Kenneth P. Thomas is professor of Political Science and fellow in the Center for International Studies at the University of Missouri-St. Louis. He is the author of "Competing for Capital: Europe and North America in a Global Era" and "Investment Incentives and the Global Competition for Capital." He blogs at Middle Class Political Economist.
This week, the Senate's Permanent Subcommittee on Investigations released a report on Apple (via Ars Technica) which shows how the company managed to amass $102 billion in offshore profits on which it is deferring taxes. As Ars Technica notes:
Some of the interesting bits from the Senate's report: three Apple subsidiaries in Ireland claim no responsibility to pay income taxes to any country. Apple Operations International, one of the Ireland three, reported $30 billion in income during 2009 to 2012 despite having no employees and not filing income taxes anywhere within the last five years.
This is, amazingly enough, perfectly legal (to use the title of David Cay Johnston's great book), but "it's also profoundly unethical," according to Richard Murphy of Tax Research UK. Apple creates all of its products in the United States, yet engages in the legal fiction that an Irish-based entity, Apple Sales International, actually owns right to the patents' use outside the U.S. and hence is entitled to royalties from all non-U.S. subsidiaries.
According to the Senate report, Apple shifted "$74 billion in worldwide sales income away from the United States to Ireland where Apple has negotiated a tax rate of less than 2%." The source for this was no less than Apple CEO Tim Cook himself.
With this legal fiction, Apple drains away funds from the country which has let it flourish and shifts the burden to other taxpayers. As reported in a New York Times article in April 2012, Apple does the same thing within the United States, shifting profits out of California into zero-tax Nevada, cutting support to the schools and other institutions from which it benefits, again leaving other taxpayers to foot the bill.
How does Apple respond to this? According to the Los Angeles Times, Cook told the committee on Tuesday, "We not only comply with the laws but we comply with the spirit of the laws. We don't depend on tax gimmicks." That's a little hard to swallow, considering that Apple was actually a pioneer of many of these accounting gimmicks.
As the New York Times reported in the article linked above, Apple was the first to designate sales people in a high-tax nation as employees of a subsidiary in a tax haven like Ireland and to use an accounting technique known as the "Double Irish with a Dutch Sandwich," which sends profits through three subsidiaries and ultimately to the Caribbean. Indeed, the article reports, the latter technique "is used by hundreds of other corporations — some of which directly imitated Apple's methods, say accountants at those companies."
What needs to be done? The Senate report gives several recommendations, beginning with revising the rules to prevent the transfer of intellectual property to tax havens under bogus terms. In addition, as Richard Murphy proposes, we need to replace consolidated accounts with country-by-country reporting, so we would know just how many employees each subsidiary has and how much income tax it paid in each country. Only then would we have a clear basis to see how much tax Apple and others like it are avoiding through accounting tricks.