US senators have accused Apple, the world’s most valuable company, of also being the world’s biggest tax avoider, as congressional investigators yesterday laid out how the technology giant has jumped through tax loophole after loophole in order to save some $44 billion of otherwise taxable income. Today they’ll follow up by grilling Apple CEO Tim Cook on Capitol Hill.
Aside from the fact that Apple clearly has amazing tax lawyers, what does all this mean? Here are the four key things you need to know:1. Corporate tax reform will be the big issue in Washington, now that the deficit is off the front burner. As I wrote in back in January, American firms have some two trillion dollars in cash on their balance sheets stashed abroad, in large part because they don’t want to bring that money home and pay America’s 35% corporate tax rate. (Ireland, where Apple apparently stashed much of its cash, has a 12.5% rate— though it appears Apple was able to negotiate an even lower one than that.) With unemployment still high, and wages still flat, the government wants companies to bring that cash back to the US and put it work creating jobs at home, and the investigation into Apple’s finances is clearly a warning shot to other major US multinationals. Tax reform is coming, not just in the US, but also in other major developed countries (more about that below).
2. Cash rich tech firms are replacing bankers as the new corporate bad guys. A year ago, I wrote a column called Learning To Hate Big Tech, which led with the investigation into Apple’s tax avoidance, but also laid out other Big Tech v. Government battles, like the push to get Amazon to pay local sales tax (which the government won) and the FTC’s anti-trust investigations into Google. The bottom line is that, when you have a lot of cash and can move much of it abroad easily, as the biggest tech companies do, everyone is going to start paying closer attention to what you are doing. As I wrote at the time, “Steve Jobs was once quoted as asking: ‘Why join the Navy if you can be a pirate?’ But when you are the most valuable company in the world, it’s harder to play the rebel.” The truth is that Big Tech is as corporate as it comes and, since Big Tech is also where most of the new growth and income creation in this country is right now, there’s little doubt that these companies will draw more and more attention from regulators, tax collectors, and social activists.
How well the industry defends itself may depend on how many new jobs it can account for. After coming under fire for outsourcing, Apple published a study showing that it had “created or supported” 514,000 US jobs, far more than the 47,000 Americans currently on its payroll. The study’s methodology can be interpreted and spun many ways, but the bottom line is that this is going to become a more heated political issue in the years ahead. Technology has historically created more jobs than it has destroyed. But the periods in which the creative destruction happens aren’t pretty, and they tend to be characterized by high levels of inequality or social discontent; think Victorian England, or the decades preceding the 1929 stock market crash in the US.
A number of academics, including folks at tech-friendly places like MIT and Stanford, believe we’re entering one of those periods. That’s why it will become crucial for Big Tech to prove that it’s enriching the 99% as well as the 1%. As the folks on Wall Street know, social issues can very quickly become just as important as your social network.
3. Large government debts and shrinking public budgets means all rich countries will be looking more closely at corporate tax avoidance. At Davos in January of 2013, British Prime Minister David Cameron, whose country is leading the G8 at the moment, announced his desire to take on corporate tax avoiders internationally, telling multinational tax avoiders to “wake up and smell the coffee”, in a pointed reference to Starbucks, which recently “volunteered” to pay more tax in the UK in response to an investigation into its tax avoidance in Britain. And just yesterday, he announced he’d written to leaders in tax havens asking for their help with this initiative. Bottom line: all rich countries are looking to clamp down on multinational tax avoiders. Look for this to be a big topic at the G8 summit in a month.
4. The heat is being turned up high on major corporations to do their part. In an economically bifurcated world, where companies are flush but workers are not, and where the historic relationship between corporate profits and local economic growth has been broken, big companies are going to be under a lot more pressure to do more for the countries in which they operate. The push-back against tax avoiders like Apple is one example of this. Wal-Mart’s response to the garment factory fire and devastating factory collapse in Bangladesh recently is another; as I noted recently, the US retailer is now funding Bangladeshi government efforts to improve labor standards. The bottom line is that companies that have been flying 35,000 feet over the economic troubles of their headquarter nations or the countries in which they operate are going to be force to come back down to earth. Apple’s tax troubles are just the beginning of a very big fight between the world’s richest companies and its governments.
