Apple, hypocrisy and stakeholder tax

By Edward Hadas
May 22, 2013

Apple is the latest multinational to feel the heat on cross-border tax management. The news that the tech giant used Irish law to lower U.S. tax payments should not have been surprising. After all, “Do no evil” Google had no second thoughts about recording what were essentially British sales as Irish, for the sake of a lower tax rate. It’s hardly likely that Apple, which has cultivated a certain anti-establishment air, would have hesitated.

Indeed, until a few months ago, I don’t think there was a corporate treasurer anywhere who would have taken justice into account when deciding on tax strategy. At most, there might be worries about bad publicity, but the well-established corporate practice of tax dodging had generated little attention.

And who would complain? Lower taxes on profit bring benefits to most people connected with companies; the money that doesn’t go to the government goes to workers, customers and shareholders. Besides, most experts who understand the arcane rules of international taxation are paid to use them to keep payments down.

In theory, politicians could be indignant about the government’s lost revenue. But legislators approved the tax laws and almost never objected to aggressive interpretations. Although corporate lobbying certainly played a role in these political decisions, there is a reasonably strong economic case for letting companies engage in guerrilla tax-shopping.

Taxes on profit provide a relatively low portion of the total government take – 9 percent in the United States – and new or retained jobs and investment usually generate far more new tax revenue than is lost by lower taxes on profit. For small countries such as Ireland and Luxembourg, the choice is often between luring companies that can provide a little tax revenue and receiving nothing.

Politicians are now complaining. Hypocritical? Sure, but in the maxim of François, duc de La Rochefoucauld, the 17th century French moralist, “hypocrisy is the tribute which vice pays to virtue”; and fair corporate taxes are really virtuous.

The ethical argument is simple. Taxes on profit should be considered a partial payment for the many services which governments provide: protecting property rights, providing an educated workforce and generally holding society together. An unfairly low tax payment is no different from unfairly low wages, unfairly high prices or unfair disregard of environmental damage.

Traditionalists reject the idea that corporate managers should balance the legitimate interests of all stakeholders, including governments. They think that managers should first of all serve shareholders, whom they call “owners”. However, that piece of economic theory is unrealistic, because in the long term shareholders only gain if everyone else does. It is also unjust, because in reality shareholders, who should be known as “residual financial investors”, are only one of many important constituencies, and rarely the most important.

If everyone thought in global terms and for the long term, there would be no problem introducing a fairer regime: a reasonable portion of profit paid as taxes in the country where they were earned. After all, any losses from higher corporate-tax payments would eventually be compensated somewhere with gains from lower non-corporate taxes.

Back in the real world, conflicts are inevitable. The complexity and variation of national tax codes will inevitably slow progress, and even if governments agree on the principle of international tax equity, they won’t rush to change their own regimes. Ireland and other tax havens would almost certainly balk, and the United States would resist abandoning its tax on profit earned in other countries.

I see three encouraging precedents. Many countries sacrificed immediate self-interest in agreeing to tariff cuts in the decades after World War Two. A combination of shame and political pressure has worked wonders in the campaign against jurisdictions which give individuals legal protection against foreign taxes. Most recently, shame alone is bringing higher safety standards in garment factories.

The shame weapon has already been unleashed in the new battle against corporate-tax manipulation. Bad publicity of the sort that Apple is now receiving can be effective, since companies respond to public opinion. Still, while Starbucks buckled in the UK, Apple has shown no sign of repentance and Fiat Industrial is planning a tax-motivated headquarters move, from Italy to the UK.

As with tariffs, individual taxes and factory safety, substantial progress requires a group effort. No single participant has enough clout to dictate rules, but if enough big players agree, the pressure on laggards is irresistible. The tax agenda is straightforward. First agree on key definitions: where sales take place and what price is fair for intra-company international transactions. Then ban letter-box legal entities.

Negotiations have not even started, but I think they can succeed, especially with unrelenting pressure from the public. While corporate-tax injustice is not the global economy’s most serious problem, it is easy to see and relatively easy to solve. Please, politicians: don’t be foolish enough to waste this opportunity.

 

12 comments

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ARE YOU SERIOUS?

“And who would complain? Lower taxes on profit bring benefits to most people connected with companies; the money that doesn’t go to the government goes to workers, customers and shareholders.”

How about the average American taxpayer who has to make up for corporations deliberately cheating on their taxes?!

And this isn’t nearly as legal as you portray at all.

