The worm in Apple (and the US tax code)–offshoring of US Profits

by Linda Beale

The worm in Apple (and the US tax code)–offshoring of US Profits

Citizens for Tax Justice has focused on Apple’s ability to lower its US effective tax rate by offshoring its profits to tax havens.  See, e.g.,  Robert McIntyre, What Apple Pays in Taxes and Doesn’t, NY Times Letters to the Editor, CTJ, How to end Apple’s offshore shenanigans, May 4, 2012;   [hat tip Paul Caron at Tax Prof].  Here’s the key idea in both the letter and the report.

Since Apple’s profits stem mainly from its U.S.-created technology, most, if not all, of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore.
If we treat all of the untaxed portion of Apple’s offshore profits as really U.S. profits that were artificially shifted to offshore tax havens, then Apple’s U.S. tax rate is much lower than Apple reports. Under this approach, Apple’s 2008-10 effective federal tax rate comes to only 13.4%, and its effective federal tax rate over the last six years (2006-11) was only 12.1%. (Likewise, Apple’s revised effective state tax rate in 2008-10 was only 3.6%, instead of the 8.0% we reported in our state corporate tax study issued last December.)  CTJ report.

How does CTJ know that Apple parks its profits offshore in tax havens where they are subject to minimal taxes?

Apple says that if it told its foreign subsidiaries to pay Apple the whole $54 billion offshore amount as a dividend, then Apple would owe $17 billion in U.S. federal income taxes. That reflects a $19 billion tax at 35 percent, less a $2 billion foreign tax credit (the sum of all the foreign income taxes that Apple has ever paid). Which means, with a little more arithmetic, that about 90 percent of the $54 billion in accumulated offshore profits has never been taxed by any government.  Id.

This is a genuine problem for the US in the age of digitized information.  Companies easily “sell” their most important intellectual property to offshore affiliates, for prices that are set by modeling and that fail to capture the obvious–that no price would actually be sufficient to purchase the company’s valuable intellectual property away from it, since the IP is in fact the basis for the company’s business.  So companies offshore their profits to post-office boxes in tax haven countries and claim that the US Is no longer the source of their profits, even though the IP was invented in the US, is still used in the US and still results in most of the sales actually in the US.

There are at least two possible solutions.  One would be to deny companies the ability to treat the IP they use to create their products as sold for tax purposes, and to permit only licensing for royalties to actual factories in countries that are not tax havens. Another would be to end the deferral on “active business” profits offshore.  It makes no sense because it incentivizes companies to offshore as much of their business as possible.

crossposted with ataxingmatter