Apple fall afoul of U.S Corporate Tax Code

Apple fall afoul of U.S Corporate Tax Code

Apple’s refusal to engage with politics in Washington has cost them an embarrassing news cycle. Investors should pay attention to tech companies’ political influence as the industry experiences growing regulatory pains.

The U.S. Senate’s Permanent Subcommittee on Investigations held hearings last week on Apple’s corporate income taxes. The Subcommittee’s staffers are the professional investigative team of the Senate, charged with looking into areas of interest to the Congress. Chaired by Senator Carl Levin (D-MI) the Subcommittee was exploring the problems with America’s corporate tax code. There is widespread bipartisan agreement that the tax code needs to be reformed.

Apple came into the Subcommittee’s crosshairs as an example of how companies abuse the existing tax code. The investigative report charged that Apple employs “a complex web of offshore entities” to avoid falling under the tax jurisdiction of any nation. For example, “Apple Operations International” is not a tax resident of any country. It is resident in Ireland, but has no employees or physical address there. Ireland only taxes companies that are managed there, while the U.S. only taxes companies that are resident in the U.S. Thus Apple avoided paying any taxes on $30 billion of its income that flowed through this subsidiary over five years.

In defending the company’s actions, Apple CEO Tim Cook was quick to point out that the company had not violated any law. He also stated that other components of Apple paid roughly $6 billion in taxes last year, possibly making it the single largest taxpayer in the U.S. Cook argued that the real culprit in this case is the U.S. tax code. America on paper has one of the highest corporate tax rates in the world, but a complex series of loopholes means that no company actually pays the full rate. Many companies like Apple have become adept at finding and exploiting all possible loopholes to get to the lowest possible rate.

The Subcommittee inquiry likely stems from the fact that Apple’s tax team is particularly good at this game. For example, Apple Sales International paid an effective tax rate of .005% in 2011 on $74 billion in income. Cook stated that if the tax code were simplified and the overall tax rate was brought down to 25%, Apple would consider bringing some of its overseas money back into the U.S. At current rates, the company would have to pay an estimated $9.2 billion in taxes to repatriate its overseas holdings.

Perhaps the most noteworthy and widely overlooked aspect of this story is that Apple has now doubled its lobbying budget to $4 million per year. Even with this expansion, Apple spends a disproportionately small amount of money on lobbying. Previously the company had followed a Silicon Valley tradition of steering away from direct political involvement. Google, in contrast, spent $18.2 million on lobbying in 2012. As a result of their respective investments in political influence, Google is far better positioned than Apple to win the legislative, regulatory and public relations battles the tech industry will face in the near future.

Categories: Finance, North America

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