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Is Apple paying their "fair share" in taxes?

Is Apple a tax cheat?
Is Apple a tax cheat?
Photo by Taylor Hill/Getty Images

The question currently chasing Apple around the world at this point in the corporation’s history, is does Apple pay their “fair share” in taxes? Another question, based on that premise, is who should be in charge of determining their “fair share”? The final question, that which is currently being argued by the European Union (EU), and was settled in the U.S. Senate last year, is whether or not Apple’s practice of funneling of corporate profits is legal.

In 2013, a U.S. Senate investigation found that the executives at Apple had negotiated a “special low tax rate” with Ireland that allowed Apple to avoid paying at least $15 billion in U.S. taxes on $44 billion in foreign income from 2009 to 2012. The charges that the Senate investigated involved Apple finding innovative accounting maneuvers –that some term funneling profits— to Ireland to avoid paying America’s 35% corporate tax rate on all profits over $18,333,333.00, and that they placed some of their operations in Ireland for the purpose of taking advantage of Ireland’s 12.5% rate. Some have also charged that Apple has found a way to pay a mere 3.7% on some of its income. The U.S. Senate concluded that while Apple may be engaging in this activity, they begrudgingly could not find any illegalities in such actions.

Some that read such stats, and assessments, and the subsequent interpretations made by political writers and government bureaucrats trying to castigate Apple for their accounting maneuvers, say: “Go Apple!”

By most accounts, Apple is the most innovative company in the world. By most accounts, they have hired some of the most innovative minds in technological development that the world has ever seen. Why shouldn’t they, then go out and hire some of the most innovative minds in accounting that the world has ever seen to help them keep more of the profits that they have worked so hard to achieve. Most people have no problem applauding Apple for their innovation, and those same people know that we wouldn’t have near the technology, or the modern day conveniences we currently have, if Apple had never existed. Those same people do not applaud them for finding innovative ways of keeping more of their own money, and successfully, and legally, avoiding the most onerous corporate tax rate in the world, in the United States.

I don't know how you got to have Apple to have so much of their business in Ireland, we thought they were a Californian company,” an Irish newspaper quoted Democrat California Governor Jerry Brown saying during an event for Irish start-ups doing business in San Francisco.\

“When you look at their tax returns, they're really an Irish company ... it's called creative accounting.”

Those of us that read such a condemnation from a Governor –a condemnation of Ireland and Apple that a Brown spokesman later said was a joke— wonder whether or not Jerry Brown has ever been able to sit down and properly read his job duties. One of the primary details listed in his job description is to focus on creating a climate, tax and otherwise, that will attract more businesses to his state. In this particular case, Governor Brown should be focused on creating tax breaks for Apple to keep more of their operations in California. What he focuses on instead, as is customary for Democrats, is to condemn those corporations that don’t bow down and accept the tax structure he and his legislature have created or, at least, not fixed. He also jokingly condemned Ireland for creating a tax structure that is more business friendly. One would think, if Jerry Brown was, in fact, joking, that Apple, Ireland, and the voters of California probably don’t get it.

The accounting maneuvers that Apple employs not only allows Apple executives, and employees, to keep more of the money that they earned with their innovations and technology, but it also keeps Apple’s shareholders happy, as Apple consistently produces profits in their quarterly reports.

Victor Fleischer, of the New York Times, disagrees:

Shareholders are indifferent to whether a dollar of tax is paid to the Treasury Department or to a foreign government and credited in full by the American tax system. Either way, it’s a dollar that won’t be distributed to the shareholders.”

Shareholders may not see whatever dollar Fleischer is vaguely describing, but they will see three others, for with every share that they own Apple will pay them a dividend of $3.29. Even if that weren’t the case, however, shareholders would still applaud the innovative ways Apple has managed to avoid paying the brunt of the 35% the U.S. Treasury requires on profits, because it allows Apple to continually report substantially higher profits, thus making their stock more attractive to potential investors. I’m not sure if Victor Fleischer realizes this, but when a company continually reports high profits that will attract new investors, and continually attracting new investors causes the stock price to go up, which leads to shareholders seeing more dollars when they decide to sell that stock. It’s a win win for all shareholders, and it leaves them far from indifferent in regards to “whether a dollar of tax is paid to the Treasury Department or to a foreign government and credited in full by the American tax system”.

But as voters we do care about actual dollars flowing to the federal government,” Fleischer continues. He then writes a comment about attaining a larger percentage of Apple’s profits would help us pay for our food stamp program. {1}

It is rare that a New York Times writer states, even in a roundabout manner, that there might be a problem with the food stamp program. While it is true that attaining a larger percentage of Apple’s profits would help us pay for our food stamp program, it’s also true that Apple has done nothing to cause the food stamp program to be in the dire straits it’s currently in. Rather than waste our time going through Apple’s accounting books to find out if we can extract another dime from them to pay for one of the many programs that are a providing a burden to honest taxpayers, perhaps our time could be better spent investigating those that have built, and rebuilt, and wrecked the current infrastructure that is providing taxpayers such a burden. We may also want to consider investigating all of the fraud, abuse, and waste that is inherent in all of these programs. Investigating the government’s accounting, and tightening the ship, could have long term effects and leave all of us with less of a burden, as opposed to harassing a legal enterprise that is seeking to keep more of them money it has earned.

