Apple CEO Tim Cook Will Propose Corporate Tax Overhaul, Report

| Analysis

Apple CEO Tim Cook will be using his time in a Congressional hearing to propose an overhaul to the U.S. corporate tax system. News that Mr. Cook would appear in the hearing broke early Thursday morning, but the leader of the world's richest corporation told The Washington Post that he will propose changes that make it easier for U.S. companies to bring profits back to the U.S. rather than holding them offshore.

The hearing is called "Offshore Profit Shifting and the U.S. Tax Code," focusing on the estimated US$1.7 trillion being held in offshore tax havens by the richest U.S. companies.

Apple alone has roughly $100 billion held offshore. If it were to bring that money back to the U.S., it would pay 35 percent in taxes. Wall Street doesn't fancy the idea, which is why so many companies keep overseas profits overseas.

Apple went as far as to borrow $17 billion from the bond markets against those overseas funds. The company will use that money in an accelerated program to buy back shares and pay a higher dividend. It was orders of magnitude less expensive for Apple to borrow the money than it would have been to repatriate those profits and pay the taxes it would then owe.

That is effectively what this Congressional hearing is about, and Mr. Cook is set to propose changes that would reset the rules.

“If you look at it today, to repatriate cash to the U.S., you need to pay 35 percent of that cash. And that is a very high number,” Mr. Cook told The Post. “We are not proposing that it be zero. I know many of our peers believe that. But I don’t view that. But I think it has to be reasonable."

He added, "Apple has a very strong moral compass, and we believe in really good corporate citizenship. You can see this in the number of jobs we create in the U.S. and how much we invest in the U.S."

Some pundits, corporate executives, think tanks, tycoons, and others have argued that the tax rate for profits earned overseas be eliminated, often arguing that it accounts to double taxation. U.S. corporations theoretically are paying local taxes on those profits already, they argue, and shouldn't have to pay again when they bring the money back home.

The reality, of course, is much more complicated. Companies have found ways to use complicated networks of subsidiary companies that they base in offshore tax havens and then have foreign operations pay those much of their income to those subsidiaries—often in the form of licensing fees—so that their local tax burdens are minimized. A zero percent tax on foreign profits wouldn't change that.

Apple itself has been called a pioneer in this area, being credited with inventing the Double Irish With a Dutch Sandwich technique of moving money around.

Mr. Cook didn't offer The Post the details of what he would propose, but he won't be advocating a zero percent tax on foreign profits. He also noted that Apple pays a lot of taxes in the U.S. as it is.

"You may not know this, but Apple likely is the largest corporate taxpayer in the U.S.," he said. "When you combine state and federal, Apple is paying approximately $1 million an hour in just domestic income taxes."

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Comments

Bosco (Brad Hutchings)

The more money these companies amass overseas, the better the case for a zero corporate tax, and the more incentive for these companies to hold the capital offshore and invest in offshore development and production.

A key point is that investors pay taxes of capital gains and dividends. That’s where the double taxation occurs when a corporation is subject to a corporate tax. A secondary point is that if the idea of “corporations as people” bothers you, why would you want them paying taxes and cementing that notion?

But the overriding point is that with sums this large, this is now a negotiation. Apple can easily hold out for three Presidential election cycles. Even in the era of insane Bush/Obama budgets, $100B is still a big chunk of change that the government isn’t going to get any of, as corporate tax or taxed investors, unless it makes serious concessions.

skipaq

A zero corporate tax is good in my opinion. I would also like to see the whole tax code thrown out. Replace it with a flat tax or perhaps a national sales tax. But that is wishful thinking.

Lee Dronick

Apple is paying a million dollars an hour in domestic income tax! We are talking serious money.

1stplacemacuser

$1 million/hour is about $8.7 billion/year. Not chump change, but not mind-boggling big, especially for Apple.

