When Apple's chief executive was before a Senate investigative committee last month answering questions on his company's efforts to avoid paying taxes, he represented just one of many notable companies engaged in legal tax cheating. Washington should crack down on the use of overseas tax havens, and the bipartisan concern raised over Apple's tax gimmicks is a promising sign that perhaps Congress will start doing its job. For too long, both political parties have conspired to allow corporations to avoid paying their fair share.
While Apple paid more than $6 billion in taxes last year on its American operations, it has been able avoid paying at least $74 billion in federal taxes between 2009 and 2012, according to congressional investigators. What Apple did is not technically illegal, but it should be and would be were it not for the influence corporations have on both political parties.
Apple established subsidiaries in countries such as Ireland, where the company would be exempt or nearly so from taxation. Under U.S. tax law, subsidiaries are taxed where they are incorporated, even though some of Apple's entities had no employees and were operated from Apple headquarters in California. Under Irish law, corporations are taxed where they are managed and controlled. In other words, Apple claims to be essentially stateless for tax purposes, after recording 65 percent of its worldwide income in Ireland.
Apple uses a typical trick to hide American-made profits overseas. It assigns valuable intangible assets such as patents to a subsidiary in a tax haven country. Profits made from American clients and consumers then become royalties paid to that subsidiary for the use of the patent. This defers the company's U.S. tax liability on those profits until they are repatriated back into the country.
The loss to the federal Treasury is staggering. In 2008, American multinational companies claimed that 43 percent of their $940 billion in overseas profits was earned in five small tax-haven countries, including Ireland. Yet only 4 percent of their foreign workforce was in those countries, according to the nonpartisan Congressional Research Service. Sen. Carl Levin, D-Mich., chairman of the investigative committee, cited a study that said 30 U.S. multinational companies with more than $160 billion in profits paid no federal income taxes over the last three years.
Part of the solution is to prevent American companies from deferring taxes on overseas profits. That would encourage the repatriation of the estimated $1.6 trillion in profits that U.S. corporations have hoarded overseas, leading to more investment and economic growth at home. And the added tax revenues could be used to help reduce the corporate income tax rate that stands at 35 percent, something that President Barack Obama and many in Congress in both parties want to do.
The burden of federal taxes has markedly shifted from corporations to individuals over the last 30 years. In 2011, individual tax receipts totaled $1.1 trillion while corporate taxes contributed only $181 billion. This glaring imbalance should be corrected.