THIS IS TAX FRAUD, PURE AND SIMPLE — MADE EVEN MORE EGREGIOUS BECAUSE THE GOVERNMENT IS IN ON IT.

THE TAX CHEATERS WANT TO NEGOTIATE A “TAX HOLIDAY” WITH THE GOVERNMENT TO ALLOW THEM TO BRING THE PROFITS BACK TO THE US — FREE OF TAX, IF POSSIBLE, BUT AT A SIGNIFICANTLY REDUCED RATE, IF NOT.

From the UK Guardian:

——————————–

Senators accuse Apple of ‘highly questionable’ billion-dollar tax avoidance scheme

Senators claim Apple has avoided paying billions in US tax by creating offshore entities that are not tax resident anywhere

http://www.guardian.co.uk/technology/201 3/may/20/apple-accused-tax-avoidance-bil lions-scheme

——————————–

Tim Cook’s pitch for a corporate tax holiday suits Washington just fine

Politicians will be happy to hear the Apple CEO talk about a corporate tax holiday, so long as some money goes to government, too

http://www.guardian.co.uk/commentisfree/ 2013/may/17/tim-cook-tax-holiday-suits-p oliticians

————————————–

WHO ARE THE LOSERS, AGAIN?

THE AMERICAN PEOPLE WHO ARE BEING CHEATED OUT OF TAX REVENUE BY THE WEALTHY CLASS.

—————————————

An excerpt from the second article, in case you don’t read it yourself:

“About $1.7tn of US corporate dollars are sitting overseas, and those companies say they would love to bring it back to the United States. But what they would do with it?

They say they would invest it in the American economy. A New America Foundation study (pdf), co-written by Laura D’Andrea Tyson,
maintained that companies could use the money for two purposes:

“They can distribute them to their shareholders in the form of dividend payments and share repurchases; and they can use them directly to fund their domestic economic activities or to reduce their debt.”

The paper estimated that $581bn in repatriated cash would go to to US shareholders, of which $192bn will go to US households. With the struggling US consumer and 12 million people unemployed, that sounds like a nice boost for the economy. Appealing, right? Companies could spread the wealth, either giving it to stockholders or pumping it into the economy – wouldn’t that be a nice change from what we hear about the unevenness of the economy, and companies hoarding cash while households struggle?

Unfortunately, it’s more like wealth redistribution for corporate dummies. History shows us that these promises are not to be trusted.

Companies had a tax holiday once before, in 2004, when a set of major corporations were allowed to bring back their overseas profits at a tax rate of only 5.25%. You might imagine that it resulted in an enormous economic boost, but here’s what happened instead, in the words of Treasury official Michael Mundaca:

“There is no evidence that it increased US investment or jobs, and it cost taxpayers billions … the nonpartisan Congressional Research Service reports that most of the largest beneficiaries of the holiday actually cut jobs in 2005-06 – despite overall economy-wide job growth in those years – and many used the repatriated funds simply to repurchase stock or pay dividends.”

So we tried a tax holiday before, it accomplished nothing except lining some corporate coffers, and it hurt the economy. It actually gave a kind of moral permission for companies to cut jobs, even when the economy was booming.

———————————–

ARE YOU SERIOUS?

ABOUT 1.7 TRILLION DOLLARS SITTING IN BOGUS TAX ACCOUNTS TO HIDE THEM FROM THE AMERICAN PEOPLE, AND WHO CARES?

Posted by EconCassandra | Report as abusive

If ANYONE is a hypocrite, Mr. Hadas, it is you.

This statement by you is egregiously misleading, that “most experts who understand the arcane rules of international taxation are paid to use them to keep payments down”.

These ARE NOT ARCANE, BUT LEGITIMATE TAX-AVOIDANCE SCHEMES, THESE ARE DELIBERATE TAX FRUAUD SCHEMES.

———————————–

From the first UK Guardian article above:

“The complex arrangement includes three subsidiaries, based ostensibly in Ireland, which appear not to be designated as tax resident anywhere, the committee said. A source on the committee called them “iCompanies – I for imaginary, invisible”.

The commitee said that the arrangement, described by one senator as “the epitome” of tax-avoidance schemes, allowed Apple to pay only very small amounts of tax on much of its overseas profits, thanks to the Irish companies that exist “nowhere” for tax purposes.”

———————————–

LET’S SEE, HOW DO YOU INTERPRETE “COMPANIES THAT EXIST ‘NOWHERE’ FOR TAX PURPOSES”?

I INTERPRET IT AS BLATANT TAX FRAUD BY THE COMPANIES INVOLVED.

