Apple pays “all the taxes we owe—every single dollar,” its boss, Tim Cook, told the Senate permanent subcommittee on investigations on May 21st. The previous day the subcommittee had issued a report claiming that Apple’s extensive use of tax havens and shell companies had helped it avoid paying tax to Uncle Sam on $44 billion of profits between 2009 and 2012.
Apple has a two-pronged tax avoidance strategy, says Carl Levin, the chairman of the subcommittee. First, it “executes a shift of the profit-generating power of its intellectual property to an offshore tax haven”. Second, it “uses a number of tactics to ensure that, once this income is offshore, it remains shielded from US taxes”.
Among the tactics identified by the report was the creation of a subsidiary, Apple Operations International, based in Cork, Ireland, which in turn is parent to the group’s international sales arm. Between 2009 and 2012 the Irish offshoot recorded profits of $30 billion, courtesy of its having sucked in vast sums from other subsidiaries. Yet it has not filed a tax return anywhere for the past five years.
The company is incorporated in Ireland but in effect is managed from America (where its board meetings are held). That lets it claim it is a resident of nowhere for tax purposes, thanks to a difference between Irish and American rules: America bases residency on where a firm is incorporated; Ireland on where it is managed or otherwise controlled. Mr Levin called this the “Holy Grail” of tax avoidance: stateless profits, beyond the reach of all taxmen.
Apple, which points out that it paid $6 billion in American tax in 2012 (a year in which its global pre-tax profit was $56 billion) is not alone in attracting the attention of Mr Levin and his colleagues. An earlier subcommittee hearing took to task Microsoft and Hewlett-Packard over their tax avoidance. Overall, such techniques have helped American companies to amass an estimated $1.9 trillion offshore, safe from the American taxman.
Assiduous tax avoidance has driven down the share of corporate tax to around 9% of federal government revenues, says Mr Levin, noting that the average American public company pays an effective rate of 15%, less than half the statutory rate of 35%. “A recent study found that 30 of the largest US multinationals, with more than $160 billion in profits, paid nothing in federal income taxes over a recent three year period,” the senator noted.
It is not just American politicians who are indignant. The latest company to get a roasting from a British parliamentary committee was Google. On May 16th it was branded “devious” and “unethical”, and accused of misleading earlier hearings. This follows grillings of Starbucks, Amazon and the big four accounting firms (the high priests of the tax-avoidance industry).
British bosses echo their American counterparts in insisting their behaviour is not indecent, merely the consequence of flawed rules that need to be fixed. On May 20th Sir Roger Carr, president of the Confederation of British Industry, said tax avoidance should not be viewed as a matter of morality: “There are no absolutes.” The public takes a different view: in December, Starbucks decided to pay £20m ($32m) in tax to the British government that strictly it did not owe, to head off a consumer boycott that was hurting sales.
At this week’s hearing in Washington, DC, Mr Cook pointed to Apple’s own tax planning in support of his call for reform of the corporate tax regime in America, which he claimed disadvantages its companies against foreign rivals. RATE and LIFT, two groups of the country’s biggest companies, are lobbying Congress to pass a series of tax reforms including lowering the marginal rate of corporate tax, broadening the tax base against which it is levied by scrapping loopholes and moving to a “territorial” system which links the tax bill more closely to the sales (and perhaps also the number of employees) a firm has in any given country.
A territorial system alone would not stop the use of tax planning to game the system: after all, Britain and many other countries run their tax systems on such lines, and still lose lots of revenue to clever tax schemes. But there is already strong bipartisan support in Congress for some sort of tax reform. And, according to Edward Kleinbard, a business-tax expert, the recent revelations about Apple have encouraged supporters of reform to start discussing a minimum corporate tax rate of, say, 15% on foreign income. In this case, if the Internal Revenue Service found that a company were paying a rate of less than 15% on its profits in any other country, it could demand the shortfall.
Yet the failings of global corporate taxation will not be remedied by one country acting alone, even America (and there is no guarantee that the bipartisan consensus will translate into a sensible new tax law soon). Doing something about tax havens and loopholes is rising rapidly up the global agenda. David Cameron, Britain’s prime minister, says it will be a priority for the meeting of the G8 countries he will host in June. In July the OECD, a group of rich countries, is due to present a plan for global tax reform to the G20, which includes developing countries.
But for all the political rhetoric and populist appeal of taxing multinationals more, there are strong vested interests behind today’s flawed system. Chief among them are the governments of places that benefit from acting as tax havens, which are not just small tropical islands but include Luxembourg, Ireland (which gains jobs from hosting some of Apple’s subsidiaries) and Britain, which has a tradition of being relatively lenient on firms that break, as well as bend, the tax rules. So it will be no surprise if any reforms that emerge from the current political fury will do no more than tinker. If so, for all their public enthusiasm for tax reform, it is hard to imagine Mr Cook and his peers at Starbucks, Google, Amazon and the rest being terribly upset.
© The Economist Newspaper Limited, London (May 25th 2013, From the Print Edition)