presence at a global scale, so moving resources around easily is a must for keeping things flowing.
mejiac
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mejiac,
User Rank: Ninja
1/7/2016 | 4:04:01 PM
Re: Tim Cook attacks critics without merit
@melgross,

To add to your comment, this is how last year Microsoft was able to make a deal with Nokia, utilizing offshore resources.

We can't blame US companies for seeking tax shelters as it's simply a way of maximizing resources that can later be used for future investments and growth. Many individuals do this for the exact same reason.

Tech giants like Apple are no different since they are companies that have presence at a global scale, so having available capital that's easy to move around makes transactions run smoothly.

(Anyone that has had to deal with international transactions and currency exchange knows that is both a nightmare and it's very costly)
vnewman2
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vnewman2,
User Rank: Ninja
1/7/2016 | 3:10:26 PM
Re: Tim Cook attacks critics without merit
@melgross - while I'm not up on all the corporate tax laws per se, I think the issue is actually one of morality or malintent. As in, the only motivation for choosing that particular locale is soley to avoid paying taxes.
jries921
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jries921,
User Rank: Ninja
1/6/2016 | 8:57:43 PM
Perhaps...
...we should set tax rates on the basis of expected revenue minus expected cost of collection instead of listening to demagogues on both the left and right.  If corporate tax rates really are too high, then that will tend to show up in how hard corporations try to avoid paying it, not in how loud thewhining about "double taxation" is; or about how half the population are freeloaders who pay no tax at all.  Same goes with personal income tax; same goes with sales tax; same goes with import duties and just about any other tax one can think of.
melgross
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melgross,
User Rank: Ninja
1/6/2016 | 8:18:48 PM
Re: Tim Cook attacks critics without merit
Quite frankly, I don't think you understand the situation. US law doesn't require US corporations to pay any tax on earnings made, and held, overseas. Apple, and other companies, are doing nothing wrong. The law doesn't require US corporations to bring any of those earnings home either. The entire discussion here is ridiculous. The column is ridiculous. None of these companies are breaking US law.
stevew928
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stevew928,
User Rank: Ninja
1/6/2016 | 2:02:08 PM
Re: US entitlement?
Basically, because the US is trying to get taxes any way they can. To my knowledge, they are the only country that does this.

I'm not sure what the situation is for temporary workers (out of country), or companies with a satellite office in Canada. I'm a US citizen, but also have permanant residency status in Canada. I don't work for a US company, nor does my wife.

Unless we renounce our US citizenship, the US taxes us based on our income... Canadian income. It's not at the same rate as if we lived and worked in the US, and I think it doesn't apply under a certain income level, but taxed. We have to file (and pay) just like if we still lived in the USA.
stevew928
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stevew928,
User Rank: Ninja
1/6/2016 | 1:53:26 PM
Re: US entitlement?
But, for a company which is huge, and actually headquartered around the world (maybe with a 'main' one in a particular place) should all the taxes go to that one 'home' country? Even if, as Cook says, the majority of profits don't come from the USA?

Should they then move the headquarters to the country with the lowest taxs? Should all those other countries who buy their products and participate through employment, get no tax dollars?

I'm all for the USA closing loopholes and lowering their tax rates, as I think that would be good for the country, and the actual correct way to deal with it (rather than trying to guilt companies into not working within the laws to their benefit).
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