They pay taxes in the US on US profits (along with payroll taxes, etc)
They pay local taxes on profits earned overseas. Then they gather up those profits in an Irish subsidiary, where they get the most most favourable tax treatment available to them.
Why would they, as a multinational company, not do that? Why would they repatriate those profits, not earned in the US to the US and take a second tax hit?
If the contention is that they are somehow hiding US profits by misrepresenting them as overseas profits to avoid taxes, then that would obviously seem rather sleazy. But if that's not the case, what's the moral or legal argument against what they're doing? Or are they misrepresenting what they're doing? It's hard to get a handle on the underlying issue with all the congressional posturing.
First of all, when Apple pays income tax in most countries, they will receive tax offset credit in USA so they don't have to pay tax twice on same profit.
But Apple doesn't even do this. The whole point of having Irish subsidiary is to give it intellectual property which is the real money maker here.
What happens then is quite simple. Subsidiary company in Ireland is charging Apple in other countries huge licensing fees. In fact, so huge that it amounts to 100 billion dollars. Licensing fees are tax deductible so Apple is basically avoiding paying corporate tax all over the world because licensing fees and royalties eat up all the profit.
Of course, Apple as a group of entities is making billions in profit but as far as overseas tax authorities (Australian Tax Office, UK Revenue & Customs etc) are concerned, Apple is barely breaking even therefore is not paying its fair share of tax.
Obviously this whole scheme comes at cost. All these billions are basically stuck somewhere in Ireland and can't be used. They just sit there and earn interest.
Eventually money will have to come to America. How? Irish subsidiary will pay dividends to parent company Apple Inc. At that point all these billions in profits will get finally taxed at ~35% by IRS.
Congress is just asking Apple when they are going to bring to USA all those profits and what's the point of deferring it. Apple is saying, we will bring it when you lower our tax rate. They are basically blackmailing the government.
edit: I was wrong by saying Apple doesn't pay corporate tax in USA. I modified my comment to reflect what I have learned from comments bellow.
> Subsidiary company in Ireland is charging parent company Apple Inc. huge licensing fees.
Cook explicitly denied this in his testimony. Are you simply assuming Apple is doing the same thing some other companies have done, or do you have evidence they have done this?
I believe the details are in the committee report released before the hearing. The claim is that the IP deal is not something that would be done with a third party it is far too cheap.
Among various other points it says Apple paid 6 billion in taxes last year which sounds unlikely if they were 'barely breaking even'.
I don't have any trouble believing that a large multinational has the means, opportunity and incentive to exploit every bit of every tax code it is subject to in order to minimize its tax liability. I'm just finding it difficult to get a handle on the basic issues between the 'zomg corporations, our evil overlords' and 'leave Britney/Apple/the free global market alone' rhetoric. My vain hope is to somehow summon up some grellas-like entity who is knowledgable in these matters and will provide a bit of level-headed insight.
You are actually right. They pay corporate tax in USA on profits generated in USA.
What they really do is that they don't pay their rightful share in other countries such as Australia and UK where they transfer profits to Ireland through phony IP claims.
For example, their net profit margin in Australia was less than 2% in last financial year which means they paid only $40 million in tax on revenue of $6 billion.
All that profit which should have been taxed in Australia and in other countries now sits somewhere currently untaxed in Ireland.
Let's just take that as a given, but Apple's tax status in other countries is not why their CEO gets called to testify before the US Senate - my questions were specifically about that.
Not that we're going to get much further in this, though, given that the submission dropped off the front page and into the dark recesses of HN a few minutes ago.
I agree with you, but playing devil's advocate, American Citizens pay US taxes on their income, regardless of where they live (http://americansabroad.org/issues/taxation/us-taxes-while-li...) - so why shouldn't US Corporations be required to Pay US Taxes on their income, wherever they make it?
Note - my answer to that is very, very quickly you would find that successful US companies re-incorporating in other countries, in much the same way wealthy Americans will sometimes give up their US citizenship.
> why shouldn't US Corporations be required to Pay US Taxes on their income, wherever they make it?
Because the law doesn't say they have to. That's enough for me.
I'm a left-wing, pro-high-tax guy, but I can never understand people who get angry at corporations for obeying the law. Besides being nonsensical, it's actively counter-productive. So long as people are focusing their attention on the corporations, nobody is pressuring the politicians to fix the actual problem.
I think one naive answer is that US citizens living abroad get credits or deductions for local taxes they may have paid. A more general one is that we already accept the idea that corporations and individuals are governed by different tax laws so "Why shouldn't one be exactly like the other?" has a somewhat flippant reply in "They don't, already, for various reasons, so why should they be?"
But I don't think the objections (or counter-arguments) to Apple's behaviour as simplistic as that - it's just I don't quite understand what the source of the controversy is and was hoping that someone else did.
Regarding tax credits - that's fine, let's say Ireland taxes at 12.5%, and US at 35%, then all companies would be required to pay would be the difference, 22.5%.