SO, WHAT IS THE OBAMA GOVERNMENT GOING TO DO WITH “OUR TAX MONEY” THAT THESE COMPANIES HAVE STOLEN FROM US BY FRAUDULENT MEANS?

ACCORDING TO THE ARTICLE, THEY WANT TO CUT A ‘DEAL”.

HERE’S MY SUGGESTION FOR A “DEAL”:

ALL OF THE MONEY BROUGHT BACK AT 100% TAX, PLUS INTEREST AND PENALTIES THAT A REGULAR TAXPAYER WOULD GET HIT WITH BY THE IRS FOR DELIBERATE TAX FRAUD.

THEN, BEGIN THE CRIMINAL INVESTIGATION TO DETERMINE WHO GOES TO JAIL FOR THIS.

OF COURSE, THAT WILL NOT HAPPEN.

REMEMBER WHEN OBAMA PROMISED “CHANGE WE CAN BELIEVE IN”?

WELL, IT’S TURNED OUT TO BE THE “SAME OLD SHIT” INSTEAD.

Posted by EconCassandra | Report as abusive

Your article is pathetic in its so-called “ethical” arguments. The wealthy class got caught red-handed with their “hands in the till” and now they are defiantly refusing to bring home the taxes that they are cheating the American people out of, demanding instead some sort of “deal”.

Unlike you, I see NO encouraging precedents.

Ireland is not the first, nor only, incident of wealthy tax cheats hiding their ill-gotten gains elsewhere. Switzerland comes to mind, as well as the Cayman Islands, but there are also a multitude of others.

NOTHING has been done by this government to collect ANY of it. The classic example is Switzerland, where the government first offered amnesty to wealthy tax cheats, but then instead of pursuing them, the govenment began to bargain with them!!!!

THERE IS ONLY ONE “ETHICAL” WAY TO TREAT THESE PEOPLE, AND THAT IS TO SEIZE THEIR PROPERTY AND PUT THEM IN JAIL!!!!!!!

Instead, you suggest we “shame” them???

GIVE ME A BREAK!

Posted by EconCassandra | Report as abusive

Some really pointless rhetoric in the comments here. The author is making a valid point. Corporations are generally playing by the rules. Most citizens affected live in democracies. If those citizens are unhappy with with the results of the rules in place, change them. It is hypocritical to enact legislation and then become unsatisfied when the terms of that legislation are applied.

Posted by Nurgle | Report as abusive

All people having their pay reported on W-2 forms are the real heroes that hold the country together. While government gives them some deductions, their income is totally reported. The corporations and individuals having income outside of a W-2 report what income they chose to report. Any concern about tax rates for them is a joke. Pay a high tax rate, but hide as much income as you can. Whine all the time about tax rates so as to keep people looking one way and justify the actions of tax fraud. Pays well so it seems.

Posted by Bigred44 | Report as abusive

Thankfully, Mr. Hadas, your opinion counts far less than Tim Cook’s accurate presentation of the facts.

Posted by Plinius | Report as abusive

Apple is being singled out unfairly. These tax rules date back to when Apple was still struggling to survive. These rules were basically created by lobbyists (and the politicians in thrall to them) for larger, older multinational corporations. Apple has to follow along to compete against other corporations that use these loopholes. Politicians are not about to put the heat on those corporations originally responsible – they know better than to bite the hand that feeds them.

Posted by QuietThinker | Report as abusive

Taxes on profit provide a relatively low portion of the total government take – 9 percent in the United States ..”
Business uses far more of the government provided physical infrastructure and financial, legal, and foreign service structure than individuals. It is unconscionable that our corporate taxes are slow. Yes, we have high nominal rates, but these are a complete fiction. Our effective corporate taxes rates are extremely low.

“– and new or retained jobs and investment usually generate far more new tax revenue than is lost by lower taxes on profit.” This may be true sometimes, but has yet to be proven true in general. It is certainly not true with respect to the foreign profits loophole under discussion. In recent years those profits have been used to build plants elsewhere and shut down US factories.

Posted by QuietThinker | Report as abusive

@ Nurgle –

A really pointless reply.

If you knew ANYTHING whatsoever about corporations and how they really operate, you wouldn’t make assinine statements like this.

By the way, this country is NOT a democracy. It is a plutocracy and always has been.

Next time you have occassion to actually read the US Constitution, you need to pay closer attention to the “fine print”.

