taxes

Numerous sources, including The Telegraph, are reporting that Apple’s Italian subsidiary has agreed to pay a €318 million fine for tax fraud.

A spokesman for Italy’s tax office confirmed that the tech company’s Italian subsidiary had agreed to pay the sum to end the investigation, with the amount paid in line with what the agency had asked for.

Citing the Italian newspaper La Repubblica, The Telegraph says:

Apple had been accused of tax evasion over five years, from 2008 to 2013, by booking sales in Italy through its Irish subsidiary.

The Telegraph also reminds readers of Tim Cook’s statement that Apple “every dollar and euro it owes in taxes.”

This is actually a pretty good deal for Apple. This settlement was negotiated based on estimates that Apple owed €880 million in corporation tax. So they still managed to swindle the country for more than half a billion euros.

As Reuters recently pointed out:

“A U.S. Senate investigation in May revealed that Apple structured its operations so that the vast majority of its non-U.S. profits are reported in Ireland, by companies which, through an unusual feature of Irish tax law, are not tax resident in that country.

“ASI [Apple Sales International] contracts with mainly Chinese companies to manufacture iPads and iPhones. ASI then sells these products to another Irish company which resells them to retail subsidiaries in Italy and other European countries.

“The pricing of the inter-company transactions ensures that the lion’s share of the profit ends up with ASI, the Senate report said. Low profits in countries like Italy mean low tax payments there.

“Countries usually consider companies registered on their territory to be tax resident there but Irish law allows ASI to be tax resident nowhere. This means its profits go untaxed.”

As The Guardian says:

This month, the Apple chief executive, Tim Cook, described accusations that the world’s richest company was sidestepping US taxes by stashing cash overseas as “political crap” and insisted: “We pay every tax dollar we owe.”

That may be true for dollars, but apparently it’s not the case for other currencies.

Italy may be the first of many EU companies that claim their due from Apple, who has long siphoned off sales through its Irish subsidiary, which benefits from an extremely beneficial tax regime. That tax deal is under investigation by the European Union.

Apple is, of course, far from being the only company to “avoid” taxes in this manner. Such large tech companies as Google and Facebook, as well as Amazon, use the same techniques. I hope they, too, pay their fair share.

The recent hullabaloo over Apple not paying income tax is almost surreal. The company has so much money overseas – currently some $100 billion in cash – that it has issued bonds to proceed with a share buy-back plan. The interest on the bonds is much less than the amount of tax the company would pay if they repatriated some of their income.

In addition, it turns out that Apple negotiated a “secret deal” with the Irish government back in the 1980s, so they only pay 2% income tax on the money they park in that country, though they actually only paid about 0.5%.

My question here is not whether it is moral for Apple to do this (the law allows them to do so), but why Apple or any other major corporation is not treated like other US citizens?

Expatriate US citizens – whether they are permanent residents of other countries or not – are taxed by the US on their foreign income. There is an earned income exclusion, which increases from time to time, and which does not take into account exchange rates. A US citizen could be well under the threshold for paying taxes one year, but if on the date that the exchange rate is calculated, the rate is unfavorable, they could owe taxes the following year on the same amount of income. (The current earned income exclusion is $95,100 for an individual, and $190,200 for a couple.) This exclusion also does not take into account the relative cost of living of a country. If the cost of living is higher, salaries will be higher. I experienced this 25 years ago when I lived in Norway for a year; everything cost nearly twice as much as France (where I was living before that), but salaries were higher to compensate.

In addition, the paperwork for Americans overseas filing taxes is substantial, complicated, and in many cases requires the use of a tax attorney or accountant. (See this Boston Globe article for more about this issue.)

What’s even more unfair is that Americans abroad are taxed twice. Once in the country they live in, and another time, if they earn more than the earned income exclusion, by the US. It’s interesting to note that the only other country in the entire world that does this is Eritrea.

Yet Apple isn’t even a resident of another country. Their subsidiaries are, but those subsidiaries only make money for the US company; Apple doesn’t have separate business entities for different countries or territories. (Though they manage to avoid paying VAT in all EU countries but one by “locating” their iTunes Store activities in Luxembourg, where VAT is only 3%, thereby denying VAT income to other countries where digital content is purchased.)

It’s obvious that expatriate Americans get little or nothing in exchange for their taxes. Other than the low-probability events requiring getting bailed out by the US Consulate, Americans abroad get no Social Security benefits, no unemployment, no health care, or anything else for their tax dollars. Apple, however, and other global corporations, get huge benefits from the US legal system, research infrastructure, publicly-subsidized education system, and the many international treaties and agreements governing such key factors to their success as intellectual property and trade regulations. So all of Apple’s sales overseas benefit from the broader fact that it is a US company.

So let’s treat Apple – and Google, Amazon, Yahoo! and all the others – like American citizens. Tax their overseas income, don’t let them set up a web of tax shelters, but make them pay their share.