It's well known that Apple Inc. has more money than the Greek pantheon—ummm...back when Zeus was in charge—and there has been much ink spilt over what Apple should do with it. Taxation is a big part of that equation, and it's worth a little discussion. I thought I'd make it a little more interesting by throwing the notion of corporate politics and local responsibility into the mix.
Hordes of Hoards
Apple has US$137 billion in cash. Unofficially, it's more than that as Apple has had another quarter of accumulating even more money. It's likely more than $146 billion at this point.
When Wall Street talks about Apple's cash and taxes, the discussion is almost always on the huge tax hit Apple would take if it brought the $90-plus billion of its hoard that sits offshore. The U.S. has a corporate tax rate that could result in a 30 percent hit if it brings that money back.
Apple isn't alone here. As much as $1.9 trillion is being held offshore—mostly in tax havens—by multinational giants who want to keep that money on their balance sheets without ponying up to federal, state, and local governments.
And why not? It's not illegal. Yay money!
Oh and 83 corporations hold 75 percent of all that money. Consider them the 0.1% of the corporate world and think about wealth disparity, but that's another issue.
That's only one part of the story, though. Yes, Apple has all this cash, and yes, Apple will have to pay a lot of money if it brings it back. Wall Street tends to focus on this issue and argue that a tax holiday for corporations would be a good thing.
A tax holiday would allow these companies to bring some or all of their profits back to the U.S. The economy would benefit as this money would be put to work here in this country. Apple, for instance, would likely put some of its money into the hands of AAPL shareholders, and those shareholders would spend it or invest it.
There's also a movement afoot to lower the corporate tax rate to be more in line with other Western countries. I won't presume to debate federal tax policy in this piece, largely because I wouldn't know what I was talking about.
There's More than One Way to Tax a Corp.
What I will talk about is local responsibility, accountability, and even corporate self-interest, because the other part of the equation is how that all that money gets taxed locally when and where the profits are being earned.
Take New Zealand. This country is known for its incredible scenery and love for Hobbits, but it's also a not-so small market for Apple. TechDay, a New Zealand publication, reported over the weekend that Apple posted revenues of NZ$571 million in New Zealand for 2012, up from NZ$414 million in 2011.
According to the report, Apple paid 0.4 percent tax on the revenue generated in New Zealand in 2012. Astute readers will note the delicate odor of BS in that angle, because companies don't pay tax on revenue, they pay taxes on profits. That's an inflammatory way of presenting the data.
In fact, it turns out that Apple paid 31 percent tax on taxable profits of NZ$5.1 million. Zoinks! That's a hefty percentage, right?
But wait, there's still more to this story. Back of the napkin math suggests that Apple's profits were roughly 0.89 percent of sales. This for a company with famously massive gross and operating margins that allows it to accumulate that massive cash hoard.
Less than 1 percent in profits? Please. Apple is well known around the world for using legal means to funnel it global revenues through channels that shift its profits to subsidiaries in countries with much lower tax burdens.
The New York Times reported in 2012 that Apple was the inventor of "The Double Irish with a Dutch Sandwich." This is where a company routs profits through an Irish company, then a Dutch company, and then to tax havens in the Caribbean in a complex scheme of tax avoidance.
Unless New Zealand is the one place in the world where Apple can't produce profit from more than half a billion dollar in sales, it's a safe bet that Apple is employing such methods in New Zealand.
Make no mistake about it, Apple does this all over the world. It's part of why the company is so fabulously profitable. Apple isn't alone in doing this sort of thing, either, even if it's an innovating leader in the field. Hey, what do you know, this is another area where everyone copies Apple's innovations.
From a Wall Street/capitalism perspective, Apple not only isn't doing anything wrong—remember that this stuff is all legal—Apple is doing everything right. It's making money for shareholders, and that is Apple's ultimate responsibility.
Samsung and Texas
I'll be the first to stand up and cheer Apple's efforts to do many things better than every single one of its competitors in the area of corporate responsibility. In the environment, in promoting worker rights and conditions in its Asian supply chain, in energy use—these are all areas where Apple shames its would-be competition, and the mainstream press should be ashamed of not shining a brighter spotlight on these issues.
This local tax thing, however, is something I believe it is in global capitalism's best interests to reconsider. For instance, let's look at one of Apple's bitterest rivals, Samsung, and that company's deal in Manor, TX.
Texas shells out billions in tax incentives to corporations every year. This, combined with Texas's lack of an income tax, makes it an attractive place for companies to do business, but this comes at a cost.
In 2012, while state and local governments were dishing out tax incentives to Samsung, Apple, and an alphabet soup of other companies, Texas had to slash its education spending by $5.4 billion. That kind of seems like a case of cutting your nose to spite your face and then going out of your way to make sure your face grows up uneducated, too, but maybe that's just me.
On a microcosm basis, Samsung's deal with the Manor Independent School District—a school district just outside Austin that includes parts of eastern Austin—encapsulates the problem.
Samsung invested billions dollars building a fab in Austin that makes chips for itself and Apple. Those billions include not only buildings, but good paying jobs, too, and that's why Samsung got more than $230 million in tax incentives for the project in 2005. In December of 2012, another tax deal was reached that caps the amount of local school property taxes Samsung pays. This is on top of the earlier deals.
The result? The Manor Independent School District has crowded classes and fewer programs, according to The New York Times. Many of those students are the children of Samsung workers, and some of them are the children of executives. (I'd bet dollars to donuts that most of Samsung's local execs live in Westlake, which has a well-funded school district, thank you very much.)
Do Business Globally, Think Locally
I'm not accusing Samsung of wrongdoing here, just as I'm not accusing Apple of wrongdoing for its Double Irish with a Dutch Sandwich financial wizardry. These companies are working the system for what they can get, and according to the rules that's OK.
There comes a point, however, where it becomes detrimental to their own corporate self interest. Local taxes pay for local infrastructure, for education, health services, police and fire fighting. These are important things to community growth, and that in turn leads to prosperity and more consumers. Rather than looking for creative ways out of paying those local taxes, the international giants should instead embrace their local responsibilities.
If a company like Apple is going to make a profit from New Zealand consumers, Apple should contribute its fair share to the local tax base. If Samsung is going to invest billions in making chips, it should be happy to contribute its fair share to local school taxes.
This will require a good many people to think differently, but to do otherwise is short-sighted. It's stupid. It's detrimental to good citizenship.
For full disclosure's sake, I am an $AAPL shareholder.