Rico says there's a lot more to this story, of course...
Landon Thomas, Jr. and Eric Pfanner have an article in The New York Times about Ireland and its taxes:
The secrets of how Apple avoided billions of dollars in taxes lie in a low-slung building of glass and brick in the hills of County Cork.Rico says he used to work for Apple, and went to the Cork facility several times; if Apple has a good deal on taxes, it's not like tons of money doesn't go into the Irish economy other ways...
There, in the Hollyhill Industrial Estate, and elsewhere in Ireland, Apple employs a mere four percent of its global work force. But there, too, Apple recorded a staggering 65 percent of its worldwide income— $26 billion last year— enabling the company, according to Senate investigators, to markedly reduce its tax bill in the United States and the rest of the world.
Such arrangements are not uncommon in Ireland, where for years authorities have not only tolerated, but encouraged, multinational companies like Google, Facebook, Pfizer, Johnson & Johnson, and Citigroup to set up shop and provide good jobs, in return for helping those companies pay less tax around the world.
But as Timothy D. Cook, Apple’s chief executive, found himself on Capitol Hill being questioned about Apple’s tax practices, Ireland came under sharp criticism for its attractiveness as a pied-à-terre for American companies doing business in Europe. At the eye of that storm: a special corporate tax rate of only two percent that Senate investigators say Apple worked out with Irish tax authorities.
Carl Levin, the Michigan senator who heads the Senate Permanent Subcommittee on Investigations, said Apple was “exploiting an absurdity” by using three Irish subsidiaries to legally avoid taxes.
The United States Senate is hardly Ireland’s only critic on tax matters. Britain, France, and other European Union countries have long been annoyed by Irish policies. During hearings in the British Parliament last week, Margaret Hodge, a member of the opposition Labour Party and chairwoman of the Public Accounts Committee, which oversees taxation, upbraided Matt Brittin, Google’s vice president for North and Central Europe, that the company’s tax practices were “devious, calculated and, in my view, unethical”.
Even before the Senate subcommittee invited Cook to testify, the British prime minister, David Cameron, declared that the topic would be a focus of the meeting of the Group of 8 richest countries he plans to convene next month at Lough Erne in Northern Ireland.
“We need a truly global solution,” Cameron wrote in a letter to Herman Van Rompuy, president of the European Council, in April of 2013. “As I am sure you will agree, the path to reform starts with the basic recognition that current global tax rules do not reflect the modern and globalized economy that our citizens live and trade in.”
Ireland, with an economy that ranks 47th in the world, is not a member of the Group of 8.
Ireland’s deputy prime minister, Eamon Gilmore, has disputed the Senate report’s contention that Apple paid a special rate, saying “Ireland doesn’t negotiate special tax rate deals with any companies.” He said that if Apple was not paying its fair share elsewhere in Europe, the fault lay in “loopholes” in other European countries that make it too easy for companies to avoid taxation. “That’s an issue that has to be addressed first of all in those jurisdictions,” Gilmore told reporters in Brussels.
The charge by the Senate subcommittee that Apple avoided paying $44 billion in taxes in the United States by keeping the bulk of its $102 billion cash hoard offshore has struck a nerve here in a recession-racked country where unemployment is fifteen percent and the government is looking for ways to repay an eighty billion euro bailout, now equivalent to $103 billion, that it received from the European Union and the International Monetary Fund in 2010.
“There is something wrong with this picture— the revenues of these companies keep increasing while our workers are getting crushed,” said Peter Mathews, a chartered accountant who is also a member of the Irish Parliament for the governing Fine Gael party. “Apple’s cash pile is about the size of our national income. Why not have them pay a four percent levy to contribute to our national recovery?”
