A taxation conundrum

By John Lloyd
May 28, 2013

For the giants of Silicon Valley, the fall from freedom’s children to social pariah has been something of a Shakespearean reversal of fortunes. Google, Apple and Facebook might be Lear, Othello and Macbeth in the suddenness and completeness of their fall from a grace that was bequeathed to them by the generations that found their technologies liberating, empowering and even beautiful.

These companies are nothing like the robber barons that were rebuked by the U.S. government a century ago. They are not locking out workers or running sweatshops. On the contrary: They’re hiring people. Led by Facebook founder Mark Zuckerberg’s advocacy group FWD.us, they are agitating for immigration laws to be loosened so they can hire clever Chinese, Indian and other citizens and pay them lots of money. Those lucky enough to get into their now-sprawling campuses gain access to a kind of gold-plated welfare state where choices of delicious food, health centers and dental clinics are theirs for the using.

The companies say transparency and freedom of speech are at the heart of all they do. Transparency is a Google “Core Value”; Facebook has signed up to the Global Network Initiative, dedicated to advancing freedom of expression to help “shed a spotlight on government practices that restrict expression and seek over-broad requests for user data.”

Freedom and transparency make up one of the largest battlegrounds between states and citizens today, and the fact that the Silicon Valley companies put themselves on the side of citizens has attracted high-profile recruits to their offices. In the UK, two big-time journalists renounced their trade to work for Google: John Kampfner was editor of the leftist New Statesman and head of the NGO Index on Censorship. He is now an external adviser to Google on free expression and culture. Peter Barron edited the BBC’s probing Newsnight program and, while a reporter on the program, won a 1995 award from the Royal Television Society for reports on the arms-to-Iraq scandal. He’s now head of external relations for Europe, Middle East and Africa at Google.

As unlikely as it is that the rich, clever people behind these companies will lead their employers to tragic fates, they have a very large problem on their hands. Relative to their earnings, these companies pay very little taxes. This is not, it seems so far, a crime. But it may be worse than a crime; it is a product of their philosophies.

Last year, Facebook paid “negative taxes” – that is, the taxpayer paid the company $429 million because Facebook had written off the value of the stock options awarded to Zuckerberg and other executives. The company received a huge tax deduction of $16 billion. This is quite legal, but, as Senator Carl Levin (D-Mich.) said in a debate on the Senate floor last April, “As with so much of our tax code, it’s not the law-breaking that shocks the conscience, it’s the stuff that’s allowed.”

Levin’s governmental affairs investigations subcommittee interviewed Apple Chief Executive Officer Tim Cook and other top executives a few days after the release of a congressional report that claimed Apple uses a complex “highly questionable” tax-minimization strategy. Part of this strategy involved the shift, more than 30 years ago, of a major part of the company’s ostensible central control function to Ireland, where corporate taxes are very low. As Levin put it, “Folks, it’s not right.” After the hearing, even critical observers concluded that Cook wasn’t really rattled.

Across the Atlantic, another feisty committee chairman and former labor minister, Margaret Hodge, also thinks it’s not right. As Cook faced the senators, Google Vice-President Matt Brittin was being warned that it was a serious offense to mislead Hodge’s committee – an offense he might have committed when, last year, he argued that no sales transactions were done in the UK by Google but were routed through a subsidiary in Ireland. Google, like Apple, has a center in Dublin that is nominally its European hub. Hodge said the committee was alerted to the discrepancy by a report by Reuters’ Tom Bergin (who received the Orwell Prize for the piece). Hodge said, “It was quite clear … that the entire trading process and sales process took place in the UK.” Google’s sales in the UK are worth 3.2 billion pounds, but most are routed through Dublin. In 2011 it paid 6 million pounds in UK corporation tax.

The various executives of these companies don’t exhibit much sense of guilt when confronted by irate lawmakers. The British new technology writer Dick Pountain wrote in his blog that when Google CEO Eric Schmidt came to the UK earlier this month, he “treated UK PM David Cameron with the amused air of a cheeky schoolboy talking to a nagging teacher … a mask for the fact that he now wields more power than a mere PM and knows it.” Pountain also quotes the former Facebook employee Katherine Losse from her book, The Boy Kings, that Schmidt’s philosophy is, “If you want to change the world … start a company. It’s the best model for getting things done and bringing your vision to the world.”

In a fine piece of close reporting, George Packer reveals a world where the magnificent headquarters buildings “keep tech workers from having even accidental contacts with the surrounding community.” The spirit that imbues the engineers who work there carry Schmidt’s belief: that companies are king and governments are at best passé. This view, once framed as state-of-the-art idealism, is now seen as deeply self-serving and destructive of societies that depend, for their infrastructure, social services and much else, on the tax that these companies are determined not to overpay. Not all lawmakers see it this way.  Senator Rand Paul (R-Ky.) spent his time on the Levin committee hearings seeking to protect Apple from “bullying.”

At times over their 100-year history, corporations have vied with governments for primacy and for the moral high ground. A new battle is now joined, and governments in Germany, France and other European states are following the UK and the U.S. into the trenches. It’s a battle not just for more tax revenue but also for the concept and practice of the nation-state and its provision of public goods. That makes the issue central to us all.

PHOTO: Apple CEO Tim Cook is pictured as he confers with staff during a break at a Senate homeland security and governmental affairs investigations subcommittee hearing on offshore profit shifting and the U.S. tax code, on Capitol Hill in Washington, May 21, 2013. REUTERS/Jason Reed

19 comments

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Their payroll of long term US citizens are low and most of their operations are outsourced. They should be considered foreign organizations as far as taxes, protection of their interests in trade talks, etc. Very little of their wealth stays in the USA.

Unless a firm has a large US payroll or produces or buys most it’s products in the USA, their cash flow does not stay in the USA.

Posted by Samrch | Report as abusive

I do not blame companies for being very good at minimizing their taxes. I do blame the total incompetency of our government and the IRS in not changing with the times.

Congress has the power to change what’s wrong, but before it can be changed there should be genuine intelligent evaluation of what we have versus what we need in terms of regulations. This country obviously needs a “performance specification” for revenue, an intelligent plan to assure that companies with substantial activities in these United States and sell substantial product here pay their fair share of local, state and federal taxes.