This nation uses an “electoral college” system, which was specifically included by our “founding fathers” to prevent any such notions of what was going on in Europe at the time to inflame the masses here as well.

This works to ensure that neither the “popular vote”, nor our “elected representives” — who, in fact, are elected to represent the interests of the wealthy class in each state — are able to exercise any undue power over the government.

This is one reason why our government — actually, I should say YOUR government — is totally deadlocked, mainly because the two wealthy factions are fighting an existential “battle royal” over the remains of this once-great nation. Kind of like vultures fighting over the decaying remains of a corpse.

Why should they care what happens to this nation, when there is no “down side” to what they are doing in any way at all.

After all, they are citizens of the world, and can’t afford to be sentimental about the US population that has become a drag on their wealth.

——————-

What is there so difficult about understanding that what these companies have done is far beyond what the present liberal US tax laws permit?

Just in case you don’t know how to spell it, here is the definition for you and for Mr. Hadas, as well.

fraud

noun
1.
deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.
2.
a particular instance of such deceit or trickery: mail fraud; election frauds.
3.
any deception, trickery, or humbug: That diet book is a fraud and a waste of time.
4.
a person who makes deceitful pretenses; sham; poseur.
Origin:
1300–50; Middle English fraude < Old French < Medieval Latin fraud- (stem of fraus ) deceit, injury

Related forms
fraud·ful, adjective
fraud·ful·ly, adverb
an·ti·fraud, adjective
pre·fraud, noun

Synonyms
1. See deceit. 3. wile, hoax.

If you notice the word has been around for awhile, so your ignorance of the concept is no excuse.

Posted by EconCassandra | Report as abusive

@ QuietThinker –

You state “Apple is being singled out unfairly. These tax rules date back to when Apple was still struggling to survive. These rules were basically created by lobbyists (and the politicians in thrall to them) for larger, older multinational corporations. Apple has to follow along to compete against other corporations that use these loopholes. Politicians are not about to put the heat on those corporations originally responsible – they know better than to bite the hand that feeds them.

———————

Are you serious?

There is NO excuse for what these companies did!

For one thing, Apple and the other companies involved in this tax fraud deliberately created secret accounts to hide money from ALL sources of taxation.

DUH!

ALL companies “struggle to survive” in order to grow and make money for their stockholders.

Since when is a corporation “excused” from obeying the law that is on the books, no matter the “reason”.

I am quite sure Apple and these other corporation have their own lobbying groups as well.

And Apple should be excused because they had to “cheat to compete”?

If our politicians are complicit they should go to jail also, just like the perpetrators.

Right now, they want to cut a deal, which is nothing more than one dirty hand washing the other, so nothing will be done.

It is the lack of concern as to what the wealthy class and are government are doing “in bed with each other” by the American people that has gotten us into this mess.

I find it incredibly difficult to believe you don’t seem to comprehend the basic illegality of what these people have done.

Posted by EconCassandra | Report as abusive

A “reality check” from the UK Guardian:
————-

What is the economic responsibility of corporate America?

Even Fed chairman Ben Bernanke is calling out the private sector for not doing its part to help the frail economy

Heidi Moore (updated)
Heidi Moore
guardian.co.uk, Thursday 23 May 2013 14.15 EDT
Jump to comments (130)

The best kind of Federal Reserve chairman is the one who doesn’t believe he owes anyone anything. That is when we start to hear the truth about the economy more directly.

Seven years into his term, and unlikely to renew his engagement in Washington, Ben Bernanke has reached this state. He started out as a diplomat and an able politician who avoided offending people and adopted the appropriate Washington plumage to survive. Now he is the truth-teller we need.

He has spent seven years dealing with a do-nothing Congress with little more than perhaps quiet exasperation. Now that his term is nearly over, he is a bolder man. In his testimony before the Joint Economic Committee of Washington, he pulled no punches. He declared:

“Monetary policy is not omnipotent. We are pushing pretty hard at this point.”

Bernanke has chided Congress before, subtly, on its refusal to take action with the budget and revise fiscal policy. He was not so subtle this time. Bernanke noted that long-term health of the economy is “not the Fed’s job” – “that’s the private sector’s job and Congress’s job.”

Congress, we can leave aside. We know that austerity is painful and counterproductive, as the travails of Europe have shown us. If we didn’t know it, Bernanke made it clear. Bernanke’s mention of the private sector, however, is important. While Congress and the Fed discuss what to do about the slow economy, there are a few voices notably absent: those of any important CEOs willing to do their part to increase hiring.

