Apple Inc. is having one of the most successful years on record. In March, its stock value topped $506bn, making it the world’s most valuable company – and one of the six most valuable companies at any point in history. Record sales were made in the US in 2011, with over $41.8bn worth of gadgets passing hands, including 72.3 million iPhones – an 81 percent increase on 2010. Compared to Exxon Mobil who has a market cap of $400bn, IBM’s $240bn and Wal-Mart’s $210bn, Apple is a juggernaut. Its valuation now exceeds the GDP of oil-rich Saudi Arabia. As the spotlight is directed at Apple, the company’s bottom line is the subject of interrogation, with governments keen to reclaim every penny.
Experts believe UK sales could have accounted for around 10 percent of Apple’s worldwide sales of £63bn in 2010, but the corporation only paid around £9.8m in UK taxes – an effective rate of 0.1 percent of overall profits. Like any multinational, Apple has shifted patents and intellectual property, among its biggest assets, to subsidiaries in other countries that are low and no-tax havens, in moves referred to as the ‘Double Irish’ or the ‘Dutch Sandwich’. With offices in the British Virgin Islands, Ireland and the Netherlands, Apple has weighted funds around the globe in order to avoid its money costing it as much.
The company’s strategies are of course fully legal and quite common practice, but the company has now been accused of side-stepping UK tax rules, overworking accounts, and according to The Daily Telegraph, is under investigation by HM Revenue and Customs. The charges have been triggered after an enquiry into online retailer Amazon, which has not paid a penny in British corporation tax for the past three years, despite recording sales of almost £8bn.
HMRC has refused to comment on Apple’s tax status specifically, but released a statement to the world’s media saying: “We apply the tax laws as they apply to multinationals so the UK receives the tax revenues to which it is legally entitled. Where there is a high risk of the UK losing out we move our resources to challenge that risk and we work within the Joint International Tax Shelter Information Centre (JITSIC) on a coordinated global approach to prevent loss of tax through unacceptable corporate structuring.”
Apple does not fall far from the tree; the list of multinationals favoured by tax laws is long and well established, and includes other technology giants like Google, Oracle, Cisco, Microsoft and Adobe, drug giant Pfizer and utility leaders Duke Energy. It’s estimated these global corporations are holding $1.5trn in profits overseas in order to avoid the UK taxman. According to the New York Times, Apple has $12bn waiting offshore, Google has $17bn and Microsoft $29bn.
“Standard operating procedure for corporations is they keep one set of books for their shareholders and another for the tax man,” said Reuters columnist and New York Times veteran David Cay Johnston. “Many corporations routinely tell investors they incur millions in corporate income taxes, while the financial records they give the authorities show they owe nothing or are due refunds.”
Google has the lowest tax rate among its technology peers, according to Bloomberg. The company pays a 2.4 percent tax rate though the US-average combined federal-state rate is 39.2 percent, by legally transferring money to end up in island sanctuaries that have no income tax. “It’s remarkable that Google’s effective rate is that low,” says Martin A. Sullivan, a tax economist who formerly worked for the US Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”
A study by the US Government Accountability Office showed one quarter of the world’s 100 largest contractors, including Altria Group Inc. and Tyco International Ltd, have had or continue to have, subsidiaries in the Caymans Islands, which has no corporate income tax for companies incorporated there. At least 10 of the 30 companies listed on the Dow Jones Industrial Average have had units with addresses in the islands, including News Corp., which also has more than 150 subsidiaries scattered elsewhere. “These manoeuvres, actually permitted by tax law show how companies that use such strategies get the biggest benefits,” said Edward D. Kleinbard, a law professor at the University of Southern California in Los Angeles.
A report from public policy organisation The Greenlining Institute published earlier this year investigated 30 companies who feature on the Fortune 100 lists, and a net total of 51 foreign subsidiaries from 2010 to 2011. Nineteen of these companies were in tax haven jurisdictions and sixteen of them had 10 or more subsidiaries in these countries. They calculated the amount of cash held overseas had shot up 21 percent in just one year, to just under $430bn, finding also that Apple and Microsoft had the biggest increases in cash held offshore.
“We looked at high tech companies specifically because they were making so much profit,” said Samuel Kang, co-author of the report. “They were one of the few industries making not just profits, but record profits, during the economic downturn.” The UK’s Trade Union Centre (TUC) General Secretary Brendan Barber complained that tax laws should be more stringent on those operating in the UK: “Big companies and wealthy individuals are now so adept at exploiting tax loopholes that they are seemingly able to choose their own tax contributions,” he said. “There must be a level playing field, rather than one in which multinational companies enjoy huge tax advantages over their smaller competitors.”