Paying taxes, for some people, seems like how the cable TV networks work. You pay a fixed amount for a bundled package. You pay a higher fixed amount for a more extensive package (although for taxes, the packages are more-or-less the same, which may also be the case with cable). People who don’t like paying any taxes want to have an a la carte version. Pay for what you want. You want defense, pay. Want education, pay. Want fire and police, pay. Don’t want highways, don’t pay.

Of course, just like cable, that would jack up the prices for each item. And, there are some non-negotiable items, like defense. If you don’t like defense, you still have to pay because the government can’t NOT cover your 400 sqft of living area, or your 2 sqft of personal space wherever you are. You got defense, no matter what.

As for corporations, I don’t agree that 35% is too high. What’s gone wrong is that money is no longer a physical entity, like dollar bills. They’re just a number in an account, and it can be stored anywhere around the world. Before, it could take weeks to move money from the US to France or enen the Caymans. Now, log in, click-click, done. Because money can be held elsewhere, corporations can avoid taxes. The solution, which makes it unavoidable, is to create a global corporate tax structure.

A corporation has to be located somewhere. Define where that place is, based on some firm criteria. Charge taxes anywhere in the world at the rate that location would charge. Ensure that there are no locations willing to charge an arbitrarily low rate. Take away the benefit of off-shoring by having agreements between countries to have equitable tax rates.

Ok, so some countries like the Caymans might say, “Hey, you’re taking away how we make money.” Well, I think it might be reasonable for the countries like the US or the UK to kick back a little to the Caymans. The agreement would be, “raise your corporate tax rates to ours. You’ll lose customers because there’s no incentive to incorporate in the Caymans anymore. Corporations will go back to where they came from: the US, Hong Kong, Qatar, France, wherever. And since we countries will increase our tax revenue, we can take some of that and kick it back to you, the Caymans, under some agreed upon formula.”

ibuck

Large corporations: We won’t pay any income tax, nor any property tax or we’ll move to another state. We pay enough money in bribes, err, campaign contributions, to elected officials, and in anonymous, false and defamatory advertising. We’re not big job generators, and in fact, want to move most jobs offshore and have you protect our interests by spending lots of money on defense safeguarding our overseas offices & factories, where we exploit laborers and the environment. We don’t pay; the people pay.

The people (eventually): Let’s eliminate corporate charters and protections. Make everyone and all companies, at a minimum, pay a dime on each dollar of revenue, with a surcharge on all imported goods. Governments cannot give away property tax dollars ever.

Bosco (Brad Hutchings)

What’s dumbfoundingly incomprehensible about the approaches of lefties like 1stplace and ibuck is that here is a case that makes it clear as day that a high corporate tax ends up collecting less revenue for the government than zero corporate tax, and yet off you go on tangents about how anyone who can do the simple math hates firemen and wants anarchy. The Left is not even about raising the most money possible so government can waste it profligately!! They’re about ensuring that everyone and every company get screwed equally. Hilarious.

Note: I’m saying nothing about “Republicans”, who are totally useless to the cause of a free market capitalism that actually generates the wealth we enjoy.

daemon

Bosco,

As long as I have to pay taxes on money that I’m paid and taxes on things that I buy, I see no reason why corporations shouldn’t be taxed on money they’re paid and on things they buy as well.

In short, throw the entire board of directors and all corporate officers for Apple into prison for tax evasion. It worked on Capone, it can work on Apple too.

Bosco (Brad Hutchings)

daemon, Heh. A good reason why corporations should not pay corporate income tax is that (a) it artificially encourages multi-nationals to invest elsewhere rather than repatriate their dollars, and (b) it raises less money and results in more opaque (legal) tax avoidance behavior than just taxing the investors for capital gains and dividends.

Any policy that encourages a company to float bonds for a stock buy-back is a cruel joke to everyone. But that’s exactly what the corporate tax has done.

daemon

Bosco,

If you or I tried a similar tactic with our own money we would be serving long prison sentences along with Wesley Snipes.