One would think that fixing the problem from the perspective of the problem creator’s side might make more sense, as it would provide for a better, more long-term fix, than calling for money to be shoved up the backside of the problem that would inevitably only create more waste, fraud, and abuse.

A poster on the Motley Fool message board, wrote the following:

iCrapple has evaded tax on over 50 billion dollars in offshore accounts and should be held criminally liable by the USA government. We as a society need to shut them down.”{2}

The question I would ask this otherwise anonymous writer, detailing a common sentiment among those that hate Apple, is what does it do for you if Apple were somehow forced to pay anything more in taxes, much less $50 billion? Are you of the mind, as it appears the NY Times writer Victor Fleischer is, that keeping more of Apple’s tax revenue in the U.S. would help pay for food stamps, and that your tax burden would be decreased? Do you honestly think that state and federal politicians would simply allow that $50 billion to sit in their coffers, or that they would reserve such payments for food stamps, to relieve you of some of your burden? Or that they would allow their piece of the $50 billion dollar pie to sit in their coffers and not be allocated? Do you honestly think that those state and federal government officials –not bound by balanced budget amendments— would allow for surpluses? That would make no sense to the current lot of politicians we have elected.

In the current context of tight public budgets,” said Joaquín Almunia, vice president in charge of competition policy for the European Commission. “It is particularly important that large multinationals pay their fair share of taxes.”{3}

Some of us read a quote like that, and wonder why a person, in a seat that is ostensibly concerned with competition, would be worried about any budgetary problems various governments have inflicted upon themselves. This quote should read, “In the current context of tight public budgets, it is particularly important that all government officials learn the discipline of budgeting.” As American writers, and the current lot in Washington D.C., and in too many seats of too many state legislatures, have shown, this mindset is no longer exclusively the home of the European Commissions.

Perhaps the reason that Apple has done everything it could to “evade” U.S. corporate taxes is that those taxes are too high. Perhaps our federal government should find a way to lower the highest corporate tax rates in the world to see if that allows America to be more competitive with the rest of the world when it comes to attracting a greater percentage of the operations of multinational corporations. It’s not Apple’s fault, or Nike’s fault, that America is no longer competitive in this arena, and all corporations should consider it an obligation to their shareholders, and the consumers of their products, to take a greater portion of their operations offshore. It’s not their fault that we’ve elected politicians that have decided it’s politically feasible to try to tax these corporations out of existence.

Let’s suppose, for a second, that Apple had decided that making a profit was less important than exhibiting what anti-corporate types call a “corporate conscience”. Let’s say that Apple executives decided that it was more germane to their public relations to pay the “unnecessarily” high U.S. corporate taxes just to fulfill some convoluted definition of patriotism that some politician pushes to allow him tax more, and that their listeners begin to hear that so often that they actually believe it. The first result would be that Apple probably wouldn’t be the Apple we know today. They would probably be back in the pack with the rest of the “more honorable” institutions that decided to be “more honorable” and thus less disagreeable to the minions that believe their politicians. There would be little-to-no innovation coming out of that Apple, as their research and development departments would need to be slashed; the prices of the products they produced would be priced out of reach; and the state and federal governments would see even less taxable revenue from Apple than they currently do.

Most consumers are not political. Some are. Some politically-minded people will purposely avoid purchasing any Apple products based on these funneling practices, but most consumer-driven purchases revolve around price and pocketbooks. If Apple were to engage in what the Apple detractors, and the government regulators, call for, and they paid the estimated $50 billion they purportedly owe the U.S. government, that expense would be passed along to the consumer in the form of what economists call an incidental tax ... that we pay on all products we purchase. The result would inevitably be that the iPhone, and all other Apple products, would be priced out of range for most consumers worried about their pocketbooks. The politically patriotic consumer that believes what politicians say, could say, “You should purchase only Apple products, because 100% of their operations are conducted in America, and we see the benefits from their taxable revenue. It helps pay our food stamp program.” The reply, from the average consumer, both political and nonpolitical, would most likely be: “That’s awesome, but it’s still too pricey for me.”

{1}http://dealbook.nytimes.com/2013/06/04/calculating-apples-true-u-s-tax-rate/?_php=true&_type=blogs&_r=0
{2}http://www.fool.com/investing/general/2014/06/10/apple-inc-stock-worth-120.aspx
{3}http://www.latimes.com/business/money/la-fi-european-union-apple-tax-ireland-starbucks-20140611-story.html