Naked Capitalism on the Apple Model

Is Apple Risking Its Brand Overseas With Its Tax Gimmicks?

Posted: 28 May 2013 11:16 PM PDT

One of the striking aspects of the Senate Permanent Subcommittee on Investigations hearing on Apple’s aggressive tax-avoidance strategies is the way the Senators bent over backwards to declare Apple love even as they poked and prodded at the tech giant’s various, um, devices. Being an icon of US tech prowess, even if the halo is slipping, will do that.

For those with less Apple lust or otherwise unwilling to cut the Cupertino giant slack just because it has sleek products and cool stores, a new article by tax maven Lee Sheppard at Forbes gives a layperson-friendly overview of how Apple managed to keep $44 billion of revenues out of the hands of the tax men (I’ve spoken to Sheppard, who has also given me copies of her vastly more technical, paywalled articles at the journal Tax Notes on l’affaire Apple).

One of the things that readers might not realize that even with the Senate scrutiny, tax pros still have to engage in a bit of guesswork to figure out precisely how Apple arrived at the miraculous result of having foreign sales, which contribute roughly 60% of Apple’s total profit, taxed nowhere. But certain parts are clear.

Apple has achieved a result that is similar to Google’s parking its intellectual property overseas. The consumer products company has an Irish holding company at the apex of its foreign operations. This company is in Ireland and has no employees or operations. But it is the group finance company. And the money is not in Ireland, but in New York banks and managed by employees in Nevada. So the funds are in the US even though they are domiciled abroad. This company has no residence from a tax perspective and pays taxes nowhere.

Below that is a principal company, again in Ireland. It houses the contracts with Apple’s Chinese manufacturers, owns the inventory they churn out, and manages the supply chain in Europe and Asia. It has 250 employees but like its parent, it claims tax residence nowhere but did pay taxes to Ireland under a special deal where it paid less than 2% of income, well under Ireland’s already bargain-basement 12.5% statutory rate. This company and another company hold the foreign licenses to Apple’s intellectual property. If you listened to the hearings or read some of the commentary, this is where the “cost sharing” agreements come in. Apple first entered into this cost-sharing agreement in 1980, which is astonishingly early for such aggressive tax planning (the company likely had just begun selling abroad). Cost-sharing rules were more permissive then. Apple has amended the agreement twice, but these agreements are evaluated as of when created, so Apple is effectively grandfathered under the old rules. Note that Sheppard wonders whether the amendments were handled carefully enough for them to deserve that treatment; in her wonky article, she uses words like “brazenness” and in Forbes, depicted Apple’s practices as worse than typical multinational “hokey tax schemes”.

Even though Tim Cook tried to defend Ireland as more upstanding than using one of the Caribbean tax havens, Sheppard sets the record straight:

Ireland is a tax haven. The European definition of a tax haven is a country that cuts deals with foreign companies that don’t do any business there.

She also said that tax professionals who work for big corporations were gobsmacked by Apple’s conduct. It’s one thing for a company that sells oil or makes industrial parts to get edgy in its tax structuring. None of its customers care. By contrast, Starbucks, which had gotten bad press for its tax avoidance in the UK, volunteered to make a significant payment to the government to buy itself some goodwill. And bear in mind that voluntary payment is not a tax and hence not deductible from US taxes. One tax professional told Sheppard that his company made sure to pay tax in every jurisdiction in which it did business to avoid reputational damage. Sheppard writes:

Apple is playing fast and loose with consumers’ affection for its highly discretionary products, especially in Europe. It is ill-advised for any consumer products company not to pay tax where it sells products. Equally important, Apple’s tax avoidance is also testing the patience of strapped European governments that are looking for ways to get American multinationals to pay tax.

Americans may still swoon for Apple, but even here, Samsung is making a serious dent in Apple’s lead. Prospective customers in austerity-racked Europe are going to cut a tax evader a lot less slack when social services are being cut and ordinary citizens are being squeezed dry. Will it take a brick thrown into an Apple store in Europe to get Cook and his fellow executives to realize that their strategy needs to be revamped? And this isn’t just a matter of disaffected citizens. The OECD has a “base erosion” project underway, meaning it is looking into how to crack down on corporations and individuals who manage to exclude some or all of their income from their tax base. The Europeans have already made it clear that they are unhappy with Apple-style practices of not paying taxes where sales are made and paying taxes nowhere.

Sheppard debunks the idea that the US should tolerate these practices because what is good for Apple must be good for America:

Sen. Paul demanded that the subcommittee apologize to Apple for hassling it about taxes because it is a job creator. His argument is that if big companies are indulged on tax, regulation and other matters they will provide jobs and growth….

This syllogism no longer holds. Technology has replaced semi-skilled blue collar jobs with robots and semi-skilled pink collar jobs with computers. Globalization sent unskilled manufacturing jobs to low-cost countries like China.

Apple will never become a mass employer on the order of the old GM. Apple employs a mere 52,000 people in the United States. That is roughly the same number that Ford employed at one large plant, River Rouge, 70 years ago. Apple’s employees are educated and well paid. Ford’s union workers were semi-skilled and well paid.

Ford’s new plant on the Rouge site can be visited by the public. It has relatively few workers and a lot of Japanese robots doing final assembly on pickup trucks. The manufacturing jobs that required sheer brawn and no brains have gone to countries where wages are fraction of U.S. wages. The supposed U.S. manufacturing revival will never create enough jobs to replace the lost and offshored jobs.

And don’t kid yourself that if Apple and its tax-avoiding tech confreres got their sought-after tax holiday, they’d do the right thing and invest. Sheppard again:

Even if Congress naively were to believe that tax-free repatriation of untaxed foreign profits were a good idea, we’ve been there, done that, and got bike oil on the T-shirt. In 2004, Congress granted a tax holiday, and companies with big stashes of offshore profits attributable to valuable intangibles—that’d be pharma and tech—repatriated billions of dollars in the form of dividends and executive bonuses.

The PSI hearings are pretty much certain not to tighten up on Apple’s pet loopholes. But at least the harsh scrutiny should keep the tech companies’ pleadings for more tax gimmies in the form of a tax holiday at bay. And as we noted on the Melissa Harris-Perry, the days of this sort of wildly favorable multinational tax treatment may be coming to an end. If the OECD’s base erosion project does not produce meaningful enough reforms, the UK, France, and Germany have vowed to act unilaterally, and they would provide air cover for smaller countries to follow suit. So this debate may is moving beyond where the US can continue to make the world a safe hunting ground for its multinationals. Given the need to rein in unaccountable international companies, that should be seen as a welcome development.

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