When they don’t, should we not fire the idiots responsible; even if they’re unionized federal bureaucrats? If anyone has the necessary authority, why is it not being intelligently used? If no one is presently accountable, that would seem a good place to start.

Posted by OneOfTheSheep | Report as abusive

@OOTS – reasonably put. I read recently that one of the first and most negatively impacting results of budget cuts was the choice to greatly reduce the number of secular subject matter experts available to the government. Thus, we get tax structure advice from PWC, which is perhaps not ideal for the citizenry. Civil servants attempt to execute policy rather than writing law, though accountability should never be minimized. It’s gonna take folks with a lot more expertise than your average US Representative to understand and promulgate an effective tax code. Kaizen!

Posted by Nurgle | Report as abusive

Clearly, some big US based companies no longer see themselves as American companies, and the people who own and run these companies don’t identify themselves as American business people or executives.

These companies grow and exist in a virtual world, where the only thing that matters is success – a virtual notion defining the dimensions of that virtual world and its denizens.

These companies have a lot of direct and indirect political influence over the US government, as well as on other governments – through lobbying, contributions, the media, and the promise (sometimes illusion) to ‘create jobs’.

In the long run, the power of big supranational companies as well as their attitude and behavior will weaken the states’ institutions and the rule of law.

Posted by reality-again | Report as abusive

Mr. Lloyd,

Your open admiration of these “criminals” disgusts me. You are nothing more than a sycophant. What is worse your opinion is representive of what is wrong with this nation and government today.

You mistakenly argue that they are not the “Robber Barons” of old, They are not “locking out workers or running sweatshops. On the contrary: They’re hiring people. Led by Facebook founder Mark Zuckerberg’s advocacy group FWD.us, they are agitating for immigration laws to be loosened so they can hire clever Chinese, Indian and other citizens and pay them lots of money. Those lucky enough to get into their now-sprawling campuses gain access to a kind of gold-plated welfare state where choices of delicious food, health centers and dental clinics are theirs for the using.”

They are actually worse. They are undermining the US ecomony by their immigration policies, which exclude US workers, and by their open defiance of US tax laws that are already far too liberal. These people have, in fact, bought and paid for the US government and are reaping the rewards of that investment at the expense of the rest of the nation. They are nothing but modern day “Robber Barons” who are decimating this nation’s economy and stealing from the American people.

You state, The companies say transparency and freedom of speech are at the heart of all they do. Transparency is a Google “Core Value”; Facebook has signed up to the Global Network Initiative, dedicated to advancing freedom of expression to help “shed a spotlight on government practices that restrict expression and seek over-broad requests for user data.”

You state, “Freedom and transparency make up one of the largest battlegrounds between states and citizens today, and the fact that the Silicon Valley companies put themselves on the side of citizens has attracted high-profile recruits to their offices.” It seems that “transparency” of their illegal tax fraud activities was somewhat missing, and they are NOT on the “side of citizens” who are being cheated by them. And, yes, high profile ponzi schemes always attract those greedy and lacking in morals to join. The prime example is the banking “industry” today, which consists of parasites just like those in Silicon Valley.

“They (do not) have a very large problem on their hands. Relative to their earnings, these companies pay very little taxes. This is not, it seems so far, a crime”, but only because the government is on their payroll, just like any other organized crime to ensure freedom of their criminal activities.

You state, “But it may be worse than a crime; it is a product of their philosophies.”

ARE YOU SERIOUS? REALITY CHECK!

Their “philosophy”, just like any other capitalist company, is to make money for their stockholders — regardless of the means employed to do that. These people differ from the old “Robber Barons” only in that they are far more savvy in terms of the need for propaganda to sell their bullshit to the American people that they are a new and different kind of “citizen friendly” company, but nothing could be further from the truth.

These people are no different than your “friendly banker”, which everyone knows is an oxymoron. Or, for that matter, the “honest” politicians who keep them rolling in obscene amounts of wealth at the expense of the “non-elite” in this country.

You state “At times over their 100-year history, corporations have vied with governments for primacy and for the moral high ground. A new battle is now joined, and governments in Germany, France and other European states are following the UK and the U.S. into the trenches. It’s a battle not just for more tax revenue but also for the concept and practice of the nation-state and its provision of public goods. That makes the issue central to us all.”

What, exactly, is the “moral high ground” these corporate tax cheats are supposed to represent? You are wrong. This really IS just a battle to impose the law on tax cheats who have been caught red handed.

There is NO moral high ground in cheating on taxes.

There is NO “concept and practice of the nation-state — as the conclusion one would draw from your unmitigated bullshit that these people have some sort of special privilege under the laws — and its provision of public goods”.

From their perpspective there is NO provision for the public good, only that which benefits the few at the expense of the many.

That is NOT admirable, nor is it responsible behavior by ANY corporation, but unfortunately it is the “norm” in the present economy, which is why we are currently in trouble as a nation.

Your defense of these people is totally without merit, and your fawning attitude towards them doesn’t qualify as objective reporting of the issue.

This immorality of our nation’s companies in terms of their responsiblities towards the American people is a “slippery slope” which will destroy this country.

The immorality of our government in terms of their responsibilities towards the American people is the enabler for those who would destory this nation.

These twin immoralities lie beneath everything that is wrong with the US.

Posted by EconCassandra | Report as abusive

” they are agitating for immigration laws to be loosened so they can hire clever Chinese, Indian and other citizens and pay them lots of money.”

What a silly statement. They hire foreign “indentured servants” on restricted visas who serve the dual purpose of undercutting American salaries and providing a cheap, easily dispensable labor pool.

And the “boy kings’” may disdain the quaint notion of the nation state and the provision of public goods but they still choose to build their palatial residences in a jurisdiction–the Bay Area–that provides a level of comfort in infrastructure that can only be possible through the American taxpayer. But then only “little people” pay taxes, right?

Posted by bluepanther | Report as abusive

” they are agitating for immigration laws to be loosened so they can hire clever Chinese, Indian and other citizens and pay them lots of money.”

