Apple’s tax affairs open the door for global corporate tax reform

By blaming governments for their tax affairs corporations like Apple are inviting the responses they least desire: increased taxes and global tax regulation

ebra-miklerGlobal corporate tax avoidance is estimated to cost governments around the world US$240 billion in foregone revenues each year. Put this figure in the context of the uncertain economic environment across Europe since the 2008 financial crisis, including high levels of public debt as a result of bailing out the British banking system, and the protracted Eurozone sovereign crisis thereafter, and it is no wonder that corporate tax avoidance has emerged as a hot button political issue.

Large multinational corporations (MNCs) that minimise their tax payments while the tax burden is shifted to ordinary citizens has led global civil society and the media to wage a campaign against the ‘unfair’ nature of the global corporate tax system. This campaign has companies like Apple firmly in its sights.

One of Apple’s tax minimisation strategies is the creation of three subsidiaries – Apple Operations, Apple Sales International and Apple Distribution – incorporated in Ireland but effectively not registered as a tax resident of any country.  Putting it simply, Apple pays taxes in the US, but is able to legally claim most of its profits are earned in other jurisdictions.  These jurisdictions, in turn, do not regard these profits as taxable. Its three subsidiaries collect dividends from most of Apple’s offshore affiliates and pay little to no tax on these, or a specially negotiated minimal rate.  In fact, they seem to exist primarily for this purpose.  This has attracted not only the ire of the public, but also now the European Commission (EC).

States like Ireland compete to offer firms like Apple opportunities to minimise their tax payments. Despite a potential €13 billion tax windfall by way of the EC’s ruling against Apple’s tax concessions, nevertheless the Irish Finance Minister Michael Noonan declared he had no choice but to seek cabinet approval to appeal in order to defend the integrity of the Irish tax system. Noonan’s response indicates the challenges faced by those seeking to overhaul the global corporate tax regime to make MNCs like Apple pay their ‘fair share’ of tax. The decision by the Irish government to appeal the ruling, and effectively turn down €13 billion in taxes from Apple, demonstrates that tax competition remains firmly at the centre of many states’ strategies to attract foreign investment.

Apple also plans to appeal the EC’s ruling. This is despite revelations from the 2013 United States Senate Committee on Homeland Security and Governmental Affairs inquiry into Apple’s tax avoidance strategies that the company exploited the differing legal provisions of the US and Ireland to pay no tax on income totalling US$30 billion between 2009-2012 through Apple Operations International.  It also enjoyed a tax rate of 0.05 per cent on income of US$74 billion over the same period through Apple Sales International.

US government representatives at the Senate inquiry were damning in their criticism of Apple. Senator Levin argued that ‘Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven’ but instead ‘created offshore entities holding tens of billions of dollars, while claiming to be a tax resident nowhere’. Senator McCain noted that although ‘Apple claims to be the largest US corporate taxpayer…it is also among America’s largest tax avoiders.

Apple representatives appearing at the inquiry interpreted things somewhat differently. Apple CEO, Tim Cook, highlighted the company’s decision to keep its product design and development staff (approximately 50,000 employees) in the US, the jobs created by companies in Apple’s US supply chain, and emphasised that Apple is the largest corporate tax payer in the US.  He further stated that Apple pays all the taxes it legally owes and does not ‘stash money on some Caribbean Island. This may all be true, however as Senator McCain noted, the tax Apple pays in the US would be far greater were it not for the revenue the firm has moved offshore to be effectively outside the reach of any tax authorities. Cook’s response was that what was needed was a dramatic simplification of the US tax code, suggesting Apple would be prepared to negotiate paying more tax in the US as long as its offshore arrangements are left alone.

In our article to be published in the next issue of Global Policy, available in advance here, we argue that Apple’s response amounts to it blaming the US government for its tax arrangements rather than accepting responsibility for them. We also suggest that Cook’s comments indicate Apple is more concerned about traditional financial and market performance metrics, rather than the company’s social responsibility.  If his views are shared by other corporate leaders, it is unsurprising that they dismiss concerns expressed by governments and tax justice advocacy groups.  Instead, they stress their firms’ lawful behaviour.  Apple, and other large MNCs like Starbucks and Amazon that have been the focus of media attention and government inquiries around the world, consistently explain their tax strategies with reference to the law and even declare their pride with the way in which they have structured their tax affairs.

This type of response is more than simply revealing. It is also strategically cavalier.  In claiming their position as a legitimate one, and in the process shifting blame to governments for the opportunities afforded them, they are inviting and politically enabling the response they least desire.  Through their response to inquiries and demands that they pay their fair share of tax, MNCs like Apple have confirmed that they cannot be part of the solution to global tax avoidance.  They have politically enabled global regulation, and in advance of this politically emboldened national policymakers to unilaterally put in place greater tax demands while working towards the necessary global reforms to undermine the strategies of tax havens.  They are effectively helping to kill the geese (tax havens like Ireland) that laid their golden eggs.