Apple to Senate: We Comply with the Law - Change the Law

| Analysis

A brief note: The following piece of analysis is about politics and Apple. Technology and politics intersect all the time, and this has only grown as Apple has become more successful. If you are the sort who doesn't want to read about politics on a Mac site, just stop here, close the page, and move along. Go ahead, I'll wait until you're gone...

If you're still here you realize that Apple's top execs were testifying on Capitol Hill about taxation, and commentary about that appearance necessarily and by definition involves politics. You are welcome to disagree with my opinion, but do not waste anyone's time telling me I shouldn't talk about politics.

Apple CEO Tim Cook and CFO Peter Oppenheimer had a straight-forward and direct message for a Senate subcommittee questioning the company about its tax practices: we comply fully the law, we don't hide profits from the U.S., and if you don't like what we're doing, change the law.

In his opening statement, Mr. Cook said:

"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 not only comply with the laws, but we comply with the spirit of the laws. We don’t depend on tax gimmicks.

We don’t move intellectual property offshore and use it to sell products back into the U.S. to avoid U.S. taxes. We don’t stash money on some Caribbean island. We don’t borrow money from our foreign subsidiaries to fund our U.S. business in order to skirt the repatriation tax.

Be the change you want to see

Tim Cook was emphatic on these issues. He spoke with passion and conviction, and he emphasized that if the subcommittee wanted to see change in the way multinational companies do business, they need to change the laws that govern corporate taxes and how foreign profits are taxed.

Examining Apple's Taxes

“Unfortunately, the tax code has not kept up with the digital age,” Mr. Cook said. “The tax system handicaps American corporations in relation to our foreign competitors who don’t have such constraints on the free movement of capital.”

He added, "It is in this spirit that we recommend a dramatic simplification of the corporate tax code. We strongly believe such comprehensive reform would be fair to all taxpayers, would keep America globally competitive and would promote U.S. economic growth."

Mr. Cook spoke emphatically about Apple's role as an innovator, too, and he argued that his company takes its responsibilities as a taxpayer in the U.S. very seriously. He was less emphatic about Apple's role outside the U.S.

To that effect, Apple was met with a mixed reception in the hearing. While Senators Carl Levin (D-MI) and John McCain (R-AZ) accused Apple of hiding profits from the U.S. Treasury, other senators from both sides of the aisle spent their time asking for Apple's input on how to right the system.

In addition, most of the participants praised Apple and/or its products, including Senators Levin and McCain.

And then there was that thing that one guy said...

I should add that much ado has been made out of comments Senator Rand Paul (R-KY) made in defense of Apple. Those comments were made before the questioning even got started, and the philosophy behind those comments were at odds with the message that Tim Cook was there to deliver.

In my opinion, it would be wrong to make too much of those comments. Senator Paul was grandstanding; he was using the platform of the committee on which he sits to demonize the government in which he works, harnessing Apple's brand in his efforts to do so.

In the meanwhile, Tim Cook's message was that with great success comes great responsibility, something quite at odds with Senator Paul's Tea Party-centric philosophy. Mr. Cook stated more than once that his proposed changes to the tax code would result in Apple paying more in taxes, but that he thought the results would be better for Apple, better for business, and better for America.

From Mr. Cook's opening comments:

Apple is a company of strong values. We believe our extraordinary success brings increased responsibilities to the communities where we live, work and sell our products.

We enthusiastically embrace the belief, as President Kennedy said, “To whom much is given, much is required.” In addition to creating hundreds of thousands of American jobs and developing products that deeply enrich the lives of millions, Apple is a champion of human rights, education and the environment. Our belief that innovation should serve humanity’s deepest values and highest aspirations is not going to change.

Apple is also a company of strong opinions. While we have never had a large presence in Washington, we are deeply committed to our country’s welfare. We believe great public policy can be a catalyst for a better society and a stronger economy.

There was lots of grandstanding in today's hearing on both sides of the aisle, but Mr. Cook's message stands in stark contrast to Senator Paul's argument that the big bad government owed Apple an apology.

There's always more room for grandstanding

There will be even more grandstanding on the part of many institutions, advocacy groups, and politicians in the days and weeks to come, much of it aimed at or derived from Apple's role in this hearing. On Tuesday afternoon, for instance, I heard a representative from a left-leaning advocacy group state on CNBC that Apple was lobbying to maintain the status quo when it comes to corporate taxation.

Which is, of course, precisely the opposite of what Apple is actually doing.

