“The uproar about Google paying £130m in back taxes and raising the amount it pays in the UK by just £10m a year is merely a little local difficulty compared with what comes next,” John Gapper writes for The Financial Times. “Apple could soon be instructed to pay billions, triggering a showdown between Europe and the US and a potential breakdown of the international tax system. This sounds apocalyptic but it is a decent bet.”
“Apple disclosed on Tuesday that its minimally taxed pot of overseas cash has grown to $200bn. Tim Cook, chief executive, flew to Brussels last week to protest at the likelihood of being told by the European Commission to pay a chunk to Ireland, where it has operated since 1980,” Gapper writes. “American politicians are angry at what some call ‘a direct threat to the interests of the US.'”
“We face a historic moment. The tax system formed under the League of Nations in 1928 relies on the idea that companies should be taxed largely where profits are created, not where they sell their products and services,” Gapper writes. “It could soon fall apart and what happens then is anyone’s guess, although it will not be pretty and will probably resemble a global tax war.”
Read more in the full article here.
MacDailyNews Take: Good. Blow up this broken “system” and design a proper one for modern times.
The U.S. corporate tax rate is way too high. Obviously. It forces drastic and convoluted tax avoidance efforts.
Under the current U.S. corporate tax system, it would be very expensive to repatriate that cash. Unfortunately, the tax code has not kept up with the digital age. The tax system handicaps American corporations in relation to our foreign competitors who don’t have such constraints on the free flow of capital… Apple has always believed in the simple, not the complex. You can see it in our products and the way we conduct ourselves. It is in this spirit that we recommend a dramatic simplification of the corporate tax code. This reform should be revenue neutral, eliminate all corporate tax expenditures, lower corporate income tax rates and implement a reasonable tax on foreign earnings that allows the free flow of capital back to the U.S. We make this recommendation with our eyes wide open, realizing this would likely increase Apple’s U.S. taxes. But we strongly believe such comprehensive reform would be fair to all taxpayers, would keep America globally competitive and would promote U.S. economic growth. – Apple CEO Tim Cook, May 21, 2013
SEE ALSO:
Apple CEO Cook lobbies EU antitrust chief over Irish back taxes – January 21, 2016
Think Ireland’s corporate tax is unfair? Wave goodbye to Apple and thousands of jobs if it’s changed – November 14, 2015
Apple announces 1,000 new jobs in Ireland as EU tax ruling nears – November 11, 2015
Apple tax probe won’t hurt Ireland, Finance Minister Noonan says – October 5, 2015
EU’s Vestager says will not complete tax inquiries of Apple, others in second quarter – May 5, 2015
Apple warns of potential ‘material’ financial damage from European tax probe – April 29, 2015
Apple may have to pay Ireland 10 years of back taxes – April 30, 2015
Ireland’s Prime Minister: Apple has nothing to fear from end of ‘Double Irish’ tax avoidance strategy – November 4, 2014
Apple says it may lose Irish tax break – October 31, 2014
Ireland to end tax lures that drew U.S. firms – October 14, 2014
EU tax probe spotlights Ireland’s allure for multinationals – October 13, 2014
EU watchdog to give reasons for inquiry into Ireland’s tax treatment of Apple – September 29, 2014
European Commission accuses Apple of prospering from illegal Irish tax deals – September 28, 2014
EU threatens expanded probe into Ireland’s tax practices regarding Apple, Googles, other companies – June 20, 2014
EU’s investigation of Apple’s taxes isn’t going to cause the company any problems – June 13, 2014
EU launches tax avoidance investigations on Apple, Starbucks, Fiat – June 11, 2014
Not in Taxes anymore: On site at Apple’s famous Irish ‘headquarters’ – November 2, 2013
Regan: U.S. tax code spurs loveless foreign corporate ‘marriages’ – May 13, 2014
Ireland to close Apple’s tax loophole, but leave bigger one open – October 15, 2013
G20 think tank OECD proposes blueprint for global crackdown on tax avoidance – July 19, 2013
Thomas Sowell on Apple, corporate taxes, and ‘the road to serfdom’ – May 28, 2013
Taxing Apple just taxes you – May 24, 2013
Don’t tax Apple, tax its shareholders – May 24, 2013
If Apple paid more tax, we might pay less or something – May 22, 2013
Apple CEO Tim Cook pounds another nail into the Keynesian coffin – May 22, 2013
Apple CEO Cook makes no apology for company’s tax strategy – May 22, 2013
I know this is all very complicated, but if I understand correctly, Apple’s subsidiaries in each country are companies that have a local tax burden. If the company were merely distributing products to the retail channel, it would be very different.