I say just apply the law to the people who are breaking it on the corporate level, all of the officers. Lock every one of them up, seize the assets overseas, not like our government hasn’t done that before, and make sure that corporations know damn well they better pay now.

Bryan Chaffin

daemon, in what way are Apple’s executives and board members (and all of the other company execs and boards that do the things Apple does) breaking the law? You may be confused about the differences between tax evasion and tax avoidance.

daemon

BTW, if some dippy cashier tells you her store’s cheese steak is better than everyone else’s cause they use ribeye and you look at what the cook is making and it looks like ground chuck, it’s more than likely ground chuck and not ribeye, no matter what that dippy cashier is telling you.

daemon

Bryan,

It is true, I am not making a distinction between evasion and avoidance. But um… what exactly makes avoidance legal when evasion isn’t?

Bryan Chaffin

It’s a night and day difference. At issue is the practice of keeping profits offshore because the current law says that income tax is owed on those profits when it is repatriated to the U.S. Avoid the repatriation and avoid the taxes, but the taxes are still due when and if the money is repatriated.

Apple (and the other companies that do this) hasn’t evaded anything, they’ve merely put off the day when they must pay.

daemon

Bryan,

The only night and day difference is the claim that one (avoidance) is legal and the other (evasion) is illegal. I don’t see how avoidance can be legal when evasion is illegal.

This might be some sort of legal definition of actions that mark one set of actions as being evasion and thus illegal and another set of different actions as avoidance, but I’ve never heard of any type of legal definition in law for tax avoidance. I do know that trying to evade paying taxes in any way is illegal. Just reference Ringo Star who can’t even step foot on UK territory without being arrested and thrown in prison for tax evasion.

Bosco (Brad Hutchings)

Daemon, There is no requirement that Apple repatriate any of this money. The government penalizes them for doing so, to the tune of 35%. Then people like you who don’t understand policy or math harp on the execs for acting like criminals.

Ideally, you should want to tax the investors (owners) of the company. Believe it or not, you’d get more money that way. Bonus is that the lawyers and accountants who come up with these byzantine schemes would be out of jobs or doing more productive work. But your sense of fairness is blinding you. It’s kinda funny.

Bosco (Brad Hutchings)

Bryan wrote: Apple (and the other companies that do this) hasn’t evaded anything, they’ve merely put off the day when they must pay.

And the key point is that they are waiting for a lower rate. The big ones with billions offshore can easily wait out 3 Presidential elections due to low interest rates they can get floating long term bonds. They’re going to get what they want, which is a sharply reduced rate or at the minimum, an emergency tax holiday. It’s pretty silly to resist it, and thus resist the tax revenue that will come in. But don’t ever doubt people’s skewed sense of fairness and justice to work completely against them.

Bryan Chaffin

daemon, perhaps this will help.

As noted above, U.S. multinationals are not required to repatriate their foreign profits. When and if they do so, they must pay taxes on it. Until then, no taxes are owed.

You can’t evade what you don’t owe, and thus no laws are being broken. Indeed, they are being followed to the letter.

Brad, I disagree with you about the attorneys and accountants being put out of work by scrapping the corporate income tax. The shell game being played outside the U.S. will continue to be played. That’s a separate issue from keeping the money in offshore tax havens after it accumulates. In Apple’s case, that shell game is a part of how the company amassed so much money in the first place.

Bryan Chaffin

While I disagree with you on the good guy/bad guy arguments, Brad, I agree that the tax rate will either be lowered or another tax holiday will eventually be declared.

Probably sooner, rather than later.

I look forward with great interest to see what Tim Cook proposes. Apple may have the clout to spark some momentum for change. The current system is clearly flawed, irrespective of one’s political leanings and philosophy on the nature of governance.

daemon

Bosco,

That’s not a penalty, that’s their tax duty. To not pay it is a crime. Keep in mind, we don’t even require them to pay that full 35% if they show that they paid taxes on it in other countries. And seriously resorting to an ad hominem attack via my supposed ignorance of policy or math without any attempt at an actual discussion is unfair of you, not to mention a breach of etiquette. Please refrain from such until I’ve at least demonstrated that I lack the knowledge and math skill….