The corporate and financial side of America – the private sector – is not doing its part to help the economy. Congress, as utterly useless as it has been in producing decent legislation, can only do that – legislation. Companies and banks actually hold the purse strings and hiring power, and they are not loosening them to help the economy.

Take a bill introduced by Democratic Representative John K Delaney of Maryland this week. The bipartisan bill – with 13 co-sponsors from the Republican and Democratic ranks – is devoted to improving the country’s weakening infrastructure by luring corporations to contribute to the effort.

Many of these corporations, in protest of “high corporate taxes” that they rarely actually pay, hire expensive lawyers to avoid the entirety of their tax bills. Yet they use the nation’s roads for trucking, our waterways for shipping, our bridges and city streets and airports. In small towns, one big corporation can make the entire economy, as FedEx is in its Tennessee headquarters. But how about the towns and the states that these companies just pass through on their way to making money? They don’t get the same economic benefit to help with their maintenance.

While major corporations are happy to use infrastructure, they contribute very little to its maintenance as long as they don’t pay their full compliment of taxes. Yet convincing these corporations to pay their full tax burden is a lost cause, as was evident yesterday when Apple CEO Tim Cook smilingly explained openly to Congress how Apple uses Irish subsidiaries to lessen its US tax bill. The lawmakers mostly met Cook’s testimony with adoration. The message of his appearance on behalf of corporations everywhere was: allow us to pay lower taxes, and we will stop avoiding them.

As this ego-fed debate continues, the nation’s infrastructure needs repair – hundreds of billions of dollars in repair, according to many studies – and that money isn’t coming from the government. So Washington has to think carefully: how can it persuade corporations to do their duty and pick up part of the tab for the services they use?

The answer is in Congressman Delaney’s bill, which proposes that companies be allowed to repatriate their foreign earnings at a lower tax rate – as low as 8%, probably – if they use some of the money to buy new infrastructure bonds. The bonds, of which only $50bn will be sold, will raise about $750bn for infrastructure investment.

With its bipartisan support and solid negotiation technique – a simple quid pro quo – the Delaney bill is likely to be successful, or at least should be. It is perhaps the first constructive answer to both a government and a corporate problem.

Still, there remains a question of whether the offshore tax holiday was ever really a plausible corporate problem, or one hyped by CEOs as an excuse to inflate their company’s coffers and their stockholders’ wallets rather than invest in new initiatives. Once the offshore-profits issue is out of the way, what excuse will companies have left for not investing money in the American economy and American workers?

The issue of offshore profits and a tax holiday was a red herring: US companies have not been hurting for cash. The stock market is at record highs overall, and particularly so for big companies. The stock market riches are flooding corporations in inflated stock options and paper wealth. Corporate profits, as a percentage of US GDP, are higher than ever, according to the St. Louis Federal Reserve.

The 2004 tax holiday showed that the companies that took advantage actually fired workers, and that was during a good economy. There is no reason to believe they would be any more eager to hire as long as there is the excuse of a weak economy.

The truth is, the weak economy is not out of the hands of corporations. They don’t have a tax problem. They don’t have an economic problem. They don’t have a problem of an unskilled workforce. Instead, they have an innovation problem. These companies could, for instance, invest in new initiatives or expand their business models. Very few, if any, companies are doing that. In fact, a recent study from Accenture raised the question of whether CEOs even believe in innovation as a solution any more. The survey of 512 companies found 51% said they were investing more in innovation but 46% said their companies were becoming risk-averse anyway.

This is fearful thinking, and it’s the same plague that infects Congress. Just as fear has paralyzed Congress, it has scared CEOs. Yet fear is no excuse. Taxes are no excuse. Caution is no excuse.

The excuses have run out. The corporate side of America is not pulling its weight. It is not paying the fair price in economic boosterism or in taxes for all the advantages it enjoys. Instead of hearing Ben Bernanke testifying, or Congress and the Fed trading blame, maybe it’s time to ask some CEOs why they have taken themselves out of the equation of getting America back on its feet.

Even more importantly, it’s worth asking why we have let them.

Posted by EconCassandra | Report as abusive

This whole publicity stunt (And Witch Hunt that Hadas Gleefully partakes in) is intended to divert public anger away from government failures and refusal to reduce the gorging by public employees from the taxpayers purse, onto taxpaying companies who have simply obeyed the law paying in full all they are required to.

For Hadas to see a Hypocrite, he has merely to look in the mirror.

Posted by nzl-kz7 | Report as abusive