As for Google, they are making profit in the different countries where they sell ads. They even lied about UK sales, saying they were made by personnel in Ireland, when that was not the case.
So this is about taxing where profits are created: at the point of sale. There are certainly expenses that can be taken for design, R&D, etc, but you cannot pretend that when you’re selling retail or online in a country, in your own stores, that you’re not making profits in those countries. (Or, in the case of Google, selling to companies in the UK for ads shown to internet users located in the UK.)
So how is it that Apple has all this revenue funneled into Ireland? What, do all 6.4 million citizens own 10 iPhones each?
Ireland is where the intellectual property is owned. All of Apple pays royalties to Apple Ireland for the the right to use that intellectual property. That’s how all the money is funneled to Ireland, along with some distribution of product I’m sure.
Every entity has done this. GE, Microsoft, Oracle, GM, Ford, etc. The original sale of all of this IP happened during the Clinton years. At that time the Intellectual Property was valued by market appraisers, the sale from the US legal entity to the overseas legal entity was completed. This resulted in large income for US tax purposes and large tax payments to the US Treasury. That’s how the US had budget “surpluses” during some of the Clinton years.
Since that time, the US legal entity has been paying royalties to the foreign IP owning entities each and every year, getting a tax deduction in the US @ 35% tax rates and being taxed in say Ireland at 10% tax rates.
In this way Ireland just like a Lamprey attached itself to the US economy and has been draining our treasury for all these decades.
This is only partially correct. The IP held abroad by Apple Sales International in Ireland is only for offshore intellectual property rights, i.e., the IP for Apple goods sold abroad.
http://www.businessinsider.com/how-apple-reduces-what-it-pays-in-taxes-2013-5
@kirkmc: You directly contradict the article. You say “So this is about taxing where profits are created: at the point of sale.” but the article says “The tax system formed under the League of Nations in 1928 relies on the idea that companies should be taxed largely where profits are created, not where they sell their products and services”. So the article says taxes are owed where the product is created (i.e., built) not where it is sold.
The point is that Apple – and other companies – have subsidiaries in the various countries, and these subsidiaries are tax entities. So they’re not just distributing their stuff through other companies, but selling it through companies that have legal structures, and that (should) file taxes in the other countries.
MDN noted: “Unfortunately, the tax code has not kept up with the digital age.”
It is not the “digital age,” but the globalized mass market age that results in companies like Apple selling world wide.
Apple is merely navigating the international business tax regimes in the most thrifty way possible and thus helping their company, suppliers, customers and employees gain the most benefit from their actions.
The US government thinks that confiscating 50% of all GDP is NOT ENOUGH. They want 60%, or if you listen to Sanders it might be 70% with his free, free free proposals. Socialistic forms of government tend to collapse when they bleed everyone dry.
Apple is merely navigating the international business tax regimes in the most thrifty way possible and thus helping their company, suppliers, customers and employees gain the most benefit from their actions……
Um not really. Try Stock holders and top management
This is Apple… https://youtu.be/d4o13isDdfY
The idea of international tax shelters should be banned, and a fair and reasonable tax structure installed in its place. It’s unfair that large companies can manipulate their way out of paying taxes through loopholes smaller companies either do not know about or aren’t sufficiently savvy enough and/or large enough to take advantage of.
I’m so tired of people whining using the words “It’s unfair”. Does any reasonably intelligent person in this world truly believe that anything about life, business, work, or money is or will ever be “fair”? It’s just so naïve.
Unfair is life. It won’t ever change. Some people will always be lucky and live charmed lives. Some will have poor or horrific lives. Some will start one way and end the other. Still others will be somewhere in-between. A few die too young, others live beyond everyone else. It’s just a fact of life, and it’s inherently unfair. It just is.
Every tax law that is fair and reasonable to a company or person will have unforeseen and unfair consequences to another.