What a silly statement. They hire foreign “indentured servants” on restricted visas who serve the dual purpose of undercutting American salaries and providing a cheap, easily dispensable labor pool.

And the “boy kings’” may disdain the quaint notion of the nation state and the provision of public goods but they still choose to build their palatial residences in a jurisdiction–the Bay Area–that provides a level of comfort in infrastructure that can only be possible through the American taxpayer. But then only “little people” pay taxes, right?

Posted by bluepanther | Report as abusive

” they are agitating for immigration laws to be loosened so they can hire clever Chinese, Indian and other citizens and pay them lots of money.”

What a silly statement. They hire foreign “indentured servants” on restricted visas who serve the dual purpose of undercutting American salaries and providing a cheap, easily dispensable labor pool.

And the “boy kings’” may disdain the quaint notion of the nation state and the provision of public goods but they still choose to build their palatial residences in a jurisdiction–the Bay Area–that provides a level of comfort in infrastructure that can only be possible through the American taxpayer. But then only “little people” pay taxes, right?

Posted by bluepanther | Report as abusive

” they are agitating for immigration laws to be loosened so they can hire clever Chinese, Indian and other citizens and pay them lots of money.”

What a silly statement. They hire foreign “indentured servants” on restricted visas who serve the dual purpose of undercutting American salaries and providing a cheap, easily dispensable labor pool.

And the “boy kings’” may disdain the quaint notion of the nation state and the provision of public goods but they still choose to build their palatial residences in a jurisdiction–the Bay Area–that provides a level of comfort in infrastructure that can only be possible through the American taxpayer. But then only “little people” pay taxes, right?

Posted by bluepanther | Report as abusive

“There is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible” – Judge Learned Hand. From the standpoint of taxes, MC Levin and the rest of Congress have to look in the mirror.

Regarding your larger point, I do think that Cook, Jobs, Zuckerberg, et al truly believe(d) they are doing right for their employees and for society at large. What they lack is the ability to doubt those beliefs, to conceive that their largely positive intentions may have negative consequences.

I especially liked your contention that beautiful, functional, self-contained workplaces served to separate highly skilled and compensated employees from the rest of society. The intent, of course, is to keep them working long and uninterrupted hours in an intensively competitive environment where many more ideas fail than succeed. But a terrible side effect is that you don’t mingle with the masses very much.

Posted by Curmudgeon | Report as abusive

@EconCassandra

You seem to be under the impression that these businesses disobeyed the law and are in fact criminals. This notion in essence is wrong.
Facebook, Apple and Google are businesses. They are products of a free economy and gain advantage by being competitive, lean and profitable. We cannot expect a business to leave profit behind even though it’s legal and morally acceptable?

I see no ethical dilemma in creating a even more productive business through the use of the tax system. It’s part of having a free market.
It’s the governments role to regulate this free market when necessary for the benefit of society. If they do not, it should not be put on the shoulders of the businesses. They act both legally and ethically responsible.

As far as “Their “philosophy”, just like any other capitalist company, is to make money for their stockholders — regardless of the means employed to do that.”
You seem to be have forgotten that we indeed, do live in a capitalist economy. That means we have the liberty to take and bring what we need for our own wellbeing. What else do you expect? A marxist society?
And the means employed to generate profit are very well lined out, it’s law and values. If profits were generated outside of our ‘rule book’ we would have a lawsuit by now, would’nt we.

I agree with you that there is no moral high ground on cheating on taxes. However, these businesses did not cheat on taxes. They just played the game well, better than most, while others did not. During the game, they seem to have never broken the rules. And that is what they are allowed to do according to the rules of the land of the free.

Posted by theAntagonist | Report as abusive

@ theAntagonist –

What you obviously don’t understand — and I have neither the inclination nor the patience to disabuse you of your knee-jerk defense of Apple and its ilk — is that the US tax policy is part of a three-prong “capitalist” economy that is destroying this nation. The other two being “free trade” and non-existent banking “regulation”. These three together allow the totally unrestricted movemement of investment capital to any point in the world to obtain the greatest return on profit possible.

What is “wrong with this picture” is that “laissez faire” capitalism, without sufficient controls to restrain their proclivity to excess WILL destroy an economy, since it is NOT a sustainable economic theory.

Most of these tax laws have been written by Congress at the specific direction of these wealthy companies (and their stockholders) to maximize their profits at the expense of everyone else, which is why Apple’s tax avoidance schemes are not illegal.

Clearly, you understand NOTHING about what is going on in the “global economy” right now, and why it is in trouble.

I suggest a LOT of personal research might help, but I doubt it since you already have your preprogrammed opinion from the wealthy class in place and NOTHING is likely to dislodge it.

—————–

Here is an excerpt from the UK Guardian which briefly covers what I am talking about in terms of what these corporations really want, which is another “tax holiday” so they can bring their billions of untaxed revenue back to the US in order to reinvest it in the third world to make profits (it won’t be invested in the US, which they have shown before).

The big problem for the stockholders right now is that billions of profits are simply sitting idle in foreign tax havens and they cannot legally be invested without paying US taxes.

So they are trying to cut a deal with Congress to allow them to bring the taxes back to the US to help the US economy and generate jobs, NONE of which is true.

I can’t substitute for your obvious lack of education to understand these issues.

It irritates me when morons who know nothing about the truth attempt to spout propaganda about our wonderful system of economics and government.

It’s ALL a massive scam to cheat the American people out of what the wealthy class owes them.

DUH!

Fewer video games and more attention to reality might help …

—————-

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

Heidi Moore (updated)
Heidi Moore
guardian.co.uk, Friday 17 May 2013 16.32 EDT
Jump to comments (75)

Tim Cook introduces Apple’s iPhone 5
Apple CEO Tim Cook will speak in Washington DC to promote a tax holiday for US corporations. Photograph: Justin Sullivan/Getty Images

One of the strangely charming aspects of the CEO class in America (and one they share with most of Congress) is their ability to tune out the actually pressing issues of the day – the weakening American labor force, the troublesome cycle of consumer debt, the flagging pace of economic growth – and, instead, focus with laser precision on hyping the kind of issues that the rest of us might call first-world problems.

