Five myths about Apple’s tax avoidance

Tuesday’s hearing on Apple’s tax avoidance schemes made for pretty good Washington, D.C. theater. Apple CEO Tim Cook was friendly and forthcoming and most of the senators went out of their way to proffer their love of Apple products. So I doubt the hearing will help advance the much needed cause of corporate tax reform — probably the opposite. But Cook & Company also left the public with more than a few misconceptions, which I will try to clear up.

MYTH 1: Apple doesn’t owe U.S. taxes on its sales outside of the United States

U.S. tax law is clear. U.S. companies must pay corporate income tax on all profits earned anywhere in the world (here’s a good primer). The same is true for ordinary folk – if you have overseas income, you still owe Uncle Sam. There’s a credit for taxes paid to other countries and, for companies, an option to defer taxation until the money comes home. But the law of the land is U.S. taxation of worldwide income. Of course, the option to defer has long been abused, which leads to the next point.

MYTH 2: Apple is following the spirit of the tax laws

John F. Kennedy must have been rolling over in his grave when Tim Cook uttered this one. When multinational corporations avoided paying income tax by sending profits overseas and using sneaky methods to bring back the cash, President Kennedy pushed Congress to close the loopholes and we ended up with a 1962 law known as “Subpart F.” The very core of the law is to look past corporate shenanigans and tax overseas profits. Sound familiar? That’s exactly what Apple’s various Irish machinations achieved through loopholes that clever lawyers have found in Subpart F and behind-the-scenes lobbying made bigger.

MYTH 3: Apple doesn’t use tax gimmicks

Apple’s testimony on Tuesday claimed the company does not use tax gimmicks and then offered a list of a couple gimmicks it does not use – no Cayman Islands bank account, no revolving loans from foreign subsidiaries and so on. But, surprise, surprise, it’s a limited list that simply left out all of the tax gimmicks Apple does use and even invented, like the so-called Double Irish Dutch sandwich that shifts and shovels products and profits from here to there until deductible expenses end up in places with high tax rates like the United States and much of the profit – $74 billion in four years – ends up where there’s no taxes at all.

Richard Harvey, who worked in Ronald Reagan’s Treasury Department, at a Big 4 accounting firm and then at the IRS, said he nearly fell out of his chair when he read Apple’s no gimmicks claim. Apple’s denial is like notorious bank robbers Bonnie and Clyde saying they never robbed a 7-Eleven or a Safeway. About 4% of Apple’s employees and 1% of it sales are in Ireland but the Emerald Isle somehow ended up with 64% of Apple’s 2011 profits upon which it paid nearly zero tax. No gimmicks?

MYTH 4:  Apple pays the least taxes the law allows

As a couple of tax experts noted at Tuesday’s hearing, Apple’s tax maneuvers are aggressive but hardly the most aggressive in corporate America, where 30 large companies paid no taxes at all from 2008 to 2010. Just as an example, Apple has chosen to re-route almost all its profits outside of the Americas through no-tax subsidiaries in Ireland. But profits coming from Canada, Brazil and Mexico come home to be taxed in the U.S.

The whole argument that Apple is just doing what it must doesn’t stand up. Apple and other tech companies regularly make decisions that cost them money, such as to address poor working conditions at factories owned and run by subcontractors or to make their products more environmentally friendly. A variety of short and long term concerns can come into play when Apple decides what to do, not just what maximizes profits in the current financial quarter. With corporations gaming the tax system, contributing near 65-year lows in taxes as a proportion of the economy, society suffers – the very society where Apple must find its employees, customers and shareholders.

And it’s arguably worse than that specifically for Apple shareholders. As tax guru Ed Kleinbard has pointed out, the kinds of tax games Apple has played can be detrimental to the future prosperity of the company. So much cash has been piled up outside the United States that it cannot be deployed profitably or returned to shareholders through dividends. As a result, Apple is disappointing investors and depressing its stock price (Apple’s recent bond issue was a partial attempt to address this mess).

MYTH 5: Apple was singled out for criticism

Although Tuesday’s hearing was solely about Apple, the same Senate committee had execs from Hewlett-Packard and Microsoft up last September to air their tax avoidance dirty laundry. And two years ago, it was CEOs of the major oil companies under Congressional fire for their most beloved tax breaks. Next time it will probably be some executives from big pharmaceuticals.

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