It will never happen and shouldn’t, but the only way to make it sort of fair for taxes is to make all taxes flat with no deductions. Everyone pays the same rate, period. There is a whole host of arguments that can (and should be made) as to why this should never come to pass. Deductions exist for a reason, and sometimes another word for them is loophole. Loopholes are just deductions used in ways not originally intended, but not explicitly disallowed, because legislators don’t have crystal balls to see every way someone might try to exploit it. Figure out how to make tax law that can never be twisted and you will be hailed as universally smarter than anyone else.
The idea of taxation (legalized theft) should be banned. The evil SOBs who argue for more taxation never give a dime of their own money for the schemes they advocate. It’s no coincidence that leftist socialists are the worst, anti-charity greedbags on earth.
So how does the country do anything – as a country?
Clearly, most of the tiny number of people who own half the wealth of the country don’t plough it back into the “the common good”. They leverage it in the big monopoly game to make even more billions.
Sean, yes, those “tiny number” of people seek to make “more billions” and, along the way, they spawn many/many jobs for the “common good” (brings good to the commoners) and some even become part of the “tiny” that do the same.
I’m guessing by “plough it back” you mean distribute, or gift somehow? Btw, where I live, there’s a children’s hospital gifted by Mr. Dell…one of those in the cycle you speak of.
Yes, yes, tells us about your “own money” kiddo.
[The tax system formed under the League of Nations in 1928 relies on the idea that companies should be taxed largely where profits are created, not where they sell their products and services,” Gapper writes. “It could soon fall apart and what happens then is anyone’s guess, although it will not be pretty and will probably resemble a global tax war.”]
The world’s tax system is based on two competing practices. The first is taxation on production (all taxes based on earnings/production profit). The second is taxation of consumption (national sales tax).
Taxation of production is an archaic system introduced when production and consumption occurred within the same jurisdiction. The problem with this method is that today’s production most likely occurred in another jurisdiction. This isn’t necessarily a problem when that production remains within the national jurisdiction. It becomes a huge problem when production and consumption occur in different national jurisdictions.
Taxing consumption (where the item is sold, as opposed to where the item is produced) solves this problem.
Before you argue that a consumption tax would make the item even more expensive consider this: the average US produced item contains about 25% production taxes embedded in its retail price. So, elimination of production taxes would lower the cost of a $100 item to $75. Applying a 30% consumption tax on the true cost of the US produced item ($75) results in a fully taxed item price of $97.50.
Also, because production taxes are embedded in the retail price of the item being purchased it is the consumer that is actually paying corporate taxes. The corporation is nothing more than a tax collector for the taxing entity.
Adopting a consumption taxation policy worldwide would eliminate the need for tax havens and all other tax manipulation (loopholes, exemptions, etc) schemes.
Another benefit to US workers/taxpayers is that imported goods, produced where production taxes are lower than the US (or non-existent) will be taxed in the US at the same rate US produced goods are taxed, AND, US goods will be exported at the lower (no embedded production taxes) price. This has the effect of making US produced goods competitive with foreign made goods.
Example: US manufactured good (with embedded production taxes) costing $100 in the US, will cost $120 in Japan. That same good with no embedded taxes will sell for $90 in Japan.
Goods manufactured in China now costing $100 in the US will cost $130 when a consumption tax is applied.
The incentive to manufacture in China (or other foreign manufacturing countries) has been greatly reduced, resulting in more US manufacture of goods meant for the US market (aka more US manufacturing jobs).
A bill to change the US tax system to consumption vs production has been before the US Congress for many years. It has been blocked because a consumption tax cannot be manipulated to favor one group over another, and tax policy/rates are a favorite campaign issue of politicians.
You are way too smart.
I like how your consumption tax-only policy would be more transparent to its citizens who would see directly how much their government was taking from product pricing.
It would stop tax haven shopping, as tax havens only work for profits, not sales.
[the average US produced item contains about 25% production taxes embedded in its retail price. So, elimination of production taxes would lower the cost of a $100 item to $75.]
Bad calculation. If it’s got ” 25% production taxes embedded” in it already, then that’s 25% on the original amount, which would be (100/1.25) = 80. And 80 * 1.3 is 104, not 97.50.