So it’s no surprise that government and corporations, finding their methods aligned, may also find their interests aligned. They might gear up to work together again – as soon as next week, in fact.

Tim Cook, the CEO of Apple, is a perfect example. It’s easy to imagine that Cook wouldn’t have a free moment, and that he’d be busy at home in Cupertino, California, with a litany of troubles: the fears that Apple’s glory is over; that innovation isn’t on schedule; that major shareholders are selling out; and the persistent downward misery of the company’s stock price, which has plummeted nearly 40% over the past nine months.

But Cook has liberated himself from these chains and turned his attention to what he and most of Corporate America think is a more pressing problem: a tax holiday. The issue is simple: how to ensure that companies can avoid paying US taxes on money they make overseas. The notion has come into vogue several times over the past few years, but has failed to breach public opinion each time.

Cook will be making the rounds of Washington next week to push it again. He already gave an interview to the Washington Post advocating that the current 35% tax rate on overseas profits is too burdensome for American companies.

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.

Every investment banker and CEO with any honesty will admit that the 2004 tax holiday didn’t perform as promised. Still, they will insist that time will be different. Why?

Politicians know the government has absolutely no leverage after it grants the holiday. It can lower the tax rate, but it loses any say over how companies use the money they get back. The government, which rarely drives a hard bargain with Corporate America, would be even less likely to be a tough negotiator after handing companies a giant financial gift.

Which is too bad, because, as the sequester shows us, the government could do with an influx of cash. It’s easy to see why companies would like a tax holiday, but the government would like one, too: it could use the revenue. $1.7tn at a 35% tax rate would bring in no money, because no company would bring it back, but $1.7tn at, say, a 5% tax rate would put some money in Washington’s coffers.

Perhaps Tim Cook is not going to Washington to argue for Corporate America so much as to cover for the politicians who want to pad the meager federal budget.

One solution to DC’s dilemma might be to attach some strings. In Washington, there have been discussions that perhaps companies should be allowed a tax holiday – if the money can be earmarked for some major project, like infrastructure, which is suffering from funding issues and could need as much as $3.6 trillion to be fixed. A tax holiday could provide the funds for that just that fix.

Just a few weeks ago, Representative John K Delaney proposed an infrastructure bill that would offer US companies a tax holiday if they used some of the money to buy infrastructure bonds. Rep Delaney proposed, for example, that companies might get a tax break of $4 for every $1 they buy in infrastructure bonds, which would make for a tax rate of roughly 8%.

That money would actually help the economy. Bond sales have been helpful for infrastructure; the Build America Bonds program, for instance, made it easier for many municipalities to borrow money, because it made many buyers willing to lend in return for a 35% tax break on the bonds.

It turns out, then, that what Corporate America wants is also what the government wants. It just may not be what Americans want; it’s hard to root for companies to get richer, considering that all the money they’ve been making has not helped employ many more people. As such, there’s a possibility that the hearings next week will bridge the perception gap, letting Washington say that Cook persuaded that the tax holiday was a good idea.

Cook is one of President Obama’s favorite executives; in fact, he may be the only executive the president likes these days. So it’s no surprise that he’s the only one going to Washington to testify on behalf of the tax holiday. Just don’t believe that it’s really his idea alone.

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

Posted by EconCassandra | Report as abusive

What you people seem to fail to understand is that US news media is totally owned and controlled by the government and corporations to prevent the truth from reaching the American people, and Reuters is one of their best propaganda machines.

—————-

Apple’s multi-billion dollar, low-tax profit hub: Knocknaheeny, Ireland

Apple’s Irish operation has a multi-billion dollar profit – and a tiny tax bill. How does it do it?

Simon Bowers
The Guardian, Wednesday 29 May 2013 17.00 ED

Eileen Stokes and her family live a basic life, one of 16 Irish Traveller families settled on an established halting site at the edge of Knocknaheeny, a run-down northern suburb of Cork.

A brazier smolders outside their mobile home. Also within the small, breezeblock-walled yard is the family’s much-loved horse, Ginger. Excitable children show off minnows they have caught in a jar and ask for photos to be taken of themselves posing as boxers or on horseback.

Eileen’s husband pulls out a mobile phone to call his brother to come and talk to the Guardian. It’s not an iPhone.

The Stokes are the nearest neighbours to Apple’s Cork offices, just north of the Blarney Road. Almost two-thirds of the technology group’s $34bn (£22.5bn) global profits for 2011 were earned by companies registered next door.

The past 10 years have brought “unprecedented success” as the popularity of its products has spread across the world, Apple chief executive Tim Cook recalled in Washington last week.

As a result, Apple’s Irish companies now sit on reserves of cash and investments worth about $100bn – a corporate kitty that would more than cover Ireland’s entire annual government expenditure.

Over the same 10 years, Ireland’s fortunes have taken a different turn, with the country engulfed in a banking crisis and forced to seek a bailout from the EU and IMF. Between 2006 and 2011, unemployment rates in Cork city and its suburbs doubled to 18%. The area includes nine of the country’s unemployment blackspots, the worst of which is Knocknaheeny, where the jobless rate according to the 2011 census was 43%.
Cork has nine of Ireland’s joblessness hotspots, as well as Apple’s offices. Photograph: Sean Smith for the Guardian

“They never done anything for us,” says Stokes, her husband adding that many staff at the offices are foreign rather than local workers. Knocknaheeny is an area with a history of many households living below the poverty line. Of those who work, many are low-paid.

On its multi-billion Irish company profits, Apple paid an average of less than 1% tax to Dublin, leading US politicians and tax professors to accuse the group – which vies with the oil giant Exxon for the title of the world’s largest joint-stock company – of deliberately shuffling around its global profits in order to lower its tax bill.

These are earnings, tax experts say, that ordinarily would arise and be taxed, at Apple’s Silicon Valley headquarters; and to a lesser degree in markets around the world, including the UK, where many millions have bought its products.

Foremost among Apple’s accusers are two US senators: a formidable bipartisan duo of Carl Levin, a 78-year-old Democratic senator from Michigan, and John McCain, 76, the 2008 Republican presidential candidate.

