Why public companies should have public tax returns

By Felix Salmon
May 21, 2013

Every investigative journalist occasionally dreams of what she might be able to do with monster resources and subpoena power. The answer looks something like Carl Levin, whose latest report on Apple’s tax strategies is Pulitzer-worthy stuff. When Apple CEO Tim Cook testifies in front of Levin today, it’s going to be one of the most uncomfortable grillings of his life. Steve Jobs could be intense — but Carl Levin, in full flow, is truly formidable.

The first discrepancy I’d love to see Levin clear up is a simple factual one: how much income tax does Apple pay? The various tax years and fiscal years are rather confusing, but in its testimony, Apple says that its income tax payments to Treasury were “nearly $6 billion” in FY2012, for “a US federal cash effective tax rate of approximately 30.5%”. (Those numbers imply taxable income of about $19.6 billion.)

The Senate report, by contrast, looks at the 2011 calendar year, and reproduces Apple figures showing $3.884 billion in current federal taxes, plus holding on to $2.998 billion in deferred federal taxes, for a total of $6.882 billion; that means an effective tax rate of 20.1%. (Again, working backwards, the implied total taxable income increases here to $34.2 billion.)

The report then presents the actual amount of cash paid in taxes, as reported on Apple’s tax return. (This is where that subpoena power comes in particularly handy: I’d love to see Apple’s response to a reporter asking to see Apple’s Form 1120 for the past three years.) According to the Form 1120, which is the corporate equivalent of the 1099 1040 for individuals, Apple paid $2.5 billion in actual cash payments to Treasury in FY2011, up from $1.2 billion in FY2010.

The report doesn’t convert those figures into an effective tax rate, just saying that the number would be “well below the statutory tax rate”. But in in the year ended September 23, 2011, Apple overall reported net income of $25.9 billion, while in the following year its net income was $41.7 billion. Much of that income was overseas, of course. Still, it does seem that Apple’s total actual federal tax payments in both FY2010 and FY2011 were less than 10% of its reported net income.

This is particularly shocking to the US public, which has to pay taxes on its global income. Every other country’s billionaires are extremely good at escaping into a state of tax-free statelessness; America’s aren’t, and we expect that if you’re rich American, you’re going to pay a substantial amount of US taxes.

American multinational corporations, in this sense, lie somewhere in the middle: they don’t need to pay income tax on their global income, and so they can avoid billions of dollars in taxes by moving income to tax-friendly jurisdictions like Ireland, or to subsidiaries such as Apple Operations International and Apple Sales International, which pay taxes in no jurisdiction at all. (Their headquarters are in Ireland, so they are sheltered from US taxes, but since their operations are mostly in the US, they don’t pay Irish taxes, either.)

The only real punishment for avoiding taxes, if you’re a US corporation, is that your offshore profits are stuck offshore, where it can be hard to invest them or return them to shareholders. So when Apple claims in its testimony that it “supports comprehensive reform of the US corporate tax system”, note its two key provisos: that such reform be “revenue neutral”, and that it allow “free movement of capital back to the US”. The first would mean that US corporations wouldn’t actually pay the taxes they’re avoiding right now: total corporate taxes would remain at an all-time low. And the second would mean that the biggest corporate tax loophole of all — the ability to pay no taxes on foreign earnings — would be made substantially bigger.

The Senate report quotes Mark Keightley, making a very important point:

Corporate tax revenues have declined over the last six decades. In the post-World War II era, corporate tax revenue as a percentage of gross domestic product (GDP) peaked in 1952 at 6.1%. Today, the corporate tax generates revenue equal to approximately 1.3% of GDP. The corporate tax has also decreased in importance relative to other revenue sources. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In that same year the individual tax accounted for 42.2% of federal revenue, and the payroll tax accounted for 9.7% of revenue. Today, the corporate tax accounts for 8.9% of federal tax revenue, whereas the individual and payroll taxes generate 41.5% and 40.0%, respectively, of federal revenue.

What we’re seeing here is a corporate class which is vastly more effective at evading taxes than individuals are; I don’t see that trend going away any time soon.

