My kids don’t always love the rules in my house. Occasionally, they try to change my mind about them by whining, “It’s not fair.” It never works. There is no level of complaining that will result in my throwing my hands up in the air and conceding, “You’re right, have at it.”
But then I’m not Uncle Sam.
Apple is hoping that the United States’ tolerance for pain is a little bit lower than mine. In an interview with The Washington Post last week, Apple CEO Tim Cook discussed his tenure at Apple and, not surprisingly, fielded questions on Apple’s tax practices, including the company’s decision not to repatriate income earned overseas – at least not just yet. Cook invoked the “f” word when talking about offshore income, saying that he wouldn’t bring over Apple’s overseas funds “until there’s a fair rate,” meaning, of course, a “fair” tax rate, whatever that is.
Cook was referring to the more than $230 billion cash sitting offshore. Parked funds aren’t generally subject to tax – yet. But when (if?) the money comes back home, it will be taxed. With those kinds of dollars, Apple expects, per Cook, to pay tax at a 40% tax rate (including state tax rates): that works out to a cool $92 billion. To put that into perspective, that’s twice the annual budget for the Department of Homeland Security (downloads as a pdf).
It sounds like a lot, and it is. To be sure, Apple isn’t the only company that’s holding money abroad and waiting for tax reform: companies like Google and Microsoft are said to be following a similar strategy. But don’t fall into the trap of assuming that Apple somehow got caught in a “gotcha” and was forced to keep cash abroad all at once. Cook’s wait and see strategy is nothing new for the company. Apple has been hanging onto profits overseas for years. In 2010, Cook’s predecessor, Steve Jobs noted that the company was holding onto cash waiting for “one or more unique strategic opportunities.”
Those strategies appeared to include a repatriation holiday. The push in that direction seemed to be even stronger after Apple signed the lobbying firm of Fierce, Isakowitz, and Blalock of Washington, D.C. (in 2011, Facebook also signed up with Fierce).
Repatriation holidays, or corporate tax holidays, may be beloved by corporations but are not terribly popular with voters. In 2011, the same year those lobbyists were hard at work, Rep. Eric Cantor (R-VA) and Sen. Orrin Hatch (R-UT) – and later, Rep. Kevin Brady (R-TX) – introduced proposals which would allow U.S. corporations holding money offshore to repatriate funds at about 85% less than they would otherwise pay in tax. Rep. Brady said about the bill (subscription required):
This is about creating jobs, expanding U.S. businesses and strengthening American companies.
Those words likely sound familiar. Congress and the President like to use them because they sound great. The catch? Corporate tax holidays don’t exactly work that way. In 2004, President George W. Bush signed into law a repatriation holiday which allowed multinational companies holding funds offshore to bring those into the United States at a reduced tax rate of just 5.25%, dramatically lower than the 35% statutory rate. A study by the Center on Budget and Policy Procedures showed that $315 billion in earnings were repatriated under the 2004 holiday, but most companies did not use those funds for domestic investment.
Those jobs that were to be created? Pfizer repatriated the most money under the 2004 holiday and received criticism for subsequently laying off 3,500 U.S. employees the following year. Similarly, Ford Motor Company repatriated around $850 million under the holiday and then laid off about 10,000 U.S. workers in 2005; Merck repatriated $15.9 billion and announced layoffs of 7,000 workers in 2005). Other companies that did the same included Motorola, Procter & Gamble, PepsiCo, and Honeywell International.
And that talk about giving American companies an incentive to stay in this country? It likewise didn’t happen. Companies like Apple continued to move jobs and business overseas, parking revenues offshore.
That’s likely why subsequent proposals for corporate tax holidays have been unsuccessful. A variation of a corporate tax holiday using a “reverse Dutch auction” failed in 2014.
So Apple continues to wait. When asked how long the company was willing to wait, Cook responded, “Honestly, I believe the legislature and the administration will agree that it’s in the best interest of the country and the economy to have tax reform. So I don’t think I have to make that decision. I’m optimistic that it will take place next year.”