Leading the Senate subcommittee on investigations, they discovered that international selling rights to Apple products had been transferred out of the US to a small handful of companies in Knocknaheeny.

“You shifted that golden goose to Ireland,” Levin angrily accused Cook at a six-hour hearing last week. “You shifted it to three companies that do not pay taxes in Ireland … These are the crown jewels of Apple Inc … Folks, it’s not right.”

It was an interpretation Cook politely said he did not recognise. “There is no [profit] shifting going on that I see at all,” the smiling Apple boss explained, sticking firmly to the company line.

“Apple has real operations in real places, with Apple employees selling real products to real customers. We pay all the taxes we owe – every single dollar … We don’t depend on tax gimmicks.”

But politicians and tax experts found this hard to believe. “Apple does not use tax gimmicks? I about fell off my chair when I read that,” Dick Harvey, a professor in tax law and former adviser to the IRS, told the Senate hearing.

Probed specifically on activities in Ireland, Cook claimed: “We have built up a significant skills base there of people who really understand, deeply, the European market, that serve our customers well. They provide a number of functions for that … from tech support, to sales, to reseller support, etc. So we have quite a strong presence there.”

With the two sides unable to agree, the Guardian went to Cork, seeking to build on evidence given to the Senate and test whether Apple’s claim that its Irish subsidiaries can reasonably be said to earn two-thirds of global group profits – or whether, in truth, they are little more than a fig leaf masking industrial-scale tax avoidance.

The investigation found:

• Apple’s Cork site employs large numbers of foreign workers, many employed in call centres dealing with technical-support queries raised in their home countries. Recent Cork job adverts show vacancies for a Spanish payroll analyst, Nordic customer relations adviser, Norwegian Apple specialist, Russian fraud analyst and a German Agreement admin adviser.

• Staff at what Cook calls “our campus in Cork” earned less than the average for Apple, though Harvard professor Stephen Shay has calculated that 2011 profit per employee at the Cork site was more than $9m.

• Although Steve Jobs made Cork his first European base in 1980, most manufacturing operations left Cork years ago. Printed circuit-board production went to Indonesia in 1998, while iMac assembly transferred to Wales a year later.

• Most Apple products destined for all markets outside of the Americas are manufactured by Foxconn in China on orders from Cork. Almost all of them never touch Ireland, being shipped directly to local distributors and retailers in Europe, the Middle East, India, Africa, Asia and Australia.

• Apple has been able to draw a secrecy veil over its Irish operations by making extensive use of unlimited companies, which are not required to file company accounts.

• Billions of dollars of profit pouring into Apple’s Irish coffers each year are managed by Apple’s Nevada-based investment subsidiary Braeburn Capital, making it larger than any US hedge fund. Cash reserves are held in banks in New York with not a penny in Ireland.

• Main accounting records for at least one of these companies are held in Austin, Texas. Meanwhile, notes of board meetings are taken by Apple’s California-based general counsel Gene Levoff and sent to a law firm in Ireland to be typed up as formal minutes.

• Auditors to Apple companies are Ernst & Young, the accountancy firm that also audits Google, Facebook and Amazon – each of which have also elected to set up substantial operations in Ireland. E&Y did $6bn of tax advisory work last year.

Apple declined to co-operate with the Guardian’s investigations and staff leaving work last week were told not to speak to the paper.

However, one worker did break ranks, although chose to speak anonymously. “I grew up in Denmark, so I come from a system where you pay 50% tax. So, yeah, I believe you should pay taxes – I would prefer to pay 50% and have a system that works,” he said.

“I don’t know how the Irish do it. I don’t think it’s fair, no. I think they [Apple] pay 2% tax here in Ireland, which is ridiculous – but that’s the way the system works.”

Conor Healy, chief executive of the Cork chamber of commerce, said Ireland’s unapologetic drive to recruit multinationals was good for the local economy, insisting the country’s low corporation tax rate of 12.5% was just one reason multinationals chose to relocate. “That’s something we very much promote. But that, on its own, is not sufficient for large companies like Apple to be successful.

“Cork is the EMEA [European, Middle East and Africa] headquarters for Apple … It’s delivering real services to Apple customers outside of the US and to the Apple corporation globally.

“And it is employing 4,000 real people, in real jobs here in Cork. That’s a very, very different environment to the tax haven as portrayed in some of the commentary from the US.”

Some 40 multinationals – including Amazon, Google and software security group McAfee – have set up operations in and around Cork, bringing 100,000 jobs to the area, according to Healy. And for every one of these new posts, he claims, three additional, indirect jobs are created.

In the last week, Irish ministers have been busy attempting to rebut damaging tax-haven accusations from the Senators. They have denied that Apple received a sweetheart deal from the Irish government, despite sworn testimony from Cook that Ireland, in 1980, was “very much recruiting tech companies … [and] did give us a tax incentive agreement to enter there”.

Ireland’s deputy prime minister, Eamon Gilmore, said: “[These] are not issues that arise from the Irish taxation system. They are issues that arise from the taxation systems in other jurisdictions, and that is an issue that has to be addressed first of all in those jurisdictions.”

But Sheila Killian, a lecturer in accounting and finance at Limerick University and a former E&Y tax adviser, suggested it might not be so straightforward for Ireland to wash its hands of responsibility for tax controversies such as Apple and Google. Whatever the modest benefits to Knocknaheeny, Cork and Ireland, business-friendly tax policies, she argued, can having a corrosive impact on international efforts to stand firm against aggressive tax avoidance.

“I think the 12.5% rate in itself, when companies aren’t engaged in [tax structuring], is not so problematic … But when profit is shifted into Ireland – and particularly when funds are channelled through Ireland, as appears to be the case for Apple and Google – then you have companies that essentially don’t pay much tax anywhere. They’re really bleeding tax from other jurisdictions, particularly [poorer nations in] the global south.

“Less money goes in aid to the south than flies from the south in capital. If you allow your tax system to be used by multinational firms to facilitate that kind of flight, that’s very problematic.”

Next month, David Cameron hosts a G8 summit in Northern Ireland and has promised to put tackling big business tax avoidance at the top of the agenda. In January, the prime minister used a speech at the World Economic Forum in Davos to signal his intent.

