Why Apple Should Pay Income Tax on Overseas Earnings: Because Other Americans Do

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.