Apple, which set up its first overseas headquarters in 1980 in Cork to assemble Macintosh computers, has a long history with the Irish. Its four thousand workers— the largest Apple labor force in Europe— is significant in a country of only 4.6 million people. Apple’s employees assemble iMacs and Mac Pros, and are also engaged in research, customer service, and other support functions. “Our tax system may be lax, but in exchange we get jobs and more foreign investment,” said Stephen Kinsella, an economist at the University of Limerick who contributes to the influential Irish Economy blog. “No doubt about it, the benefits outweigh the costs.”
Irish politicians through the years have stood behind the country’s official 12.5 percent corporate tax rate, so much so that, three years ago, when the previous government negotiated the international bailout, it refused to budge when European negotiators wanted to make a higher tax rate a condition for a deal.
Government figures show that in 2010 the effective rate on the gross income of companies here was only six percent, and economists say that in some cases— as with Apple— it can go lower than that. That stands in contrast to the effective corporate tax rate in other countries: 29 percent in the United States, 22 percent in Britain, 27 percent for France, and 24 percent for Germany.
More than six hundred American companies have set up in Ireland, employing a hundred thousand Irish workers and enjoying the advantages of an English-speaking work force and low taxes. Representatives of several American companies, including Amazon and Starbucks, have, like Google and Apple, insisted that they comply with the law. “Apple does not use tax gimmicks,” Cook told the Senate subcommittee.
Under European Union law, companies based in one European country are permitted to do business across the 27-nation bloc, and Internet companies, in particular, use that rule to book their European revenue in the country offering the greatest tax benefits. For many, that is Ireland. But, if Ireland were to change its approach to taxation, other low-tax European countries like Luxembourg and Slovakia would simply take its place.
“Back in the 1970s and ‘80s, when Ireland was a poor state desperately trying to attract investment, tax was a weapon that others weren’t using,” said Richard Murphy, founder of the Tax Justice Network, a group in London that campaigns against tax havens. “So Ireland developed a twofold strategy: low rates and not too many questions. It became the conduit state of choice.”
Timothy Cook (photo, center) came to the lion’s den on Capitol Hill, prepared to face down lawmakers furious over evidence that Apple, the famous company he runs, had avoided paying billions in taxes. By the time Cook walked out, the big cats on a Senate committee were practically eating out of his hand. Even the panel’s fiery chairman, Senator Carl Levin of Michigan, after blasting Apple for creating “ghost companies” that diverted billions of tax dollars from American coffers and caused needy seniors to go without meals, had some kind words for Cook and his company. “We love the iPhone and the iPad,” Levin said, going on to commend Cook and two other executives for voluntarily appearing before the Senate Permanent Committee on Investigations. “I know it’s not easy to come in front of a spotlight but it’s important for us.”Rico says it's funny that not a single Congressperson (not even the one from Washington state) said: "Hey, I love my Windows POS"...
Other senators seemed even more mollified by Cook’s low-key performance. Senator John McCain, the senior Republican on the panel, who had earlier criticized Apple “as among America’s largest tax avoiders,” took pains to modulate his message. “You managed to change the world, which is an incredible legacy for Apple,”he told Cook. “You have to be a pretty smart guy and a pretty tough guy, too, and I say that in a complimentary way,” he added.
Cook was especially disarming. “It’s important to tell our story, and I’d like people to hear directly from me,” he told McCain and the other senators. Apple, he testified, pays “all the taxes we owe, every single dollar.”
Cook joined Apple in 1998 as an expert in sales and operations, creating the efficient supply chain that helped catapult the company into the top ranks of the technology industry. He became chief executive in 2011. While his predecessor, Steven P. Jobs, was famous for his creative vision and flamboyant performances at introductions of the company’s products, Cook was known for his behind-the-scenes work, particularly for his shrewd negotiating tactics with suppliers. These skills seemed to stand him in good stead on Tuesday. Apple, Cook said, was a victim of an outdated tax system. “Unfortunately, the tax code has not kept up with the digital age,” he said. “The tax system handicaps American corporations in relation to our foreign competitors who don’t have such constraints on the free movement of capital.”
