America’s Revolutionary War was fought largely over taxes. More than 200 years later, a new trans-Atlantic battle over taxes could be brewing. Back then the fight was over tea, but today it could be Apple.
In August, the European Commission ruled that Ireland must recover up to $14.5 billion from Apple in past tax and interest. The Irish government’s tax policy has traditionally been considered very business friendly; however, the special deal they made with Apple was determined to be “unfair” by the Commission. They ruled that since 1991, Ireland provided illegal state aid to Apple, which allowed the company to pay virtually no corporate tax. While the country’s official corporate tax rate is 12.5%, Apple’s effective tax rate was as low as .005% (in 2014).
To be clear, Apple is not being charged with tax evasion, fraud, or any other tax-related offense. They are caught in the middle of a disagreement between the EC (which seeks to shut down tax havens it believes are promoting unfair trade practices by offering illegal tax concessions) and Ireland (which does not want to collect the tax from Apple out of fear of losing the jobs and investment Apple has provided).
Due to the sweetheart deal that Apple struck with Ireland, Apple has shifted nearly all of its profits outside the U.S. to Ireland, where they sit virtually tax-free. Of the estimated $200 billion in cash Apple had worldwide at the end of June 2016, more than 90% is overseas.
Apple’s not alone
This battle extends far beyond Apple. Many large multinational companies have been shifting profits overseas for years in order to circumvent the United States’ 35% corporate tax rate. By keeping large sums of cash abroad, these companies have been able to minimize their tax bills or avoid taxes altogether.
According to Citizens for Tax Justice (CTJ), U.S. multinationals have amassed $2.4 trillion in cash overseas, including Apple ($200 billion), Pfizer ($194 billion), Microsoft ($108 billion), IBM ($68 billion), Google ($58 billion), and Cisco Systems ($58 billion) among others. This cash will likely never be repatriated to the U.S.
Apple CEO Tim Cook made it clear in a 2015 60 Minutes interview that he’s not planning to repatriate any overseas cash, “because it would cost me 40% to bring it home. And I don’t think that’s a reasonable thing to do.” Note: the 40% rate includes both federal and state taxes.
The practices of Apple and other multinationals, however, have started attracting the attention of regulators and governments both at home and abroad.
Change on the horizon?
If nothing else, the European Commission’s battle with Ireland (and ultimately Apple) shows that the state of international tax is uncertain. With the EU cracking down on tax havens, resulting in fewer options for multinationals to stash their cash tax-free, pressure may build for companies to repatriate more of their cash (and invest earnings at home), especially if the U.S. can find a way to bring its corporate tax rate in line with other nations. So, U.S. policy makers are left to decide whether to use carrots or sticks to bring U.S. multinationals’ profits home.
For years, politicians have talked about cutting taxes on companies’ offshore earnings, but to no avail. Could the EC’s fight with Apple be the powder keg that leads to an international tax revolution in the United States? With some analysts predicting Apple’s appeal taking four or more years to resolve, the battle may continue for some time. But then, it took nearly seven years to go from the Declaration of Independence to victory at Yorktown.