“Some companies navigate their way around legitimate tax systems, and even low tax rates, with an army of clever accountants,” he said. “Some forms of avoidance have become so aggressive that I think it is right to say these are ethical issues, and it is time to call for more responsibility,” the prime minister said, urging multinationals to “wake up and smell the coffee”.

Meanwhile, Apple too – like Google earlier this month – has been calling for a reform of the international tax rules. Not everyone shares a view about what reform should look like, but political and public pressure for change, from around the globe, has never been stronger.

———————

http://www.guardian.co.uk/technology/201 3/may/29/apple-tax-profits-ireland-cork

——————–

Apple’s dirty little tax secret – video

http://www.guardian.co.uk/technology/vid eo/2013/may/29/apples-dirty-little-tax-s ecret-video

Posted by EconCassandra | Report as abusive

The ONLY reason the massive tax fraud has come to light at all is that what these companies were doing was discovered in the UK, beginning with Starbucks and Google (I think).

It was ONLY THEN THE SHIT HAS HIT THE FAN.

MEANWHILE, THE US “NEWS” MEDIA AND US GOVERNMENT HAS GONE INTO HIGH GEAR TO WORK OUT SOME SORT OF DEAL, WHICH IS GUARANTEED NOT TO BE IN THE BEST INTERESTS OF THE AMERICAN PEOPLE.

THIS IS NOTHING BUT “DAMAGE CONTROL” BY CORPORATIONS AND CONGRESS TO COVER UP WHAT THEY HAVE BEEN DOING ALL ALONG.

I rest my case.

Posted by EconCassandra | Report as abusive

Mr. Lloyd,

Your pathetic arguments aside, the only “tax conundrum” I see is how much in “normal” taxes, plus penalties and interest should be levied on ALL of these tax cheats.

THEN, once the tax money owed to the American people is paid, we should bring legal charges against the peole involved, with stiff jail sentences (that are actually served in a real prison for the full term).

Maybe, just maybe, IF we can reestablish the principles of “justice for all” as promised in the constitution WE can get OUR country back from THEM before they succeed in destroying it again.

———————

How one Irish woman made $22bn for Apple in a year

A private individual who shuns publicity, Cathy Kearney is thought to be the brains behind the Cork office that has helped save Apple billions

Apple Operations International in Cork, Ireland. Photograph: Reuters

Simon Bowers
The Guardian, Wednesday 29 May 2013 17.00 EDT

Cathy Kearney, an accountant in the Irish city of Cork, appears to live a fairly modest home life. A graduate of the local university, her home for 15 years has been a dairy farm outside Youghal, a seaside town a short drive from the city.

The 49-year-old lives with her husband and children in a large, but far from grand, farmhouse. Outside work she is involved in the local church. She is also, at first sight, the brains behind much of Apple’s exceptional global success in recent times.

Kearney is the Silicon Valley computer giant’s top lieutenant in Ireland, and has overseen the explosive success of the company’s operations in Cork, responsible for selling iPads, iPhones and MacBooks to scores of markets across Europe, the Middle East and Africa. No less than $22bn of Apple’s profits – two-thirds of the total for the group – came from Kearney’s Cork companies in 2011 alone. Back in the United States, Tim Cook, Apple’s chief executive, has described this international success as unprecedented.

Two years ago Kearney featured in a list of Ireland’s 20 most powerful women produced by the Irish Independent. It declared that Apple’s success owed much to her “shrewd direction”, though it also noted that she was a very private individual and had refused to provide biographical details or a photograph of herself.

“We focus on our products rather than individuals as we like to recognise the team effort at Apple,” a spokesman said.

Kearney did give one interview last month, however – speaking in private to US Senate officials. They have been gathering information about Apple’s Irish operations on suspicion that the group is aggressively – though legally – shifting profits from operations around the world, particularly from the US, to Ireland in order to pay less tax.

Of particular interest to the investigators was a cluster of companies, registered at Apple’s Cork office, to which had been transferred development rights, outside the Americas, to many of the group’s products. As one senator put it last week, Apple had “shifted that golden goose to Ireland”. Poring over paperwork for these companies, Senate staff saw the familiar names of senior California-based Apple executives, including Cook himself. They also saw Kearney’s name – again and again.

Probing further, among the companies they alighted on was Apple Operations International, the top Apple holding company in Cork. Kearney is the only AOI director in Ireland. Directors’ duties usually include attending board meetings. But the Senate officials discovered she had attended just seven of 33 AOI board meetings over almost seven years – once in person, the other six by telephone. All but one of the meetings were in California, where the other directors were based.

Link to video: Apple’s dirty little tax secret

Meanwhile, in four years, almost $30bn of profits poured into AOI, though it has no physical presence or employees in Cork or, indeed, anywhere else on the planet. One source on the Senate subcommittee on investigations joked that AOI and others were “iCompanies – i for imaginary, invisible”.

Back in 1997 Kearney’s job title at the Cork office was financial controller, though she may have worked there longer than that. Apple declined requests for an interview with her. Guardian inquiries were redirected from Cork to Apple Europe Limited, a company in Mayfair, London, with about 300 marketing and sales staff. Today, Kearney’s formal business title is vice-president of European operations for another Cork company, Apple Distribution International. But it is her directorships of AOI and other Apple subsidiaries that have attracted attention. They help satisfy incorporation requirements under Irish law, and some of them do employ staff in Cork. What surprised investigators most was that at least three of these companies, including AOI, appeared to have no tax residency anywhere in the world.

Their boards have been able to tell the Irish tax authorities that Kearney, the sole Irish-resident director, cannot be judged to manage or control these companies, and that important decision-making rests in California.

As a result, AOI and others are not deemed tax resident in Ireland.

Meanwhile, because these same companies are incorporated at addresses in Ireland, under US law they appeared not to be tax resident in the US either. “Magically,” observed Senate committee chair Carl Levin, “it’s neither here nor there.”

The Cork accountant is indeed an important woman, running a Cork office of up to 4,000 staff.

But she has also helped saved Apple billions in tax.