Apple is hardly unique in seeking to legally shield tens of billions in profits from tax collectors in the United States and overseas, even if its tactics may have been unusually aggressive. According to one study cited by Levin, thirty of the largest American multinationals, with more than $160 billion in profits, “paid nothing in federal income taxes over a recent three-year period. Zero.” Corporate tax loopholes, Levin said, need to be closed “whether or not we reform the overall tax code.”
Congressional investigators recently unveiled a detailed report showing how Apple subsidiaries— based in Ireland but spanning other regions around the world— had helped the company pay as little as one-twentieth of one percent in taxes on billions of dollars in income.
Cook sought to draw a sharp distinction between sales in the United States and those abroad, arguing that the company had complied with local laws everywhere. “The way I look at this is that Apple pays 30.5 percent of its profits in taxes in the United States,” he said. “We do have a low tax rate outside the US, but this is for products we sell outside the US.” Again and again, Cook said Apple was proud to be an American company, even if the majority of its sales took place outside the United States and were taxed at lower rates. “We are an American company, whether we are selling in China or Egypt or Saudi Arabia.”
In the most spirited exchange of the hearing, Levin bore down on the fact that Apple’s Irish subsidiaries manage to shelter much of the company’s income in Europe, Asia, and the Middle East, while it pays a higher rate on sales in North and South America.
“Of course you can bring the profits home,” Levin said during a back-and-forth with Peter Oppenheimer, Apple’s chief financial officer. “You bring them home from Canada, Mexico, and South America.”
Before Cook and two other top Apple executives testified, other witnesses suggested Apple had indeed pushed hard to take advantage of loopholes in the tax code. J. Richard Harvey Jr., a professor at Villanova Law School, estimated that Apple’s legal maneuvering had saved the company $7.7 billion in potential American taxes in 2011. “Apple is an iconic US multinational corporation that has enjoyed extraordinary financial success,” Harvey said. “In addition to demonstrating excellence in designing, building and selling consumer products, Apple has been very successful at minimizing its global income tax burden.” For example, he noted, about two-thirds of Apple’s global pretax income in 2011 was recorded in Ireland, yet only four percent of its employees and one percent of its customers were located there. While Apple has repeatedly insisted it does not engage in “tax gimmicks,” Harvey was unswayed. “Apple does not use tax gimmicks?” he said rhetorically. “I about fell off my chair when I read that.”
Despite the evidence gathered by investigators and prominently displayed on easels— like the web of affiliates Apple used to help lower its tax burden— several committee members joined in the chorus of praise for Apple’s products.
“I love Apple,” said Senator Claire McCaskill, a Missouri Democrat. “I harassed my husband until he converted to a MacBook. It’s a huge part of my life.”
The most ardent defender of Cook and Apple was Senator Rand Paul, a free-market Republican from Kentucky. “I’m offended by the spectacle of dragging in Apple executives,” he said. “What we need to do is apologize to Apple and compliment them for the job creation they’re doing.”
Instead of “bullying” Apple executives, Paul said, “we should have brought in a giant mirror to look at the reflection of Congress. If you want to assign blame, look in the mirror and see who created this mess. Apple hasn’t broken any laws, yet Apple is forced to sit through a show trial,” he said. That was too much for Levin, who organized the investigation and the hearing. “Apple is a great company,” Levin said. “But they don’t have a right to decide in my book how much in taxes they are going to pay and to whom they are going to pay them.”
Cook’s testimony before Congress was hardly his first public appearance since becoming Apple’s chief upon the death of Jobs in October of 2011. But it was a coming out of sorts.
Apple faces different challenges from the ones Jobs faced when he led the company. For one, Apple is larger, and under more pressure than ever.
Laurence Isaac Balter, chief market strategist at Oracle Investment Research, said he thought the Apple chief did a good job of treating the hearing as a constructive conversation about the problems with the business tax code and how it could be improved. And he gave Cook high marks for his performance. “You could see Cook lean back in his chair and smile,” said Balter, whose company has clients that own Apple shares. “He was totally relieved with some of the commentary.”
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