On Tuesday 5/21/2013, Apple CEO Tim Cook appeared before the United States Senate Permanent Subcommittee on Investigations. Offering testimony in a Committee Hearing is often called “grilling”, and many anticipated that to Mr. Cook’s appearance before the Senate would turn into such a grilling as well. I assume that this must have been prior to his actually testimony and the course of the hearing, because every electrical heater could have turned on the heat on Mr. Cook more thoroughly, or to stay with the analogy, hotter!
Apple legally made use of inconsistencies in global tax code, resulting in huge savings for the corporation.
But first, let’s focus on the background. As Wall Street Journal’s Janet Hook and Danny Yadron have written “Apple used technicalities in Irish and U.S. law to pay little or no corporate taxes on $74 billion over the past four years. The [Senate panel’s] report focused on the tax implications of Apple’s use of overseas entities. The report found no evidence that Apple did anything illegal.” Let’s put this in perspective:
- Apple’s net earnings during this time amounted to US$ +89bn (i.e. for the fiscal years of 2009 thru 2012)
- The technology giant earned some US$ +120bn before taxes
- Accordingly, in the described 4-year period Apple paid a tax rate of around 25% globally [all financial data via Google Finance]
- Perhaps most importantly (and, causing the largest public outcry), Apple keeps some US$ 100bn outside of the United States, despite being a U.S. corporation, which, as Mr. Cook said, he has “no current plans to bring them back at the current tax rate”. [US$ 100bn – figure via WSJ]. The company only pays a comparatively small tax burden on interest earned on those overseas cash holdings.
Jon Stewart’s compilation of senators’ most laughable and ridiculous remark during the hearing
Subsequent to the hearing The Daily Show’s Jon Stewart weighed in, commenting on some of the Senators’ remarks. I’ve added some highlights, and the video is below
Senator John McCain (R-Az.)
“You’ve managed to change the world, which is an incredible legacy'”
Senator Clare McCaskill (D-Mo.)
“I love Apple. I love Apple” (At this point, Stewart just couldn’t hold it anymore, but see for yourself…)
Senator Carl Levin (D-Mi.)
“We love the iPhone and the iPad. I got one right here”
“My granddaughter even knows how to use it”
In my view, Mr. Stewart perfectly summed it up when he said:
“In fact, the hearing was less about ‘We’re angry at you for breaking curfew’, and more like ‘What time do you think you should get home?'”
I found this unbelievable. Global taxation is a prominent issue in the 21st century. As corporations – like Apple – are becoming more global, and their revenue streams become scattered around the globe, how can national governments make sure they collect taxes on the corporate revenues, while at the same time maintaining the status of “business friendly”? What stops companies, maybe not the size of Apple, but lesser known yet still big companies, form permanently relocating to another place? In a globalized world, how can we harmonize a tax-code between bigger countries with usually higher corporate tax rates and smaller countries with usually lower rates? These would have been the questions the Senators should have asked. Instead, they resorted to ill-tempered and politically-driven accolade of Apple’s achievements. Sure, it’s popular to be “pro-Apple” when many
people voters own an iPhone or an iPad, but was it the right thing to do?
What Mr. Stewart adds on this subject matter provides another interesting perspective on this entire issue:
“The rub of this entire exercise [is]: Corporations are the only reason the tax-code is complicated in the first place. Those offshore loopholes didn’t get carved out by poor people. [The] tax-code is purposefully complex, so that corporations with resources are the only ones who can find the buried goodies their own lobbyists have hidden in the labyrinth.””
Tax holidays and competition between states
What has often been advocated in order to repatriate foreign earnings are so-called tax holidays, where cash from overseas can be transferred back to a country for a very low or zero tax rate. However, as the Motley Fool points out:
“A repatriation holiday isn’t a viable long-term solution […]. Cook maintains that such rare holidays aren’t predictable, something businesses prefer. It also perpetuates the idea of hoarding cash overseas in anticipation of the next holiday, since the precedent has been set.”
The core of the issue is really about inter-state competition in offering the best business environment. Many downsides of holding overseas-operations have been reduced in the past years through the advent and rise of (internet) communication technology. When it comes to taxation, (economically) large countries like the U.S., U.K, France, Germany, or China cannot expect that other countries will not offer a lower tax rate (like Ireland). If these large countries follow suit and lower taxes, what would prevent the smaller countries from doing the same?
A common-sense argument for simplification of tax-code
Part of the trouble with taxation is the immense complexity of the tax-code. For business this incurs legal and administrative costs. For governments and states that means difficulties in collection and a large bureaucratic apparatus, which in and of itself incurs costs. Hence, if governments want to act smart, they should take into account both sides of this equation. It only makes sense to collect taxes if I get more from doing so than I spend by doing so, and preferable that difference better be as big as possible. In my view, that is the real take-away from the recent debate surrounding Apple’s foreign earnings
Suggestions, criticism, interesting thoughts? Questions? Just drop me a message!