—————-

http://www.guardian.co.uk/technology/201 3/may/29/apple-ireland-cork-cathy-kearne y

Posted by EconCassandra | Report as abusive

@EconCassandra,

Well hello PseudoTurtle under another name. Gordon something also some time back I seem to remember.

You know when you heap so many logs on a fire people have to back off from the heat. So you’re unhappy. You see injustice everywhere. You want governments to step in.

Be careful what you wish for. Government is like ketchup. You either get none or wayyyy too much!

Posted by OneOfTheSheep | Report as abusive

Insight: How Treasury’s tax loophole mistake saves companies billions each year

(Reuters) – As the U.S. economy crumbled in early 2009, President Barack Obama offered a plan that he said would save American jobs: a crackdown on corporate tax loopholes that encourage companies to send profits abroad to avoid paying billions of dollars in U.S. taxes each year.

Tax lobbyist Ken Kies was not worried. A decade earlier, he had led a fight to preserve a key loophole – known in Treasury Department shorthand as the “check the box” rule – when another Democratic president, Bill Clinton, had tried to kill it.

“I told my clients, ‘Don’t sweat this. This is never going to happen,’” recalled Kies, who has advised corporate giants Microsoft and General Electric on the issue.

Kies was right.

Business groups rose up against Obama’s plan, arguing that it could damage U.S. businesses already threatened by the weak economy. Democrats in Congress balked, Obama dropped the idea and the loophole survived.

The story of the “check the box” loophole, which allows U.S. companies to choose for themselves how to classify their subsidiaries for tax purposes, and a companion policy known as the “look-through” rule, shows how Washington bureaucrats, lobbyists and politicians have worked together — sometimes wittingly – to save money for American corporations and deprive the federal government of billions in tax revenue each year.

What began in 1996 as an effort by the Treasury Department to simplify the U.S. tax code mistakenly ended up as a massive tax loophole for corporate America, which seized upon it and has never let go.

Besides fueling an explosion in earnings that U.S. companies keep abroad – now more than $1.8 trillion, the Commerce Department estimates, double the amount from less than a decade ago – the loophole has become a symbol of how difficult it can be to repeal a tax benefit once it becomes entrenched.

At congressional hearings last week, several lawmakers blasted Apple Inc. for using the “check the box” loophole and other international tax strategies to avoid paying what they estimated as $9 billion in potential U.S. taxes in 2012.

Two of Apple’s most aggressive questioners, Democratic Senator Carl Levin of Michigan and Republican Senator John McCain of Arizona, have called for closing the “check the box” loophole. But even they have voted to keep it alive several times in recent years when it has been inserted into other legislation.

Levin’s office did not respond to requests for a comment. McCain declined to comment for this story.

“Once a policy mistake is made that is favorable to taxpayers, and particularly to big taxpayers, it is extremely difficult to reverse,” said a former Treasury Department official who helped write the “check the box” rule and was involved in Obama’s effort to repeal it.

The former official spoke on condition of anonymity, citing the sensitive nature of the tax break.

The “check the box” loophole – which costs the United States about $10 billion per year, according to the White House – also has been a reflection of Washington’s “revolving door” culture of policy-making and lobbying. Some of the bureaucrats who helped to write the rule went on to work for corporations that used it to lower their tax bills.

They include William Morris, who was Treasury’s associate international tax counsel when the rule was imposed.

Morris, who did not respond to requests for comment on this story, joined GE in 2000 and is now director of the company’s global tax policy. The company, like many other big multinationals, keeps its tax burden well below the official U.S. corporate rate of 35 percent in part by taking advantage of “check the box” and other international tax strategies.

GE’s annual reports indicate that the company does so largely because many of its profits are directed to its vast network of foreign subsidiaries. In a filing with the U.S. Securities and Exchange Commission in February, GE said its overseas affiliates were holding $108 billion in offshore profits, which is more than any other U.S. company.

Morris’s precise role in GE’s tax strategy is unclear. The company declined to comment for this story.

Other former IRS and Treasury officials involved in shaping the tax loophole now hold senior positions at law and accounting firms in Washington and New York.

BIRTH OF A LOOPHOLE

Offshore tax shelters have bedeviled the U.S. government virtually since the inception of the tax code in 1913.

A 1962 compromise between President John Kennedy and Congress imposed U.S. taxes on “passive” income such as royalties and interest earned abroad, but not on “active” income from regular business operations.

That law, known as Subpart F, made the tax code increasingly complex as businesses grew larger and more diverse. The law was revised 10 times between 1969 and 1996 as the U.S. Internal Revenue Service tried to figure out how to classify, and then tax, tens of thousands of corporate units.

In 1996 the Treasury Department moved to simplify matters with a rule that enabled companies to “check the box” on a tax form to describe a given corporate entity – including whether it was, for tax purposes, irrelevant, a so-called “disregarded entity.”

For a company and its subsidiaries that all operate in the United States, the rule streamlined tax filing by allowing the subsidiaries’ income to be reported on the same forms as the parent company’s income.

When applied to U.S.-based multinational companies, however, the “disregarded entities” status could be used to set up high-volume subsidiaries in low-tax jurisdictions such as Luxembourg or Ireland. A key part of Apple’s tax strategy, for example, is having a subsidiary in Ireland that takes in all of the income from Apple’s retail stores in Europe.

Treasury had given little thought to how the “check the box” rule might affect U.S.-based multinational corporations, according to several people involved in the effort.

Treasury officials realized they had created a massive loophole when they noticed a spike in cross-border financing shortly after the rule took effect.

“The mistake was extending it to foreign entities,” Donald Lubick, Treasury’s top tax official at the time, told Reuters. “That was apparent pretty quickly.”

Clinton’s Treasury Department moved to revoke the “check the box” rule in early 1998. But multinational companies such as Hallmark, Coca-Cola, IBM and Philip Morris launched a full-court press to convince Congress to keep the rule in place.

Enter Kies, a former tax specialist for Congress’ Joint Tax Committee who was eager to put his expertise and contacts to work as a tax lobbyist.

Kies’s former Republican bosses – Representative Bill Archer of Texas and Senator William Roth of Delaware – accused the IRS and Treasury of overstepping their authority in trying to take away the loophole.