Political blogger and novelist Bud Meyers said Apple’s transfer pricing is “all that’s wrong with corporate America today,” and Chuck Collins, senior scholar at the Institute of Policy Studies and Chair of the Working Group on Extreme Inequality says, “Further deferrals of taxes on income of foreign subsidiaries will cost the US an estimated $199bn from 2011 through 2015, in a time when austerity measures are only set to increase. Apple is ethically rotten.”
Economist William C. Randolph says public-sector economics has yet to resolve the issue of who really bears the largest burden of taxes on corporate income: “The truth is there is a horribly inefficient system,” he said. “Under the current conditions, it’s no surprise that American multinational companies that want to sell their goods abroad try to keep as much cash out of the US legally as they can. It’s a matter of survival.”
Bloomberg recently reported that a lot of people think President Obama didn’t go far enough in his recent proposal to cut the corporate income tax rate to around 25 percent from 35 percent, and many objectors would like to see it go all the way down to zero. “Tax corporations are a waste of time because they aren’t like people – ultimately they just pass along the cost of the tax to their shareholders, workers and (to a small extent) customers,” said reporter Megan McArdle. “It might just be the stupidest tax there is.”
Across the pond, Scotland’s First Minister Alex Salmond told business leaders in April that lower corporation tax would be the “best available weapon” for an independent Scotland to improve its competitiveness. It would be unlikely to undercut the UK on income tax but a three percent-point lower corporation tax rate could create 27,000 jobs and more revenues. Economist Rana Foroohar believes lower taxes aren’t the reason that businesses choose to invest or not, in a certain country.
“As Warren Buffett told me when I interviewed him in 2011, the idea that American business is at a big disadvantage against the rest of the world because of corporate taxes is ‘baloney’,” she said. “He told me in the 50s and 60s, corporate taxes were 52 percent, and business was making all kinds of [job] gains.”
Earlier this year, the UK coalition government announced they would try to attract more multinationals by instigating more favourable corporate tax laws; whilst trying to clamp down on those creatively dodging tax. An estimated £25bn of outstanding tax is potentially owed by big companies – with David Cameron saying a tougher approach was needed towards large firms with ‘fancy corporate lawyers’. “One of the things that we are going to be looking at is whether there should be a general anti-avoidance power that HMRC can use to make sure very wealthy individuals and bigger companies pay their fair share,” he said. “The government is doing its bit to cut the rate of corporation tax – and businesses should recognise they should pay that rate of tax rather than try to avoid it.”
However, Forbes business reporter Tim Worstall believes all those who say companies should pay more tax are simply being ignorant. “Companies do not pay tax, and cannot pay tax because they are not people,” he said. “No system of taxation will ever be able to make them do so, and thus to call for them to pay more is just displaying that ignorance. We’ve known this since 1899 with Edwin Seligman’s The Shifting and Incidence of Taxation. To call for corporate taxation is simply nonsensical.”
Held to ransom
In early April, Apple announced that the company will not bring more than $60bn in profits earned abroad back home to the US, mainly due to the US anti-competitive tax policies. Other residents of Silicon Valley are currently petitioning Congress for repatriation, where multinationals will be excused the 35 percent rate that’s legally due when foreign earnings are brought back stateside, and pay five percent instead. Leading this growing coalition, called WIN America, is CEO John Chambers of Cisco Systems, and supporting companies also include Google and Microsoft and Adobe. WIN America argues that bringing back hundreds of billions of dollars could help stimulate the ailing US economy and plug the growing deficit. A study by the US Chamber of Commerce estimated that repatriated dollars could increase GDP by roughly $360bn and create some 2.9 million new jobs.
Business reporter for The New York Times David Kocieniewski writes: “These corporations claim that if we reduce their tax rates on that cash from 35 percent to 5.25 percent they will bring the money home and invest it in creating badly needed jobs. They claim that for every billion invested, 15,000 to 20,000 jobs will be created directly and indirectly, which means such a tax holiday could create up to 30 million jobs – more than enough to bring us back to full employment, and then some!”