None of the CNBC talking heads corrected him, either, which was very disappointing considering that I watched the hearing on the same network.

As I noted in earlier coverage of this topic, it is clear the U.S. corporate tax system is broken. Trillions of dollars are being held offshore. Apple recently sold $17 billion in bonds in order to finance a higher dividend and an accelerated share buyback plan.

That it was orders of magnitude cheaper for Apple to borrow the money than to bring in some of the $100 billion earned and held offshore is the proof in that particular pudding. How, or even if, it gets resolved remains to be seen.

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Comments

John Martellaro

Thanks Bryan for bringing some calm, cool insight to this affair.

Lee Dronick

Great article Bryan

Bosco (Brad Hutchings)

Bryan, if you polled 50 academic economists about what they would do about the corporate tax, 45 of them would say “abolish it”. You can pick the 50. The fact is that this type of tax is wholly inefficient, and it really just ends up hurting pension funds that are the biggest investors in companies like Apple.

Marginalizing that position as a “Tea Party” position is plain silly. But when you approach taxation as an issue of fairness, this kind of scenario is what you deserve. The government would get more money if it eliminated the corporate tax. How is that possible? Because companies would not have incentives and excuses for sitting on profits. Investors would pay those taxes.

Bryan Chaffin

Hey Brad, I was marginalizing Senator Paul’s anti-government tirade as Tea Party-centric. Just FYI.

Bosco (Brad Hutchings)

I’m just kinda surprised that anyone would think it’s OK for Senators to badger a company for behavior that doesn’t violate any laws. A company’s raison-d’etre is not to raise money for governments to waste on welfare and wars. Saying that it is some reason for the company to exist, as you and Cookie seem to be implying, is the dictionary definition of supporting fascism.

Paul’s mistake was taking the angle that Apple was to be praised for cuddling up to the government. For Apple, it’s a continuation of its excuse not to return money it doesn’t know what to do with to investors.

Adam Stocker

I find it interesting that you talk about and belittle Sen. Paul’s comments without quoting anything he said, and in effect, make it seem to anyone who doesn’t follow the link to his actual comments to say that he is at odds with Tim Cook’s position, when there positions on this issue are nearly identical. The difference is in the delivery. Tim Cook and Apple cannot go into a Congressional testimony with the attitude that Sen. Paul was able to express. You are absolutely right that Cook said basically said if you don’t like what we’re doing, change the law. Sen. Paul basically said if we don’t like what they are doing, why did we make the law this way and drag them up here to explain themselves for following it. This does go to the larger point of his “Tea Party” philosophy of “smaller” not “anti” government, but the problems we face as a nation are directly derived from government. Whichever side you want to blame, you are probably correct. But make no mistake about it, it is the fault of the government.

Lee Dronick

  But make no mistake about it, it is the fault of the government.

Only in that the Government made the tax law/code, but big money influenced Congress to make the loopholes.

 

Bosco (Brad Hutchings)

Lee, Apple is not exploiting any loopholes. If Congress were to make it illegal for Apple to not repatriate that money, Apple would be wise to ditch the United States for any country willing to give it the best deal in a New York minute.

Chances are pretty good that every adult here who has minor children, nephews, nieces, or grandchildren will see at least one of them renounce their US citizenship essentially for tax purposes at some point. The world is competing for smart people. We don’t have a monopoly on being the best place to live any longer. And just wait until you see all the losers start whining about people not loving the United States enough to be wage slaves. That will be epic. You’ve already gotten a taste of it with that Facebook guy.

Lancashire-Witch

And its not just one Government. The cash not in the USA sits (but may not be tax-resident) in foreign lands, courtesy of the those governments, sometimes enabled by negotiated agreements - not loopholes.

From the Guardian, UK—- “He [Tim Cook] also revealed that Apple had struck a secret deal with the Irish government in 1980 to limit its domestic taxes there to 2%.”

It’s a global issue expemplified by a global business. And it’s been around for a long time. 1980! Sheesh.

