The Politics of Corporate Taxes & Apple’s Cash Hoard

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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!

Hooray 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.

Holiday

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.

The PercentagesTake 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.

Smashing TaxesSamsung 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.

Reexamining TaxesThere 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.

Images courtesy of Shutterstock

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Comments

aardman

Not to defend Apple’s practices (nor condemn it), the national sales tax in New Zealand is 15%.  Yes, 15%!  That’s not VAT, that’s sales tax, so it’s a full 15% on top of the sale price.  I suspect since New Zealand imports a lot of stuff, they’ve resigned themselves to tax accounting magic by multinationals and rather than deal with all the legal and administrative hassles of tussling with high powered tax lawyers, they decided to just get their revenues right off the top.

Bosco (Brad Hutchings)

What does government expect? It’s double taxation, plain and simple. First, the corporation pays the corporate tax, and then the shareholders pay taxes on dividends. Of course the capital will shop for the best deal. The government makes nothing, while lawyers and accountants get paid to be creative.

But the tax situation further boosts Apple’s biggest problem with having a cash hoard. Shareholders would rather Apple repatriate the money and distribute it as dividends than Apple invest the money off-shore to boost its capabilities and ensure long-term profitability. That’s a vote of negative confidence.

Chris H.

It’s time for Apple to be a good corporate citizen and bring the $$$ home and pay a fair tax on it. (I’m also an Apple shareholder.)

Like everyone else, I don’t love paying taxes any more than I love spending $$$ to paint my house and exterminate termites, but I do pay those expenses to keep my house beautiful and functional and to maintain its value and I’m willing to pay my taxes to maintain a pleasant country to live in.

Come on Apple. Be a good corporate citizen, after all you can afford it.

Chris H.

 

ctopher

I’m trying to think this through. If Apple brings back a chunk of change, and pays a tax bill, then their worth will go down. Then the market will lower their share price because Apple will really be worth less. Then some shareholder will sue because there was no business reason to repatriate that money. Damned if you do and damned if you don’t?

Also, while there may be some geek shareholders like myself, the vast majority of Apple shareholders are large funds and rich people. If they were to get a big dividend, the chance of the local dry cleaner or auto dealership seeing any boost would be minimal. Instead, they would just buy more shares of Apple or something else. Or, dodge some taxes by moving it overseas themselves.

So from that perspective, Apple probably cannot, without a good business reason move foreign profits to the USA, and if they did, I doubt we’d see much benefit except in reducing the debt a tad.

Adam

Corporations and any business don’t pay taxes. Their customers do. How can I prove that? Where do corporations get their money? From the products they sell to their customers. The taxes are figured into the price before they set the price. It’s passed right along to the consumer and really just ends up being a hidden tax. So I say get rid of ALL corporate taxes period and get the taxes as a sales tax to bring it out to the open so people really see how much they are really paying.

Vasant

@Chris H.

Apple paid taxes on that money in the countries where it was earned. Apple did not simply earn billions in the US and just move it overseas to avoid paying tax. That is tax evasion. What Apple did was earn a bunch of money overseas and then refuse to repatriate it.

I agree that those who benefit from the system (i.e. the US) ought to pay for it. But I fail to understand how the US deserves 35% of of income earned overseas.

And the reason that this kind of behavior is happening is because the US has the highest marginal corporate tax rate in the world. Yes, few corporations actually pay that rate, but that’s only if they hire an army of accountants and lawyers, whereas in other countries, corporations pay a lower marginal tax rate, meaning the rate they pay straight up without combing the tax code is lower. I would support getting rid of a whole bunch of corporate tax deductions and loopholes in exchange for a lower overall rate. I think that would go a long way towards solving the problem of corporations stashing cash overseas.

If the marginal tax rate were lowered in exchange for getting rid of a whole bunch of corporate loopholes, I think it would level the playing field for smaller companies because it would dilute the advantage that multinationals like Apple enjoy of being able to carefully channel earnings through various global operations in order to get a lower tax rate.

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