Pay it to whom, though? Ireland? The US? Does the country with the highest tax rate get to set the global corporate tax rate?
I don't think any developing economy could possibly agree to such a scheme - it eliminates a less-developed economy's ability to compete for investment against established incumbents by offering tax incentives - I think this ends up translating to unacceptable protectionism for any non-economically-dominant country looking to attract investment and compete in the global marketplace. There'd never be a 'Celtic Tiger' economy under such a scheme.
US States, incidentally, compete for business on a similar basis.
That is actually a good point. I wondered why the US is so adamant about its citizens paying taxes while living abroad. Theoretically - you are not taking advantage of any of the US infrastructure like roads and parks while you're abroad. I kind of think a citizen living abroad should be taxed, but much less (because the cost is not zero - think embassy expenses).
You are only taxed for the difference between your US taxrate and your place of residency's taxrate, this means for many citizens the tax paid to the US is very little or even $0 (but they still have to go through the trouble of filing).
The problem is that multinational companies are allowed to place IP in low income countries, set the royalty payment themselves (only subject to transfer pricing rules) and then deduct royalty payments from the earnings in all the high tax countries.
Any royalty for patent, trademark, design and copyright licenses should be deducted in the country where the patent is awarded, not where the owner of the patent happens to be situated. This way all the shenanigans would come to an end.
Apple is competing with European businesses for customers and through European patent and trademark rights Apple is awarded competitive advantages in the European market. Not paying tax is another advantage. So what if the research is done in America? The European patents and trademarks apply in Europe. Let them pay tax income tax on American profits in America, on Irish profits in Ireland, German profits in Germany.
They pay almost no tax in Australia. The Australian government is madly going around closing loopholes, mainly because Apple made close to a billion dollars this year and made almost nothing (comparatively) in taxes in Australia.
Comments
Apple's argument seems to be -
They pay taxes in the US on US profits (along with payroll taxes, etc)
They pay local taxes on profits earned overseas. Then they gather up those profits in an Irish subsidiary, where they get the most most favourable tax treatment available to them.
Why would they, as a multinational company, not do that? Why would they repatriate those profits, not earned in the US to the US and take a second tax hit?
If the contention is that they are somehow hiding US profits by misrepresenting them as overseas profits to avoid taxes, then that would obviously seem rather sleazy. But if that's not the case, what's the moral or legal argument against what they're doing? Or are they misrepresenting what they're doing? It's hard to get a handle on the underlying issue with all the congressional posturing.
That's not entirely true.
First of all, when Apple pays income tax in most countries, they will receive tax offset credit in USA so they don't have to pay tax twice on same profit.
But Apple doesn't even do this. The whole point of having Irish subsidiary is to give it intellectual property which is the real money maker here.
What happens then is quite simple. Subsidiary company in Ireland is charging Apple in other countries huge licensing fees. In fact, so huge that it amounts to 100 billion dollars. Licensing fees are tax deductible so Apple is basically avoiding paying corporate tax all over the world because licensing fees and royalties eat up all the profit.
Of course, Apple as a group of entities is making billions in profit but as far as overseas tax authorities (Australian Tax Office, UK Revenue & Customs etc) are concerned, Apple is barely breaking even therefore is not paying its fair share of tax.
Obviously this whole scheme comes at cost. All these billions are basically stuck somewhere in Ireland and can't be used. They just sit there and earn interest.
Eventually money will have to come to America. How? Irish subsidiary will pay dividends to parent company Apple Inc. At that point all these billions in profits will get finally taxed at ~35% by IRS.
Congress is just asking Apple when they are going to bring to USA all those profits and what's the point of deferring it. Apple is saying, we will bring it when you lower our tax rate. They are basically blackmailing the government.
edit: I was wrong by saying Apple doesn't pay corporate tax in USA. I modified my comment to reflect what I have learned from comments bellow.
> Subsidiary company in Ireland is charging parent company Apple Inc. huge licensing fees.
Cook explicitly denied this in his testimony. Are you simply assuming Apple is doing the same thing some other companies have done, or do you have evidence they have done this?
I believe the details are in the committee report released before the hearing. The claim is that the IP deal is not something that would be done with a third party it is far too cheap.
See here for references and one view http://blogs.reuters.com/felix-salmon/2013/05/21/tim-cooks-i...
This sounds like it's practically the opposite of the accusation I quoted, no?
as far as IRS is concerned, Apple Inc. is barely breaking even therefore is not paying its fair tax share.
Is this really true, though?
http://www.bloomberg.com/news/2013-05-23/apple-tax-rate-igno...
Among various other points it says Apple paid 6 billion in taxes last year which sounds unlikely if they were 'barely breaking even'.
I don't have any trouble believing that a large multinational has the means, opportunity and incentive to exploit every bit of every tax code it is subject to in order to minimize its tax liability. I'm just finding it difficult to get a handle on the basic issues between the 'zomg corporations, our evil overlords' and 'leave Britney/Apple/the free global market alone' rhetoric. My vain hope is to somehow summon up some grellas-like entity who is knowledgable in these matters and will provide a bit of level-headed insight.
