Blog Post by: The Century Foundation , on May 22, 2013
Apple CEO Tim Cook testified before a Senate hearing this week to discuss Apple’s creative tax avoidance strategies. Apple’s behavior is perfectly legal. But Century Foundation fellow Edward Kleinbard has been busy explaining why Apple’s behavior—which Kleinbard says goes far beyond what other American companies are doing—demonstrates the need for serious tax reform. We’ve collected some of the highlights below.
First the backstory.
Apple created a set of subsidiary corporations based in Ireland. The company then used some fairly creative—but, again, perfectly legal—accounting to report signifcant profits through those subsidiaries. Because Ireland had very low corporate taxes, the subsidiaries paid very little. In fact, one paid no taxes at all on profits of around $30 billion, while the other paid a rate of 0.05% on $22 billion in profits.
This practice generates what some economists call “stateless income.”
“Apple is not an outlier in its efforts to produce ‘stateless income’—income that is taxed neither in the United States nor in the countries where its foreign customers are located—but it is an outlier in the baldness of its strategies,” Kleinbard told The Guardian. Kleinbard would know; he recently authored a lengthy study looking at Starbucks’ recent forays into stateless income tax planning. But while Apple’s strategy is hardly new, it’s certainly more aggressive.
“The baldness of the Apple strategy surprises me more than anything else,” Kleinbard told Reuters. “European member states are going to be very angry with Apple and very angry with Ireland.”
Not everyone agrees, though. Conservatives were quick to point out that Congress created this tax code; one can hardly blame Apple for taking advantage of the loopholes the Congress deliberately created. Here’s the L.A. Times posing the fundamental dilemma:
Should the company, as Apple and Cook argue, be applauded for creating hundreds of thousands of jobs and paying $6 billion in federal taxes last year, among the most of any U.S. corporation?
Or should Apple be reviled for stashing a hoard of cash overseas so it could legally skirt an additional $15 billion in taxes over four years, making it potentially one of the country’s biggest tax avoiders?
Kleinbard and the Competitive Enterprise Institute’s John Berlau debated this question on CNBC’s Closing Bell.
Kleinbard isn’t buying the notion that Apple has effectively shielded itself from U.S. tax law. The Senate hearing uncovered the fact that one of Apple’s Irish subsidiaries held almost all its board meetings in California. Kleinbard tells Bloomberg that:
Apple says their Irish subsidiaries’ “mind and management” lies outside Ireland, but the real question is, do those subsidiaries have any mind of their own at all? If they are not really competent to make independent decisions to take on risks and make contracts on their own behalf, then the structure collapses of its own weight, and the income properly should be taxed to the United States.
Kleinbard sums the entire episode with a line that was yesterday’s New York Times quotation of the day:
There is a technical term economists like to use for behavior like this. Unbelievable chutzpah.