Instead, I have a modest proposal of my own: why not at least require all public US companies to file their federal tax returns with the SEC. They already report the amount of taxes that they pay, but as we’ve seen, the reported numbers, calculated under GAAP, can differ substantially from the actual cash numbers. I’m not saying we’d shame companies overnight into suddenly paying more taxes. But at least we’d be able to see which ones are evading taxes most effectively.


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My solution: a tax of a specific percentage of income as reported to Shareholders on Form 10-K. It’s a real simplification: you get your audit and multiply the bottom line by the percentage. It pays no attention to where the income is said to originate. It’s transparent. And it cuts the legs out from under an entire class of tax planners, by putting the auditors on the hook for unpaid taxes.

Posted by masaccio | Report as abusive

I’m with masaccio. Companies have incentives to massage earnings reported to investors to make the numbers go up; they have incentives to make earnings reported to the gov’t go down. So how about we make them stick with one number, so that those two pressures can counterbalance each other somewhat? Combine that with the various ways you can get in legal hot water for being fraudulent in reporting either, and maybe we really do get more honesty, overall.

Posted by Auros | Report as abusive

“The report then presents the actual amount of cash paid in taxes, as reported on Apple’s tax return. (This is where that subpoena power comes in particularly handy: I’d love to see Apple’s response to a reporter asking to see Apple’s Form 1120 for the past three years.) According to the Form 1120, which is the corporate equivalent of the 1099 1040 for individuals, Apple paid $2.5 billion in actual cash payments to Treasury in FY2011, up from $1.2 billion in FY2010.”

Yes, obviously. Corporate income tax is paid *in arrears*!

You’ve got to get to year end to know what the tax to be paid is.

There is indeed a system whereby you pay advance corporate income tax. Which is based on your tax bill for the *previous* tax year. So, if you’re a company whose profits are rising strongly tax cash paid in any accounting or tax year will be based upon the earnings in the *previous* year. Provisions for tax to be paid will give a much better idea of the amount that will have to be paid. Simply because the balancing payment between the estimate of taxes (and thus the cash actually handed over) and the actual amount owing must, by definition, come after the end of the tax year.

The cash taxes paid number is simply nonsense with any company with swiftly growing profits.

Posted by TimWorstall | Report as abusive

Felix, I think this is interesting but misses a broader public policy point. With so much of the corporate sector going private, the impact of public tax returns is less than it would have been 20 years ago. The real problem is the business of America is business, and it is not in the least transparent.

Posted by Dollared | Report as abusive

OK, what about this argument: companies and individuals, by seeking their best deal for limiting their own taxes, in turn forces countries to compete with each other on the basis of tax rates. This means lower taxes for all of us.

Or, is that argument too dumb even to consider?

Posted by darbsnave | Report as abusive

Simplify it all the way. Quarterly statements to investors…. ARE the tax returns. And the market country is the tax country. NYSE, NASDAQ = American tax. Simple. You want to start a fake stock market in the Caiman Islands. Fine, you’re kicked off the NYSE and NASDAQ. Discontinue allowing two sets of books (a rosy set for investors, a dire set for the IRS).

Posted by AlkalineState | Report as abusive

Per the report that Felix links regarding corporate taxes:

“First, the average effective corporate tax rate has decreased over time, mostly as a result of reductions in the statutory rate and changes affecting the tax treatment of investment and capital recovery (depreciation). Second, an increasing fraction of business activity is being carried out by partnerships and S corporations, which are not subject to the corporate income tax. This has led to an erosion of the corporate tax base. And third, corporate sector profitability has fallen over time, leading to a further erosion of the corporate tax base.”

The 2nd item is a matter of where tax is collected – S corp and partnership income is taxed at the individual level not the corporate level. It just moves tax collection from the “corporate income tax” bucket to the “individual income tax” bucket. To call it is “an erosion of the corporate tax base” is misleading.

The 3rd item is what the inherent nature of the corporate income tax should be – it is paid on income.

Only the 1st item is a true “cut” – and even that one combines a true reduction (statutory rate) and a timing change (depreciation time period).

Very important to understand the magnitude of each of these different components because they are different things.

Posted by realist50 | Report as abusive

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Posted by JulzElie | Report as abusive