Kies, meanwhile, says he pursued a strategy that he figured would resonate with businesses, lawmakers and regular citizens: He argued that eliminating the “check the box” loophole would damage U.S.-based multinational companies by forcing them to pay more taxes not only in the United States, but also to high-tax nations such as France.

Roth’s Senate Finance Committee passed a bill in April 1998 to prevent Treasury from making any changes to “check the box.” That language was watered down to a non-binding resolution by the time the measure passed the Senate the next month, but Congress’ message was clear: Don’t mess with the loophole.

Treasury soon gave up its effort to revoke it.

“In light of that reception that this rule got on Capitol Hill, we withdrew the notice,” said Philip West, who was then the top international tax official at Treasury and now advises clients on international tax strategy for the law firm Steptoe & Johnson.

‘CHECK THE BOX’ GROWS UP

By 2004, thanks in part to the “check the box” rule, U.S.-based multinational corporations paid an effective tax rate of about 2.3 percent on $700 billion in foreign earnings, according to the Obama administration.

To make “check the box” tougher to revoke, Kies and other corporate lobbyists urged Congress to turn the rule into a law.

Congress did so in 2006 with legislation that became known as the “look through” rule. It bolstered the “check the box” loophole by giving corporations more latitude to move some types of income from one foreign unit to another without paying a tax.

The “look through” rule became law with little debate, according to congressional records. It was tucked into a broad extension of other tax cuts.

The 2006 law wasn’t permanent, but supporters have managed to extend it repeatedly by embedding it in large and important but unrelated pieces of legislation that were headed toward easy passage in Congress.

That is what happened in 2009, when Obama threatened to cut the loophole.

Congress has extended it temporarily twice since then as part of larger pieces of legislation. Both Levin and McCain voted to extend it in January as part of the legislation that kept the U.S. government from going off the “fiscal cliff,” a package of across-the-board tax hikes and spending cuts that threatened to plunge the U.S. economy into another recession.

Both also voted to extend it in 2010 as part of a broad tax bill.

Obama has not proposed a repeal of the loophole since 2009.

During the Senate hearing last week on Apple’s tax strategy, Mark Mazur, Treasury’s assistant secretary for tax issues, said in written testimony that the Obama administration remained “concerned about the misuse of various income-shifting devices, including misuse of the ‘check the box’ rules.”

Mazur noted that the White House has made proposals to discourage profit-shifting offshore. But it’s unclear whether Obama will try again to have the “check the box” rule revoked.

For perspective, Obama could read the words of another president who also fell short in his assault on tax shelters, this one failing to raise taxes on overseas holding companies.

“We face a challenge to the power of government to collect uniformly and fairly, and without discrimination, taxes based on statutes adopted by Congress,” that president wrote.

The letter was signed by Franklin Roosevelt and dated June 1, 1937.

Posted by EconCassandra | Report as abusive

Some of you people make even me sick . Your selective in your motives selective when looking back at who did what. NOT one of you would even acknowledge the pandora’s box that was opened wide when Ole uncle Louis Powell’s memorandum hit the desk of the US chamber of commerce then on down to every board room in America that gave way to such American icons as the infamous Corporate “Think tanks” oh yes and we know exactly what they think about after all it’s painfully obvious now what went on in those think tanks it’s no secret anymore boys ok . Yes you all chipped in and made one hell of an effort to bring about the changes that led the way to plundering America into poverty, except for a select few. Wow thanks guys nice job what next. You have already shifted the entire burden of America onto the backs of people who can least afford it . Gee fella’s I wonder how we might have down if we had Alec and the US chamber of commerce and thousands of lobbyists working for WE THE PEOPLE . I wonder what would have happened had our honorable Government pushed for Petroleum price cap’s seeing how it’s a matter of “national security” and I can only guess at what might have been had JFK no pissed off the You know who or if the 2000 election’s weren’t fixed yea fella’s it’s real easy for you people to say this that and the other but very different when you know the reality’s of just why things are as they are. WE HAVE NEVER HAD A LEVEL playing field YOU KNOW IT. I KNOW IT and the rest of America can’t get out of it’s own way which in case your in a mental coma is exactly the way they want it. So while we can’t get down the thruway without a seat belt on without immediate law enforcement attention a very select few can plunder America into poverty without a care in the world . So the next time any of you SOBs wanna talk about your tax issues remember who’s back your free ride is on and just say thanks.

Posted by roguelement | Report as abusive

@EconCassandra/PseudoTurtle,

TheAntagonist and I have made logical and pertinent posts above. You rave on and on in frustration, apparently because you perceive “blood on the hands” of all multinational businesses. The rest of us just see a status quo that needs changing.

Most of us understand that applicable rules, regulations and laws must change FIRST before there is any violation that can be successfully prosecuted. You instead seem ready to dust off and lubricate the guillotine. This is why you always come across as Chicken Little jumping up and down screaming “The sky is falling, the sky is falling”.

Mr. Lloyd said: “It’s a battle not just for more tax revenue but also for the concept and practice of the nation-state and its provision of public goods. That makes the issue central to us all.” He’s absolutely right.

You foam at the mouth incessantly about “tax cheats who have been caught red handed.” A business located and structured to pay the minimum legal tax is a “tax cheat” ONLY in YOUR eyes. All your huffing and puffing changes nothing.

Yes, there are national and international tax loopholes. Always have been and always will be. Get used to it. Ships have bilges because they leak. One may aspire to have no leaks, but it is only achievable to minimize the leaks. Reality has a way of rearing it’s ugly head.

Money presently and legally “off shore” is going to STAY “off shore” unless and until reasonable agreement is negotiated such that it makes economic sense to bring it into the U.S. We don’t “nationalize” assets here, so far, I’m glad to say.

Yes, relative to their earnings, these companies are paying very little in tax. But they are not breaking any laws in the process. Up well into the 1970s the very term “business ethics” was considered an oxymoron. I think in this regard America is slowly moving in the right direction.

If America wants these dollars to come here and be invested it must offer incentives better than other countries will offer to have them spent there. It’s that simple. Duh?

Posted by OneOfTheSheep | Report as abusive