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Wednesday, March 21, 2012

Apple Whines About Having to Pay Taxes

On Monday, Apple announced that it was going to start paying dividends to shareholders, and buy back $10 billion worth of stock. What caught many people's attention in the subsequent conference call, however, was the company's pointed statement that it would not be bringing back any of the cash it holds overseas, estimated at $64 billion, or over 64% of its current cash on hand.

The reason, as stated by Chief Financial Officer Peter Oppenheimer, is that it would have to pay taxes on this money if it were repatriated to the United States. Apple made the money, so it owes taxes on it just like you or I would. But because the money was earned overseas (though realistically, some of it probably got there through transfer pricing), it can defer paying taxes on it until the money comes home. Taxes deferred are taxes reduced due to the time value of money, but that's not enough for Apple. In good Mitt Romney fashion, Apple is working with other companies to try to get the tax laws changed in its favor.What they want, as Carl Franzen of TPM points out, is a "repatriation holiday" that will allow them to bring back the money at a greatly reduced tax rate, as in 2004. Franzen notes:
However, in that 2004 experiment, pharmaceutical companies were the largest beneficiaries and although $312 billion was brought back into the U.S. by some 800 companies, most of the money was spent on dividends and stock repurchases, as Bloomberg and the New York Times both reported, referring to numerous studies. In fact, some of the companies that benefited the most from the 2004 tax holiday ended up laying off employees.
 Today, despite having just gone through the worst economic crisis since the Great Depression, U.S. multinationals now have over three times as much overseas as was brought back in 2004, some $1 trillion, according to Franzen's article. Apple's action Monday suggests that more dividends and stock repurchases would be the order of the day once again if they got their way.

According to Justin Fox, the $64 billion is "sitting in Apple's overseas subsidiaries..." This almost certainly means it is in Ireland: According to Apple's 2011 Annual Report (Exhibit 21.1), it has only two "significant" subsidiaries outside the country (and one significant subsidiary in the U.S.), both of which are in Ireland. Apple, then, is simultaneously benefiting from Ireland's tax haven status and the deferral provisions of U.S. tax law.

What should be done? I agreed with Citizens for Tax Justice in January that not taxing worldwide corporate profits would give companies even more incentive to make their profits show up overseas than they do now. Fox notes a similar argument from tax attorney Edward D. Kleinbard, who says that ending the deferral provision is the right way to go. That way, companies' income would be taxed in the year it was earned, and multinationals would get no benefit relative to domestic companies that don't squirrel away their profits overseas. It would go a long way to ending our current situation where there is one tax law for the 1% and another one for the rest of us.

1 comment:

  1. The US corporate tax rate is far higher than the norm, for both developed and developing economies. One way the US lessens the impact of its high tax rate on US corporations is to permit profits held abroad to escape US taxation (note that these earnings, originating in foreign countries, are taxed in the country where the subsidiary is domiciled).

    I think your point is off-base and reflects a poor understanding of corporate tax practice across the world. Note that the administration’s recent corporate tax overhaul includes immediate taxation of worldwide income (whether the income is repatriated or not) AND lowers the rate, which reflects the consensus bipartisan position on how the US corporate tax regimen - which is considered out of line with worldwide practice - should be reformed.

    What I believe you are suggesting - retaining the current very high tax rate while eliminating the deferred taxation of overseas earnings - is an extreme position that I am certain would have very bad consequences for US employment and competitiveness.

    Just as an illustration, I was part of a manufacturing site project team recently that considered and immediately rejected locating the plant - the kind that generates well-paying jobs for trained industrial staff - in the US solely due to the US tax system. The comparison made the US look so unattractive that the idea was literally dropped without discussion at the initial review of the numbers.