When quizzed about its tax practices, Apple CEO Tim Cook told a Senate subcommittee his company complies with the law, and if that didn't sit well then Congress should come up with new laws. It looks like lawmakers may finally be taking his advice, and even President Barack Obama is looking for ways to get at the money Apple and other major corporations are holding outside of the country.
Congress may be taking Tim Cook's advice to heart and changing corporate tax policies
When grilled by the subcommittee, 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. 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.
First, we have Senators Barbara Boxer (D-CA) and Rand Paul (R-KY) announcing they're co-sponsoring a bill that would cut the taxes companies pay on earnings they bring into the country in a one-time deal from 35 percent down to 6.5 percent. The taxes on the money companies bring into the United States would be earmarked for the nearly insolvent Highway Trust Fund, and the repatriated cash can't be used for stock buybacks, shareholder dividends, or executive bonuses.
Next we have President Obama calling for a one-time 14 percent tax on offshore holdings, regardless of whether or not those funds are brought into the country. As part of the deal, companies would be able to bring that now-taxed money into the country without paying additional taxes. Future overseas earnings would face a 19 percent tax, again, whether or not the money is brought into the United States.
The President's proposal earmarks the tax revenue for part of a $478 billion six-year infrastructure upgrade project, according to the Wall Street Journal.
Both plans hope to draw in serious revenue from the $2 trillion major corporations are holding off shore because current tax laws make it fiscally irresponsible for them to repatriate the funds.
The plans are far from becoming law, and neither holds much hope of making it through Congress in their current form. Law makers are known for poking and prodding bills for their own ends, so it's a safe bet either would see changes to reach a compromise that keeps them from dying.
Some of the pressure for those changes will come from corporations that don't want to give up any more money than they already do. Ronald DeFeo, CEO from the international construction equipment company Terex called the President's proposal "good politics and poor public policy," underscoring the resistance Congress can expect from the corporate world.
Mr. DeFeo may not like the President's proposal, but it does hit on an important difference between his idea and the Boxer/Paul bill: policy change versus a one-off amnesty deal.
The President's proposal is more in line with Mr. Cook's message in that it proposes a policy change. Since taxes would be paid on all money earned outside the country, Apple and other companies would be free to bring their offshore earnings home without any extra costs instead of leaving it on the outside where the money is sheltered from the current 35 percent tax.
For Apple, that flat tax won't be as big a burden for some other companies because the iPhone and iPad maker has already been paying taxes in the U.S. on the money it hasn't brought into the country. So far, Apple has paid about half of what it owes on its offshore holdings, according to Fortune. The company's latest 10-K filing showed that at the end of fiscal 2014 it had an unrecognized deferred tax liability of $23.3 billion.
In other words, while other major corporations have been sitting on their overseas cash hordes, Apple has been paying U.S. taxes on theirs. That gives Apple a head start, so to speak, over its competitors.
Regardless of how it happens, it's clear the U.S. government is on a path to get some of the money companies are holding offshore. The question now is whether that will happen through a one-off deal or as a comprehensive tax law policy change. Either way, the big corporations, including Apple, will likely have to break out their checkbooks soon