Bosco (Brad Hutchings)

Daemon,

It is neither their legal or ethical duty to repatriate the off-shore profits. FACT.

$0 x 35% = $0. FACT.

Apparently, FACTs constitute breeches of etiquette. Sorry things are that way. That’s on you, not me.

—————
Bryan,

Apple’s shareholders would limit the amount of off-shore shenanigans the lawyers and accountants could play. I’d guess the $20B range might be tolerable to them. See AAPL trending back to $400 again. Too much cash on hand, not doing anything productive.

daemon

“As noted above, U.S. multinationals are not required to repatriate their foreign profits. When and if they do so, they must pay taxes on it. Until then, no taxes are owed.”

Yeah… but I’ve never been really comfortable with corporations being able to colocate in the US and outside the US unlike real people who can’t colocate.

daemon

Bosco,

You’re wrong. Corporations do in fact have both legal and ethical obligations that they must fulfill. Failure to do so results in the corporation’s demise.

Bryan Chaffin

Brad, you know that mentioning facts is not rude. Saying that people who disagree with you don’t understand policy and can’t do math is. There’s no need.

As for offshore shell games, I think that there will continue to be every incentive on the planet for any and every company to play them. Again, it’s a separate issue from the U.S. corporate tax rate.

At least the U.S. corporate tax rate is a policy issue that can more or less be solved.  As long as individual countries can pass their own laws, international tax avoidance will continue around the world.

Am I missing something?

Bryan Chaffin

daemon, technically a person could incorporate and accept work both outside and inside the U.S. and do exactly what Apple, Microsoft, Google, the oil companies, etc. do.

It’s a silly comparison on my part, of course. There’s only so much one person can do.

I am also in your camp about companies having responsibilities, both in a legal and ethical sense.

But what you’re talking is reshaping all corporate law. That’s a worthy topic of conversation (IMO), but it’s separate from whether or not Apple (et al) is evading taxes. They simply aren’t. I imagine that Apple—perhaps more than any company of its size—has paid every single cent of taxes the company owes under the legal framework of the 100+ countries in which it does business.

You can’t jail executives for obeying the law.

You can change the law to obtain a more favorable outcome, however, and that is apparently what Tim Cook plans to propose.

Bosco (Brad Hutchings)

Daemon, I have an idea. Maybe if you don’t want me to call you out on not understanding math or the basics of the tax policy in question, don’t misquote what I said to serve some other end. That’s at least as “rude” as my argument. I said that Apple and other corporations have no legal or ethical responsible to repatriate the off-shore profits. That is a FACT.

Bryan, AAPL shareholders only tolerate the off-shore cash hoarding because they know it’s better to wait it out for better tax treatment. That’s precisely why it makes sense for Apple to float a bond to pay for a stock buyback! I could harp on this issue for another two years and be proven generally correct. Apple doesn’t know how to productively use all the cash it has on hand. It needs to be returned to shareholders. That doesn’t mean Apple is dead. It doesn’t mean Apple doesn’t have 3 more iPad scale revolutionary products in it in the next 5-10 years. It means that Apple can’t use the cash it has productively. Others can. The tax rate just gives Apple a lot of temporary cover for not returning a giant chunk to shareholders.

daemon

I’m not looking to reshape law, I’m looking to have current law applied equally to all entities.

akcarver

I believe, as it appears some others here do as well, that the US corporate tax rate, which is, AFAIK, the highest in the world, is ENTIRELY too high. This results in many corporations, not just Apple, keeping their money off-shore. It would be a massive break of fiduciary trust for any corporation to bring that money back at such a high rate when other countries, like Ireland, have much lower rates. This means that we get 35% on nothing, which is nothing.