Can’t believe I agree with MDN on a take with political overtones. Will miracles never cease?
Can “First 2014…” be far behind?
They’re one and the same. Steve Jack
So, where’s my cut of MDN’s ad revenue?
Your $hit sandwich is in the mail. Enjoy every bite.
Tax business in any form is inefficient, since the incidence of the tax (those who really pay) falls on the company’s shareholders and its customers. Businesses must make a profit to survive, and any tax on business just creates a cost which must be passed on to someone. The ideal corporate income tax therefore should be zero.
A “no corporate taxes” argument might make sense if 100% of the net profit that a corporation generates in a given locality was passed through promptly to taxpaying consumers and shareholders in that locality. In fact,
1. A significant portion is never passed through to anybody–some (perhaps most) net profits from current operations are either plowed back into the business to finance expansion or they are retained as cash reserves, like the $200 billion or so Apple is holding. Are you suggesting that all those funds should be exempt from taxation? Do you just want to exempt corporations from paying taxes to support the public infrastructure (roads, police, fire, courts, hospitals, etc.) they rely on, or do you also want to exempt them from paying for public utilities like water and electricity? Those costs just get passed through to the customers and stockholders, too.
2. The net profit that is passed through goes to customers and shareholders where they live, which is probably not in the same locality, or even the same country, as the place where the corporate taxes would otherwise be paid. Assume a corporation that builds computers in China for sale to the US, which is also where most of the shareholders live: How is it fair to have China provide governmental services for free while the United States collects taxes without contributing to the public infrastructure and services that made the profits possible?
3. Only a minority of corporate shareholders are individuals who pay taxes. Most shares are owned by other corporate entities like mutual funds and pension plans. The individuals who benefit do not pay taxes until they receive a distribution. If all corporations were exempt, most taxes on profits would be deferred indefinitely, unlike the bills that the governments have to pay on a current basis to continue providing services.
It doesn’t matter who collects the taxes shipped off the federal government, it is the consumer that pays it. Corporations don’t generate tax monies out of whole cloth, they are embedded in the price you pay for the items you buy.
Corporations are merely tax collectors of the embedded taxes paid by consumers when an item is purchased.
That is true, but if corporations are excepted from paying taxes then they will reinvest profits in growth indefinitely without ever paying taxes and neither shareholders of customer or the company will be paying their share of taxes.
That could be fixed by having corporate profits reflected on shareholders returns as already happens for S-corporations.
Then only individuals would pay taxes on earnings, regardless if the money was directly earned or earned via corporate ownership.
Your logic falls apart well before your last sentence.
First, let’s recognize who holds all the power today. Multinational corporations have evolved well beyond what nation laws envisioned. No country in the planet is agile enough to keep up with the complex games that professional money managers invent.
Second, look at who really runs governments around the world. Corporations buy off dictators, communist parties, and democratically elected representatives with no problems. Much of this is legal and there is no ramification for immoral behavior.
Finally, what entities are hoarding cash? If the world is in an economic malaise, it’s not because the average person is holding onto obscene wealth. Banks and Corporations have so many tax havens, many of which are unusable by small companies.
The modern world would do well to revise the tax codes to increase taxes on raw material use, financial transactions, and waste disposal, and decrease income taxes on individuals and companies alike. But first close the corporate handout loopholes, all written by corporate lobbyists themselves, that have put all governments around the world into massive debt.
Much as I hate to say it, Jobs made Apple great by “innovating through the downturn”, reinvesting in new product development. Cook, on the other hand, is letting his financial wizards act like the greedy little accountants they are, just another corporation pandering to the greed of wall street.
You can blame wall street all you want for AAPL stock price, but Cook is the one who is trying to please the bastards there. It’s not working, because there is no pleasing WS.
Mike, you almost got there, but need a better unstinting of the differences between production taxation and consumption taxation to get there,
International Tax System? There is no such thing.
Countries can tax and impose tariff’s all they want…. but past that… nothing.
Governments see businesses and individuals as unlimited sources of money to fund every program, support every constituency, and justify every policy. Uncontolled waste, patronage, and bureaucratic inertia are destroying wealth and freedom.
This sounds apocalyptic but it is a decent bet.
NO.