Brian Lawson

If I understand the Apple company line, it’s okay to manipulate, dodge, avoid, and shelter taxes while shipping profit and production offshore, while shirking corporate responsibility to the society that gave it the infrastructure it needed to build the business… as long as it’s legal.
The behavior doesn’t have to be ethical, fair, or supportive of the commonweal as long as they can get away with it.
If Steve Jobs, Steve Wozniak and Ronald Wayne had been living in Bangladesh,  Apple could have been a second rate sweat shop selling Motorola knock-off parts. Instead, they were in America; they succeeded because they were here, where hard work and innovation and risk-taking could be rewarded.
But they did not build Apple alone; for years Apple used, in fact needed, the social and economic structure that nurtured the enterprise to succeed. And now that the company is a success? Hide the profits, ditch the country and manipulate the system to keep every buck possible.
True, they met the letter of the law, but they didn’t have to; they could have made it corporate policy to do more, to do what they could to support and nurture the society that supported and nurtured them. Instead, they chose to get away with everything they could. They could have paid a fair share but they chose to translate profit into stateless tax-free holdings. They could have accepted a lower profit margin and paid more taxes, or kept the production jobs onshore, but they chose not to. They could have done the ethical thing, but they didn’t.
And when asked why they didn’t do the right thing? The answer was they did the legal thing and if the American people don’t like it, change the laws.
Explain to me, if anyone can, how the this is ethically and morally any different than somebody claiming they did wrong because ‘the devil made me do it.’

akcarver

Bosco said:

The government would get more money if it eliminated the corporate tax. How is that possible? Because companies would not have incentives and excuses for sitting on profits. Investors would pay those taxes.{/quote]

This is a very good summation of the Laffer Curve, as I understand it. There are diminishing returns when the tax rates are too high. Just as when the luxury taxes on yachts were raised in the nineties, the yacht market bottomed out. People who could afford a big boat did not want to pay the taxes, so they did without, and lower revenues were collected as a result.

People are not static beings. They WILL respond to outside influences. When gas gets too expensive, I drive less. When Pepsi gets too expensive, I drink water more. When my taxes are too high, I change my behavior so I don’t have to pay the taxes. And I am not the only one. EVERYONE does this EVERY day.

akcarver

I really wish I could edit my comments when I make a mistake with the tags like I did above.

Bosco (Brad Hutchings)

akcarver: It’s not a Laffer Curve argument about rates and diminishing returns, but about placement of the tax. When corporate profits are taxed at the corporation rather than the investors, it sets up perverse incentives for companies to sit on capital, lest those companies have to pay taxes. When investors pay those taxes on dividends and capital gains, it keeps companies more transparent and gives them fewer excuses for financial shenanigans.

In Apple’s case, there is more than $140B whose most productive use would be in the hands of shareholders rather than in the hands of Apple. See the long running discussion here about how cash on hand is what’s dragging AAPL down. Investors don’t have any evidence that Apple knows what to do productively with that money. But with a 35% tax on $100B of it, it’s better that Apple hold it until they get a good deal. That money could be invested by stockholders in lots of other activities, many of which are in the United States.

Bryan Lawson: Capital and ideas will happily move away from people like you who think they owe this country punitive rents. You’ll see it in your lifetime and call a lot of people and companies “anti-American”. They’ll be laughing at people like you, not with you, when they leave for a better deal. See the example of that Facebook founder who took his $Billions to Singapore, paid all the exit taxes, and told the US to get stuffed. He’s not hurting for the exercise.

akcarver

Bosco, I still think the Laffer curve is in effect here. If the government were to reduce corporate tax rates to a lower rate, similar to the rates charged by Ireland (which, IIRC, is around 15%) then Apple would have no incentive to keep that money overseas. They would bring that money home, pay the 15%, and the government would get much higher revenues than they are now. Too high taxes ALWAYS results in too low revenues.

I think your idea of 0% corporate tax is probably the best way to go, but I don’t think that that will ever happen in this country. I think that 15% is definitely acheivable.

akcarver

BTW, if I were an Apple shareholder (man, how I wish I’d had $13,000 in 1997), any dividends I get would be reinvested in AAPL. Even though they can’t find something to do with their money, I still think they’re the strongest company on the planet with huge upsides.

Lee Dronick

Corporations need to pay taxes just as individuals do. They use infrastructure just as individuals do, often more so. Remember “corporations are people too, my friend.” Now does that mean that the corporate tax needs to be 35%, no of course not.

Bosco (Brad Hutchings)

Lee, you are giving a fairness argument, not an effectiveness argument. If you tax the dividends and gains of the investors, you’ll actually collect more tax and promote more transparent corporate behavior, especially among multi-nationals based here.

