Apple, Taxes, And Why Tim Cook Is Wrong

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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 Cook said the US tax code is outdated, Congress is dysfunctional, and anyway he couldn't bring those dollars "home" because the tax code would penalize Apple with a 40% tax rate.

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?

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