These issues have become more prominent as the technological advances of recent years enable "remote control" management of a corporation. Directors meetings and other legally determined functions for Apple's Irish holding company subsidiary, Apple Operations International (AOI), were held in California. AOI has no employees and no physical presence in Ireland, being entirely managed and operated from the United States. Apple's US service center in Austin, Texas, does the entity's accounting, and another Apple subsidiary in Nevada manages finances. The assets are held in a bank account in New York.
The importance of intellectual property to the profitability of tech companies has made them the focus of governments looking into the alleged shifting of profits to low-tax countries. According to Senator Carl Levin (D-MI), chair of the PSI, those "profits depend on the ideas that bring [physical] elements together in such an elegant package. That intangible genius is intellectual property that is nurtured and developed here in the United States." He continued, "[Intellectual property] is also highly mobile – unlike more tangible, physical assets, its value can be transferred around the globe, often with just a few keystrokes."
Apple's statement to the subcommittee explained the company's belief in no uncertain terms that it wasn't a tax evader: "Apple does not use tax gimmicks. Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the US in order to avoid US tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations; it does not hold money on a Caribbean island; and it does not have a bank account in the Cayman Islands. Apple has substantial foreign cash because it sells the majority of its products outside the US."
The subcommittee's description of Apple's strategies was quite different: "Apple Inc., a US corporation, has used a variety of offshore structures, arrangements, and transactions to shift billions of dollars in profits away from the United States and into Ireland, where Apple appears to have negotiated a special corporate tax arrangement of less than 2 percent. Despite reporting net income of $30 billion over the four-year period 2009 to 2012, AOI paid no corporate income taxes to any national government during that period. Similarly, Apple Sales International [ASI], a second Irish affiliate, is the repository for Apple's offshore intellectual property rights and the recipient of substantial income related to Apple worldwide sales, yet claims to be a tax resident nowhere and may be causing that income to go untaxed."
ASI purchases finished products from Chinese manufacturing corporations and then resells them to other Apple marketing affiliates around the world at a substantial markup. Ireland allows Apple to record virtually all of its profits from these transactions in that country based on a cost-sharing arrangement set up when the economic benefits of intellectual properties were transferred there years ago. It appears that only products destined for countries outside the US market use this procedure.
The subcommittee's statement concluded that "Apple makes use of multiple US tax loopholes, including the check-the-box rules, to shield offshore income otherwise taxable under Subpart F. Those loopholes have enabled Apple, over a four-year period from 2009 to 2012, to defer paying US taxes on $44 billion of offshore income, or more than $10 billion of offshore income per year. As a result, Apple has continued to build up its offshore cash holdings which now exceed $102 billion."
Subpart F of the Internal Revenue Code was enacted some fifty years ago to forestall the increased use of tax-haven subsidiaries by US corporations. Regulations designed to require "market-based" transfer prices between affiliates are now less effective because of the unique qualities of technology-based products and less frequent transfers of physical goods. According to the IRS' testimony at the subcommittee hearing, "the check-the-box regulations provide that an eligible foreign entity with a single owner can be treated as 'disregarded' as a separate entity." The result is that many US companies prefer to hold cash overseas rather than repatriate it back to the United States and incur income tax at what they perceive to be a very high rate. According to Joe Rosenberg, US corporations hold more than $1 trillion in subsidiaries incorporated in countries with lower tax rates ("Let Apple and Microsoft Bail Out Uncle Sam," the Wall Street Journal, May 16, 2013).
Unfortunately, there's no international organization with the ability to harmonize tax laws on a global basis. Each sovereign nation structures its tax laws to accomplish the objectives of raising revenue while protecting its own particular economic interests. As a consequence, countries compete against each other for tax revenue, and companies take advantage of it. One country's pain from not collecting taxes it believes result from economic activity within its borders is another country's success in using its own unique strategies to be an economic attraction. A study by the Organisation for Economic Co-operation and Development (OECD), commissioned by the G20 nations, finds that these tax-avoidance strategies, "though technically legal, erode the tax base of many countries and threaten the stability of the international tax system," according to OECD Secretary General Angel Gurría.
The tech companies aren't alone in sheltering income from US taxation. Presently, most corporations feel no obligation to help solve the fiscal problems of any country they do business in. They believe their only responsibility is to maximize return to their shareowners, and the compensation of most CEOs and senior executives is based primarily on short-term financial performance. A solution to this problem involves motivating the investment community to place more emphasis on a company's nonfinancial obligations to all of its stakeholders. Fortunately, the reporting of sustainability information by corporations is increasing.
About the author:
Curtis C. Verschoor, CMA, is a member of the IMA Committee on Ethics. He is the Emeritus Ledger & Quill Research Professor at the School of Accountancy and MIS and an honorary Senior Wicklander Research Fellow in the Institute for Business and Professional Ethics, both at DePaul University, Chicago. He is also a Research Scholar in the Center for Business Ethics at Bentley University, Waltham, MA. He was selected by Trust Across America as one of North America’s Top Thought Leaders in Trustworthy Business Behavior in 2012 and 2013. His e-mail address is firstname.lastname@example.org.
©2013 by the Institute of Management Accountants (IMA®), www.imanet.org; reprinted with permission.
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