The Taxman Bites Apple

August 31st, 2016

In 1966, Beatle George Harrison opened the legendary album, “Revolver,” with these telltale lyrics:

Let me tell you how it will be
There’s one for you, nineteen for me
Cos I’m the taxman, yeah, I’m the taxman

It made a lot of sense for its time, since rich people in the UK had a tax rate that could exceed 95%. That move forced some entertainers to move elsewhere, often Spain, to become expats and thus qualify for much lower tax brackets.

But you can certainly understand why companies hoping to do business around the world would take advantage of the best tax rates. So, in 1980, Apple set up shop in Cork, Ireland by opening a factory with 60 employees. Some of you might have even bought Macs built in Cork. I know I did.

Well that move came at a time where economic conditions there weren’t so good, which meant that a growing company, with well-paid and highly skilled workers, was sorely needed. Apple also agreed with the tax people in Ireland to grant them an extraordinary low tax rate. After all these years, that move finally caught the ire of the European Commission.

In ordering Apple to pay up to $14.5 billion in unpaid taxes, the EC ruled that the company had received illegal state aid. With a tax rate of 0.005%, as of 2014, I suppose you can see their point.

Both Apple and the authorities in Dublin are appealing the ruling, and it appears the U.S. authorities might agree, since, whatever additional tax Apple is forced to pay, it can be deducted from their tax returns in this country. Thus, the IRS stands to lose billions of dollars in collections. You can see why they’re upset.

This action is part of a crackdown against alleged sweetheart deals that has already resulted in a decision against Starbucks Corp., in which they were ordered to pay $33 million. Both Amazon and McDonald’s are under investigation, and if the decision against Apple survives the appeal process, it’ll be a huge precedent that will allow the European authorities to go after other American companies that are allegedly paying lower taxes than they should.

But it’s not something that’ll be resolved right away. Apple has deep pockets and can fund appeals for years. However, one thing is certain; Brexit, the UK vote to leave the European Union, doesn’t apply, since Apple’s deal is with the Republic of Ireland, an independent country, and not Northern Ireland, which is part of the UK.

As you might expect, the adverse ruling brought a quick response in the form of a blog from Apple CEO Tim Cook, where he explains what he regards as the ins and outs of the deal and why Apple shouldn’t pay an extra dime. The argument against Apple is that the company should pay taxes in every country in which product is sold rather than the one country in which they got a sweetheart tax deal.

It’s a curious alignment of interests. The tax authorities in Dublin want to leave well enough alone, possibly looking towards the fact that there are currently 6,000 Apple employees in Ireland. According to Cook, however, that’s just the tip of the iceberg. Apple’s products and services, including the App Store and all those developers, supposedly helped “create and sustain more than 1.5 million jobs across Europe.”

Yet another issue is whether Apple and other companies who have outsourced possibly trillions of dollars should be allowed to repatriate that money at a reduced tax rate. That way, they might be enticed to move the money to the U.S., and the IRS coffers are filled at a lower tax rate.

Obviously, there are lots of political tensions here. Apple has already been brought before Congress on the premise that they are already skirting their tax obligations. Cook, who knows a thing or two about talking to politicians, maintained during Congressional hearings that the company pays the taxes they are supposed to pay, and it is his fiduciary responsibility to Apple’s board and stockholders is to take advantage of the lowest tax rates allowed by law.

It’s hard to argue with that, and it’s hard to argue against Apple for doing something that any other multinational corporation would be delighted to do. Imagine how Apple’s board and stockholders would react if Cook said he had the firm pay higher taxes just to be politically correct.

I would not presume to suggest how the European Commission will fare when this ruling is appealed. The track record is really high, however, so the chances that Apple will emerge victorious may not be so favorable, although it’ll probably be delayed for years.

Regardless, if Apple had to write that $14.5 billion check tomorrow, it would hardly make much of an impact on the bottom line. What’s more, it’s clear that Cook’s statement is very self-serving. But that’s to be expected, and it won’t change the outcome one way or the other.

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4 Responses to “The Taxman Bites Apple”

  1. dfs says:

    In one of his decisions, Judge Learned Hand once observed that nobody has any legal or moral obligation to pay more than the minimum tax the law requires of him. If somebody thinks that Apple (like many other multinationals) is getting away with murder, he needs to blame lousy tax laws, not the corporations and individuals who are smart enough to take advantage of them.

  2. ViewRoyal says:

    Apple paid all of the taxes that it was legally required to pay, by the Government of Ireland.

    Did Apple seek to reduce its taxes legally? Yes. Just as every corporate and personal tax payer seeks to use legal tax deductions and optimizations when paying their taxes.

    If you reduce your taxes legally before paying them are you “guilty” of something? On the contrary, you would be “guilty” of incompetence if you didn’t take advantage of every legal method of reducing your total taxes.

    The question is, who controls tax laws in Ireland? Is it the sovereign nation of Ireland… Or is it the European Commission???

    • dfs says:

      The question you ask in your final paragraph is precisely the question that led to the Brexit. And I bet that sooner or later other EU member nations will be heading to the door too. The EU seems to operate under the theory that national sovereignty is obsolete and can safely be ignored. They’re going to find out otherwise.

  3. dfs says:

    If I may expand a bit on what I’ve already said, it is probably the case that EU intervention is justified when a single member nation acts in a way demonstrably harmful to all the others. If the economic policies of Greece threaten to ruin the value of the Euro, no doubt that is a valid reason for some kind of collective action. But in this case, at least as it has been reported in the press, the authors of this decision have not articulated a reason why Ireland’s tax policy is demonstrably harmful to other nations. The only nations that seem to have possible grounds for complaint are Ireland and the US, but Ireland seems quite happy with the arrangement and our State Department has already lodged a protest in support of Apple. How exactly is, say, Germany, affected by all this? It would appear that the EU’s only grounds for action is that this policy somehow offends their sensibilities. And, if they do have some opinion that it is genuinely harmful, it is far from clear why they are singling out only Apple rather than applying this decision to all foreign corporations conducting similar business in Ireland.

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