Does Apple Brouhaha Put Light on Tax Disadvantages of Tangible Goods Makers?

apple, taxes, investment, congressLast month, a sensational series of hearings by the U.S. Senate’s Permanent Subcommittee on Investigations shined a light on tax-avoidance practices of U.S. tech companies, particularly Apple Inc. The subcommittee’s investigations revealed that the nation’s manufacturers are at a disadvantage when it comes to minimizing the effects of high U.S. corporate taxes.

The simple reason manufacturers are penalized: If you make and sell a physical product, it’s hard to claim that the revenues from that product was attributed to overseas operations. For tech companies, which often make money from products like digital music or intellectual-property (IP) licensing, it can be a lot easier to fudge.

U.S. Senator Carl Levin (D-Mich.), chairman of the subcommittee, said in a statement that the purpose of the May hearings was “to examine how U.S.-based multinational corporations use loopholes in the tax code to move profits to offshore tax havens and avoid paying U.S. taxes.” Apple, Levin charged, “effectively shifts billions of dollars in profits offshore.”

At a May 21 hearing, Senator John McCain (R-Ariz.) lashed out at Apple CEO Tim Cook and CFO Peter Oppenheimer, calling Apple “one of the biggest tax avoiders in America” and charged that “Apple’s three primary Irish entities hold 60 percent of the company’s profits but claim to be tax residents nowhere in the world.” McCain called this practice “outrageous.”

Charles Duhigg wrote in The New York Times that “Apple provides a window on how technology giants have taken advantage of tax codes written for an industrial age and [that are] ill suited to today’s digital economy.” In an interview, Duhigg told National Public Radio (NPR) that many in the business community think the outdated U.S. tax system is “biased towards companies like Amazon, like Apple, like Microsoft, that manufacture digital goods as opposed to non-digital goods, the types of things like shoes and cars that you can actually touch.” This is a problem, because “the companies that have to produce those things, that have to compete with Amazon and Apple, say, ‘Look, we’re effectively paying more taxes.’”

In his statement, Levin said this new reality of American business “is at the heart of Apple’s tax-avoidance strategy.” Intellectual property, he said, is increasingly “the dominant source of value in the global economy.” IP is “highly mobile — unlike more tangible, physical assets, its value can be transferred around the globe, often with just a few keystrokes.”

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Levin insisted that Apple’s success had little to do with physical elements – “the aluminum and steel and glass” of products like the iPhone, iPad, and iPod. “Its profits depend on the ideas that bring those elements together in such an elegant package. That intangible genius is intellectual property that is nurtured and developed here in the United States,” he said.

Offshore tax avoidance strategies transfer the profit-generating potential of such IPs outside of the United States to offshore tax havens.

May report from the Senate subcommittee found that Apple runs almost all of its foreign operations through an Irish company, Apple Operations International (AOI), which has no employees. AOI accounts for 30 percent of Apple’s global profits but pays no taxes anywhere. Apple finds other ways to shift profits to Ireland, where it pays only a 2 percent negotiated corporate income tax rate, and even less in the case of one subsidiary.

Such practices, Levin said, “have allowed U.S.-based multinational corporations to amass an estimated $1.9 trillion in profits in offshore tax havens, shielded from U.S. taxes.” He cited one study estimating that “offshore earnings stockpiled by S&P 500 companies using these techniques have increased 400 percent in the last decade.”

In defense of the company, Cook told the Senate subcommittee, “We pay all the taxes we owe — every single dollar.” He said Apple doesn’t “depend on tax gimmicks” or “move intellectual property offshore and use it to sell products back into the U.S. to avoid U.S. taxes” or “stash money on some Caribbean island.” Cook, on the other hand, claimed that with all of its growth, “Apple has become — to the best of our knowledge — the largest corporate income taxpayer in the United States,” carrying an effective tax rate in 2012 of 30.5 percent and paying nearly $6 billion to the U.S. Treasury.”

Cook said Apple keeps cash in its foreign subsidiaries because the antiquated U.S. corporate tax system would make it “very expensive to repatriate that cash. The country tax code, he complained, “has not kept up with the digital age. The tax system handicaps American corporations in relation to our foreign competitors who don’t have such constraints on the free flow of capital.”

That said, Cook told the subcommittee that Apple would welcome a much simpler corporate tax code that would “be revenue neutral, eliminate all corporate tax expenditures, lower corporate income tax rates and implement a reasonable tax on foreign earnings that allows the free flow of capital back to the U.S.” He said such a reform would help American growth and competitiveness, even though such a measure would likely increase Apple’s U.S. taxes.

This article was originally published on ThomasNet News Industry Market Trends  and is reprinted in its entirety with permission from Thomas Industrial Network.  For more stories like this please visit Industry Market Trends.