I propose a massive simplification of US tax law, specifically throwing away all tax law completely, and starting fresh with this. Every adult, whether married or not, is allowed to earn $10,000 before being taxed. Every child would bring their parents a $5,000 deduction. This means a family of four would be allowed to earn $30,000 before taxation sets in. Every penny above that is taxed at 15%, no matter how it might be derived, whether wages, capital gains, gambling winnings, etc. The same would apply to corporations, who would be allowed to deduct legitimate business expenses before applying the 15% rate to what is left.

Apple has some $100,000,000,000 overseas. At a 15% rate, that would result in a tax bill of 15 BILLION dollars, which is a hell of a lot more than nothing.

The Laffer Curve really works. There is a point where too much taxation results in lower revenues.

As far as the difference between avoidance and evasion, look at it like this. it is perfectly legal to avoid getting a speeding ticket by obeying the speed limit. It is entirely a different matter to evade that ticket by not stopping when the police try to get you to go to the side of the road to give you that ticket.

Vasant

@1stplacemacuser

What you are proposing is to have all countries collude to increase their corporate tax rates. That won’t happen as long as countries see each other as competitors. As long as there is competition, there will be differences in tax rates.

anovelli

I’m curious as to the use of the term “foreign profits” in this context. Is all of Apple’s profit considered “foreign”? I have a leg on both sides with this. The mere size of companies like Apple and the banks seems to rig the game in their favor. yes, Apple pays a buttload of withholding on their payroll taxes and benefits, as they should. But if all of their profits are kept offshore, regardless of whether they system has been gamed to make that legal, and regardless of whether we elevate the preservation of profit over the benefits they receive constructing their products in low-wage countries and selling a big percentage of them here. There are other benefits and costs of doing business, and virtually no one does full cost accounting. The downside to much of this is still relegated to externalities… like the cost of pollution in countries where products are made, and other privileges afforded corporations more than people that have this co-location deal going on… don’t Apple products still say designed in Cupertino?

Lee Dronick

Corporate tax rates are one thing, the percentage they actually pay because of deductions, credits, and such is another thing.

vpndev

Tim Cook said yesterday that Apple’s overseas profit is generated from overseas activity, and is not the result of creatively moving U.S. profits overseas (as some companies do). I’m prepared to take him at his word.

There is no REQUIREMENT that Apple bring this money back to the U.S. It could, for example, invest it in corporate acquisitions overseas. Or in providing plant and equipment for manufacturers (as it has done with Foxconn and others).

Dan

The other misunderstanding is who benefits from what Apple and other corporations do by using this and other techniques to be profitable.  They increase shareholder value.  Who are the shareholders?  Most likely the very people who complain about their practices.  How?  The biggest shareholders are funds which support retirement accounts for workers, both private AND government.  The reality is, Apple’s “bad behavior” benefits many people not just their board.  To pay the tax and reduce shareholder value is unethical.

iJack

@Daemon `~ A cheese steak is not made with ‘ground’ anything. The steak is thinly sliced. Otherwise, it’s not a cheese steak.

daemon

@iJack

Next time yer in Philly, make sure to stop by Marino’s and tell ‘em that.

http://www.allmenus.com/nj/runnemede/19303-marinos-pizza/menu/

vpndev

“technically a person could incorporate and accept work both outside and inside the U.S. and do exactly what Apple, Microsoft, Google, the oil companies, etc. do.
Bryan, this is possible because because the foreign parts of Apple, Microsoft, Google etc are just that - foreign. They are not U.S. corporations or persons.

An actual person (i.e. not the legal fiction of a company being a “person”) can’t do that. For example, you personally can’t have separate U.S. and international entities. You’re one person and although you might work and have residence in multiple countries, you’re a single legal entity for U.S. tax purposes. So if you spend eight months in London writing for British websites, all that income must be reported in the year it’s earned.

As a practical matter, it will be taxed in Britain and their taxes are higher than here so you won’t owe any additional tax in the U.S. The key point, however, is that it *must* be reported and is *subject* to U.S. taxation. And in the tax year that it is earned.

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