Look at it this way… 15% of $100B is still enough money to be worth playing games with. Even 5% of $100B is enough to justify the games. Apple is the first company to have that much amassed offshore, but it won’t be the last.

aardman

I am all for corporate taxes disappearing and incomes getting taxed at the shareholder/investor level, thus eliminating double taxation.  This is already done for S Corporations.  Provided:

1.  First and foremost, we eliminate this absurdity handed down by this Supreme Court proclaiming “corporations are persons” and the attendant political speech rights (and the free reign to fund it) that goes with that.  Because basically what this means is that management can harness the resources of the corporation to promote policies that not only benefit management but hurt their own stockholders.  Corporations should have no political speech rights at all, period.  No corporate sponsored PACs, no corporate donations to fund political speech, no management “suggestions” to employees about what or whom they should support, no nothing.  Executives and stockholders as private citizens still have free speech rights but they cannot use any corporate resources whatsoever to support their own political speech.

2. Beyond that, the corporate shield should be lowered below the level right now where a corporation (cough, Microsoft, cough) can be convicted of a crime but not one executive goes to jail or pays a fine.  One of the rationales for corporate taxes is that since a corporation is a legal entity separate from the executives who run it or shareholders who own it, well then with the privilege of limited liability comes the burden of income tax liability.  If income tax liability goes, some of that limited liability should also go.

3.  If corporate taxes are to be eliminated, corporations must submit to greater scrutiny to make sure that executives (and to some extent all employees) are not using corporate budgets to enhance their lifestyles tax free.  Technically, this is theft from shareholders and is a violation of managements fiduciary duty.  I’m talking about lavish expenses on company coin like ultra luxury business jets, corporate owned vacation houses, board meetings that are held in Aspen during ski season, free gourmet meals, extra generous expense accounts, etc.  If companies offer these, amounts beyond a reasonable limit must be deemed as taxable income or benefits of the employee/executive who enjoyed it.

aardman

Just one more thing, one of the most egregious things that corporations do and which should outlawed completely is the lending of corporate resources like business jets to politicians, especially those on the campaign trail.  Donations to fund political conventions should also be outlawed.

jfbiii

“If I understand the Apple company line” — You don’t. They’re not shipping profit offshore. They’re not importing profit made offshore back to the States.

“True, they met the letter of the law, but they didn’t have to…” — No, that’s exactly what they have a duty to do: meet the letter of the law and no more, unless they can make a good business case for it. If they made it corporate policy to not use all the legal means at their disposal to retain as much profit as they could, they would be foregoing their fiduciary duty to stockholders. And they would probably be sued for it. An example of making a good business case for doing more than necessary would be their strides to be a green corporation and to crack down on their supply chain so that contractors weren’t exploiting labor. People who buy products care about those issues. A lot. By being ahead of the curve, Apple strengthens its brand. But I guarantee, if they paid extra taxes just to feel good, investors would be all over them with lawsuits.

“And now that the company is a success? Hide the profits, ditch the country and manipulate the system to keep every buck possible. ” — They didn’t hide profits. Everybody knows where the profits are. They disclose everything they’re supposed to. They don’t manipulate the system. They utilize it. Tim Cook didn’t lie when he said Apple doesn’t have a big presence in Washington (meaning lobbyists). They never have. That would be manipulative. Following the law and taking advantage of it are exactly the same thing. That is an objective fact no matter what you choose to believe.

skipaq

I would like to second that Rand Paul is not anti-government. He is for limited government as are most Libertarians. While I am not a Libertarian or member of any Tea Party group; they both stand for some things that would benefit the U.S. greatly. The way that the media, the current administration, the IRS and liberal politicians try to marginalize these Americans is frightening for me. It should frightening to anyone concerned about civil liberty.

What Senator Paul said was spot on. The politicians who created the tax code mess can surely simplify the thing without accusing Apple of anything. Why is it necessary to throw mud at a business? The mud is in D.C.. Clean up your own house public servants.

craigf

A little perspective…

http://www.huffingtonpost.com/2013/03/11/general-electric-taxes_n_2852094.html

1stplacemacuser

There was no need to drag Cook to DC for the spectacle. It was a spectacle and perhaps some butt-kissing of Cook. All the government has to do is look at how their tax code is set up, ask a couple of accountants how to leverage the loopholes and set to figuring out how to close those loopholes.

Times change, and the tax laws should change with the times. That’s why we have a standing government. Congress should do its job and fix the problems that arose due to progress.

Lancashire-Witch

… and who’s gonna persuade the Irish to change their corporate tax laws and rates?

Confused about Corporate Tax rates?  Check this from the BBC:

http://www.bbc.co.uk/news/business-22612041

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