You are actually right. They pay corporate tax in USA on profits generated in USA.
What they really do is that they don't pay their rightful share in other countries such as Australia and UK where they transfer profits to Ireland through phony IP claims.
For example, their net profit margin in Australia was less than 2% in last financial year which means they paid only $40 million in tax on revenue of $6 billion.
All that profit which should have been taxed in Australia and in other countries now sits somewhere currently untaxed in Ireland.
Let's just take that as a given, but Apple's tax status in other countries is not why their CEO gets called to testify before the US Senate - my questions were specifically about that.
Not that we're going to get much further in this, though, given that the submission dropped off the front page and into the dark recesses of HN a few minutes ago.
That sounds an awful lot like "Hollywood accounting".
I agree with you, but playing devil's advocate, American Citizens pay US taxes on their income, regardless of where they live (http://americansabroad.org/issues/taxation/us-taxes-while-li...) - so why shouldn't US Corporations be required to Pay US Taxes on their income, wherever they make it?
Note - my answer to that is very, very quickly you would find that successful US companies re-incorporating in other countries, in much the same way wealthy Americans will sometimes give up their US citizenship.
> why shouldn't US Corporations be required to Pay US Taxes on their income, wherever they make it?
Because the law doesn't say they have to. That's enough for me.
I'm a left-wing, pro-high-tax guy, but I can never understand people who get angry at corporations for obeying the law. Besides being nonsensical, it's actively counter-productive. So long as people are focusing their attention on the corporations, nobody is pressuring the politicians to fix the actual problem.
That will be true if corporations were forbade to enter the political debate at all.
But a corporation obeying a law they helped draft, lobbied for, water down, or prevented from changing is somewhat different in my opinion.
Let me be more clear, "Why shouldn't the law require US corporations to pay US taxes on their income, wherever they make it?"
I think one naive answer is that US citizens living abroad get credits or deductions for local taxes they may have paid. A more general one is that we already accept the idea that corporations and individuals are governed by different tax laws so "Why shouldn't one be exactly like the other?" has a somewhat flippant reply in "They don't, already, for various reasons, so why should they be?"
But I don't think the objections (or counter-arguments) to Apple's behaviour as simplistic as that - it's just I don't quite understand what the source of the controversy is and was hoping that someone else did.
Regarding tax credits - that's fine, let's say Ireland taxes at 12.5%, and US at 35%, then all companies would be required to pay would be the difference, 22.5%.
Pay it to whom, though? Ireland? The US? Does the country with the highest tax rate get to set the global corporate tax rate?
I don't think any developing economy could possibly agree to such a scheme - it eliminates a less-developed economy's ability to compete for investment against established incumbents by offering tax incentives - I think this ends up translating to unacceptable protectionism for any non-economically-dominant country looking to attract investment and compete in the global marketplace. There'd never be a 'Celtic Tiger' economy under such a scheme.
US States, incidentally, compete for business on a similar basis.
That is actually a good point. I wondered why the US is so adamant about its citizens paying taxes while living abroad. Theoretically - you are not taking advantage of any of the US infrastructure like roads and parks while you're abroad. I kind of think a citizen living abroad should be taxed, but much less (because the cost is not zero - think embassy expenses).
You are only taxed for the difference between your US taxrate and your place of residency's taxrate, this means for many citizens the tax paid to the US is very little or even $0 (but they still have to go through the trouble of filing).
Not true if you make over $95k, or are self-employed
From your link:
3. You are a citizen or resident alien of the US whose physical absence from the US constitutes a minimum of 330 days out of any 365.
When I lived overseas I knew US citizens counted the number of days they spent visiting family to make sure they stayed under 30 days each year.
Instead of asking that question, lets invert it: Why shouldn't US citizens living abroad be exempt on worldwide income just as corporations are?
The problem is that multinational companies are allowed to place IP in low income countries, set the royalty payment themselves (only subject to transfer pricing rules) and then deduct royalty payments from the earnings in all the high tax countries.
Any royalty for patent, trademark, design and copyright licenses should be deducted in the country where the patent is awarded, not where the owner of the patent happens to be situated. This way all the shenanigans would come to an end.
As a European, I am quite appalled that Apple almost doesn't pay tax in Europe either. Apple's European profits are compareable to their American profits, http://investor.apple.com/secfiling.cfm?filingID=1193125-11-....
Apple is competing with European businesses for customers and through European patent and trademark rights Apple is awarded competitive advantages in the European market. Not paying tax is another advantage. So what if the research is done in America? The European patents and trademarks apply in Europe. Let them pay tax income tax on American profits in America, on Irish profits in Ireland, German profits in Germany.
They pay almost no tax in Australia. The Australian government is madly going around closing loopholes, mainly because Apple made close to a billion dollars this year and made almost nothing (comparatively) in taxes in Australia.