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Posted on June 3, 2013

The Lowdown on Apple’s Tax Controversy

Written by Avner Polatsek | @AvnerPolatsek

apple iMac

Arguably the biggest financial headlines, this week, all have to do with Apple. CEO Tim Cook has been forced to defend Apple’s tax practices and prove that they have been working strategically, but not illegally, to pay the least amount of taxes possible.

As tax specialists who work with cross-border tax situations, we will be following this story closely to see how Cook weathers this storm. Each news source seems to be focusing on different parts of the story, so we thought that it would be helpful to put together a little summary of why Apple was targeted, what they are claiming, and which tax laws are being called into question.

The Situation: Using offshore entities

“Today’s hearing was called to air accusations the iPhone maker has created a web of offshore entities to avoid paying billions of dollars in U.S. taxes.

Apple, in written testimony, denied any wrongdoing and said the company was one of the largest taxpayers in the U.S., having paid $6 billion last year.

Cook and two other executives — including Chief Financial Officer Peter Oppenheimer — were to appear before the Permanent Subcommittee on Investigations. The panel, led by Levin, in a report yesterday said Apple’s subsidiaries include three entities that have no home country for tax purposes.” – (Bloomberg)

The Specifics: Ireland’s involvement

“The U.S. investigation showed that Apple had paid just 2% tax on US$74 billion in overseas income, largely helped by Irish tax law, which allows companies to be incorporated in the country without being tax resident. Britain had a similar rule but changed it over 20 years ago to stop tax avoidance.

Unlike Britain, however, Ireland is heavily dependent on foreign companies such as Google, Pfizer and Intel for employment – 150,000 of a labour force of around 2 million – and for its much-vaunted economic model of export-led growth.

While Ireland has successfully repelled attacks on its corporate tax rate from European neighbours, U.S. pressure is more difficult to ignore.

By closing its own loopholes, Washington could threaten Ireland’s status as European hub for multinationals, and economists said it would be better for Ireland to act first.

‘In the long run, the U.S. Congress, if they wanted to, could wipe out those 150,000 real jobs, and we don’t want to provoke people by over-egging it, by doing things that are clearly upsetting the U.S.,’ said John FitzGerald, a professor at the Economic and Social Research Institute (ESRI), an Irish think-tank.” – (Financial Post)

The Future: What people are saying about the future of corporate tax strategy

Littered throughout all of the Apple tax controversy coverage are a few opinions about potential changes to American tax laws. Christopher Matthews of TIME Business writes:

“One idea that’s been bandied about for many years, but which hasn’t made a lot of headway, goes by the not-so-glamorous name “formulary apportionment.” Under this system, the U.S. could tax companies based on what percentage of sales occur here. For instance, if Apple sold 30% of its products in America, then the U.S. government would tax 30% of Apple’s income at the statutory corporate tax rate of 35%.

This sort of system would work best if it were implemented internationally, but as the Brookings Institute points out in its analysis of formulary apportionment, the U.S. could move to this sort of system unilaterally because the move would actually incentivize companies to report their profits in America. This is because we’d be taxing only a fraction of profits regardless of where they’re reported, and this dynamic would motivate other countries to jump aboard a formulary apportionment system as well.” (TIME)

If you’re dealing with US taxes while living in Canada or have any questions about doing business in other countries, talk to us! As I said before, we are tax specialists focusing on US and Canadian taxes.