This week, Apple Inc. found itself in the news because of its earnings. Not because they are extraordinarily high, but because of what it does with some of those earnings. What Apple does, it seems, is serve its masters – its shareholders. You know, as corporate laws require it to do. And it maximizes what it can do for its shareholders by cleverly utilizing perfectly legal and absolutely insane tax laws.

Remember, though: Apple didn’t write the tax laws. Not in the USA, nor in any other country where it does business.

But it is under scrutiny in the United States because it has managed to use tax codes to its advantage and has avoided paying a lot of taxes in the US. Apparently, by leaving money it has earned overseas in overseas bank accounts, rather than bringing it back to the US, Apple avoided $3.5 billion in 2011 taxes and $9 billion in 2012. Despite that, Apple is still the single largest taxpayer in the United States, paying over $6 billion in 2012.

So, for example, Apple’s earnings in Ireland from 2009 through 2012 were $30 billion – yet it paid no taxes in Ireland, or anywhere else. That’s because of a program in the Irish laws regarding how foreign owned companies pay taxes. And it paid no US taxes on those earnings because it has left the money in Irish banks and not repatriated it to the US. In all of its earnings outside the US, Apple paid $21 million between 2009 and 2012 – which yields an effective tax rate of 0.06%. For earnings within the US, its effective tax rate was about 15%.

Last year, when Apple announced it was going to pay a huge pile of dividends to its shareholders, it realized it was much cheaper to take out loans that can be repaid out of foreign held assets rather than bringing those dollars back to the US, paying tax on the earnings, and then paying out the dividends. So guess what it did? Apple wins, its shareholders win, and no country’s treasury wins. But that’s what Apple believes the law allows for (it does), and what the law requires in terms of its obligations to shareholders (it does).

Now, a lot of people have a problem with this. Not the least among them is the group of people – US Congress – who enacted the insane tax code that allows this to happen. Apple CEO Tim Cook says the complicated and illogical US tax system requires corporations who truly wish to maximize earnings for their shareholders to follow a similar path.

It is absolutely certain that Apple is not alone in playing off one tax code against another. You can be sure most multinational corporations are doing exactly the same thing as Apple, even if they haven’t managed to be so efficient at it. But as the largest US taxpayer, and one of the world’s most successful companies, it is an obvious target for congressmen and women trying to appear indignantly outraged. In testimony before a Senate Permanent Subcommittee on Investigations, Tim Cook turned the tables and rebuked the legislators.

He had been called to testify because of accusations that Apple has ‘evaded’ taxes. In fact, Mr Cook pointed out, Apple has done exactly what the law allows, what it requires to some degree, and if Congress wants to point fingers it should really look at itself and re-examine the tax code. He called for a “comprehensive tax reform” although he was asking in particular for a reduction in corporate tax rates.

The Senate committee concluded that Apple has, in fact, broken no laws and that it has paid every dollar it owes. Mr Cook is right – the tax system is a mess. But this is not solely a US problem. Because it is so easy, and entirely legal, corporations worldwide manage to protect their earnings from being taxed. In each country where this occurs, the funds available to government to provide for its citizens are diminished.

Apple has about 600,000 employees worldwide (including about 4,000 in the aforementioned Ireland) and those employees pay local taxes. But the fact corporations are able to shield income from taxation is a serious blow to any nation’s central accounts.

While Mr Cook might seem a little greedy asking Congress for an effective tax rate of less than 15%, he is right that a rationalization of the tax code is imperative. The problem is that fixing the US code is meaningless if there are still ways to avoid being taxed by having money warehoused somewhere else. So a multinational solution to this multinational problem is the only way to effectively address it.

Don’t hold your breath. It ain’t gonna happen.

[For more about how the tax system is truly in need of review, see my article The Ovarian Lottery.]

Disclaimer:

I am a staunch user of Apple products. All my hardware and all my software carry the Apple label and I couldn’t be happier about that. The hardware is usually more expensive than the competition, but Apple truly does prove the adage that you get what you pay for. There is a solid reason that its customer satisfaction and loyalty is markedly higher than any competitor. Plus, they make really cool stuff.

But I recognize that they are like any other corporation – rapacious. There are some ways that they are more socially conscious than other corporations, but on the whole they are a Corporation – with a capital ‘C’ – and guilty of all the bad things that implies.

Paul Richard Harris is an Axis of Logic editor and columnist, based in Canada. He can be reached at paul@axisoflogic.com.

Read the Biography and additional articles by Axis Columnist, Paul Richard Harris


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