Reading between the lines: when Congress gives them a break.
Don’t get me wrong. I’m not opposed to a more “fair” (whatever that means) system, either. I do think we should make it easier, not harder, to do business globally. And that means tax reform. I agree with Cook when he said, “I think it’s in the best interest of the U.S. to have corporate tax reform, regardless of which political party is in charge of the White House.”
I also agree with Cook that the current system of deferral doesn’t work. He noted, “What I’ve always felt should happen is that every dollar should be taxed immediately with no deferral. But as a consequence of doing that, you should have free flow of capital.”
Sounds fabulous, right? Only Cook’s definition of “free flow of capital” and mine are probably a little different. Cook said about Apple, which is currently awaiting a ruling from an investigation by the European Union (EU) into its tax structures and practices, “We didn’t look for a tax haven or something to put it somewhere. We sell a lot of product everywhere.” It’s a curious statement as it hints that a tax-favored jurisdiction Ireland might have simply been a hotbed of iPhone or MacBook activity and not at all attractive for tax reasons (a Senate report indicated that Apple paid an effective tax rate of 2% in Ireland).
Cook denies the allegations made during the EU investigation that Apple benefited from any deal with Ireland, saying, “The structure we have was applicable to everybody — it wasn’t something that was done unique to Apple. It was their law.”
The same commission that is investigating Apple announced in 2015 that “selective tax advantages” granted to Fiat in Luxembourg and Starbucks in the Netherlands were improper. Sweetheart deals in those countries, the Commission found, allowed those companies to artificially lower their tax bills, saving millions in taxes. As a result, the Commission has ordered the companies to repay tens of millions of euros in back taxes. Those decisions are being appealed. Cook indicated, with respect to a similar investigation into Apple’s tax structures, “I don’t know how they will rule. I hope that we get a fair hearing. If we don’t, then we would obviously appeal it.”
And while Ireland also claims that it did nothing wrong, it did switch gears in 2014, with an announcement that it will put an end to tax-favored breaks used by companies like Apple and Google.
Of course, while the current tax laws appear to work for Apple, it doesn’t necessarily mean good things for taxpayers. Martin Sullivan, a former Treasury Department economist who now serves as the chief economist and contributing editor for Tax Analysts’ daily and weekly publications and blog, told The New York Times in 2012, “Apple, like many other multinationals, is using perfectly legal methods to keep a significant portion of their profits out of the hands of the IRS. And when America’s most profitable companies pay less, the general public has to pay more.”
Apple has long admitted to lowering its tax rate by taking advantage of global tax laws but continues to maintain that they have always acted legally. The company is perhaps best known in the tax world for engineering the Double Irish and Dutch Sandwich tax structure, which has subsequently been taken advantage of by companies like Twitter.
Apple’s tax strategies have not been without controversy in other countries, too. While it waited for the results of the investigation into its tax structures in Ireland, Apple agreed to pony up 318 million euros ($347.72 million U.S.) to settle a tax dispute in Italy related to back taxes. Apple had initially denied the charges in Italy with Cook telling CBS’ 60 Minutes just two weeks before, that “Apple pays every tax dollar we owe,” calling the idea that Apple is avoiding taxes on overseas profits “political crap.”
(You can read Cook’s entire interview with The Washington Post here.)
To be clear, I’m not anti-Apple. In fact, this piece was drafted on my MacBook Air. My law firm has been Apple only since 2000, a byproduct of my husband’s love affair with the company (he was an early Apple adopter thanks to a partnership, of sorts, in the 1980s between his alma mater and the Apple). And I’m not anti-capitalism (I promise you, I like money). As a tax attorney, I understand that taxpayers shouldn’t have to pay more in taxes than they are required to. But to refuse to pay up because it’s not “fair” while hundreds of thousands of taxpayers continue to pay doesn’t feel like a tax strategy. It feels like a tantrum. And it wouldn’t work in my house.