However, if Congress approves this “tax holiday,” it could cost the treasury $80bn or more, and Apple will avoid an estimated $4bn in taxes, an outcome that has caused much resentment in a country already reeling in fiscal austerity measures. Independent studies show that a similar 2004 tax holiday (that allowed Apple to dispense with a $255m tax bill at the time) did little to create jobs. In fact, profits mostly went to boost stock prices and CEO pay, and enable companies to buy back stock.
Chuck Collins believes that given the budget cuts US communities are facing, it seems reckless for the US Congress to even consider another tax giveaway to companies. “It’s unfair to individual taxpayers and small business that have to pick up the slack for tax shufflers like Apple,” he said. “At a time of huge public service cuts and national remonstration, why should we the taxpayers, give Apple a $4bn tax break? Congress should reject the corporate tax holiday for the obvious reason that it encourages bad behaviour. If these global companies know that every six years Congress will bail them out with a tax holiday, they’ll continue their off shore games.” The Obama administration has so far been resistant to the calls from corporations to allow a tax holiday, instead proposing to instill legislation with fewer loopholes and more penalties for businesses that seemingly don’t contribute to the US economy, citing the fact that in many other developed nations corporations pay less.
David Cay Johnston believes that lowering the US rate would just encourage other countries to go even lower and believes a cut would increase the pressure for further cuts in other areas that build wealth – education, infrastructure and research, making the country poorer. Rana Foroohar echoes his sentiments, saying the simple reason people have stopped investing back in the US is simply because they have lost faith in the way the economy operates. “Nobody ever stops investing because of high taxes, companies stop investing because they don’t fundamentally believe in the growth opportunities in a market,” she said in a report in Time Business. “You can’t allow US firms to repatriate foreign profits tax-free; it creates moral hazard, but it would be interesting to see how much of that money would flow back into the US if the rate was 20 percent or 12.5 percent, as it is in Ireland.”
Apple’s CFO Peter Oppenheimer said that the company’s offshore profits will stay where they are until America changes its tax laws. “Repatriating the cash from offshore would result in significant tax consequences,” he said. “We have expressed our views with Congress and the administration and think that the current tax laws provide a considerable economic disincentive to US companies.” In response, the Greenlining Institute believes the US needs to instill a number of initiatives to prevent corporate tax guidelines becoming blurred stateside and in foreign subsidiaries. “Firstly, legislation called the Stop Tax Haven Abuse Act must be passed,” they commented in their report earlier this year. “The reforms are designed to curb abuse of offshore tax havens, and would prevent companies from the US being able to claim foreign status, as well as closing multiple loopholes, and strengthening enforcement of the tax code.”
TUC believes introducing a comprehensive General Anti-Avoidance Principle (GAAR) in the UK would allow HMRC to over-rule any tax avoidance scheme specifically designed to exploit tax loopholes and allowances, and taking leadership at an international level could clamp down on the abuse of tax havens, but many people believe that aggravation towards tax aversion can only be solved at EU level. France and Germany announced they have agreed to introduce a joint corporate tax rate by 2016 – and called on other eurozone members to establish a collective financial ‘government’ for the entire continent some time this year.
The call for an administration would see the issue of a common ‘eurobond’ which would command lower interest rates. However, tax matters at EU level require the unanimous agreement of all EU member states and the UK and Ireland, among others, have refused to be drawn on the corporation tax issue – neither the tax base, nor corporation tax rates.
British chancellors (both Labour and Conservative) have repeatedly stuck to the line that taxation is a matter of national sovereignty and that further EU interference on corporation tax are unwanted by British businesses. Yet, sticking to a resolutely national position on taxation becomes less and less tenable in a globalised market where electronic as well as physical goods are increasingly traded across borders.
To even out the playing field, western organisations could look to other prominent multinational spawning nations, particularly those in Japan who have their own agenda.
The keiretsu system is a form of conglomeration in which a number of organisations link together, usually by taking small stakes in each other in order to take advantage of favourable supply chains. Every Japanese company, irrespective of domestic or foreign ownership, is treated as a Japanese resident and is liable to pay corporate taxes (42 percent including national and local income taxes and ‘inhabitants’ tax) on its total income, whether earned in Japan or overseas, and consequently, there is very little acrimonious feeling towards the system.
Whatever the outcome of investigating multinational companies, it will be hard to calculate the correct amount of tax that needs to be paid by companies with foreign subsidiaries, and with the bulk of Apple’s research and development, investment and innovations coming from the US; it’s seemingly unlikely the UK won’t take its tax fill.
Given the shifting margins of international investment at a time of wavering confidence, many economists have argued that the UK should be grateful of the business at all.