Will Senate scrutiny of Apple’s (NASDAQ:AAPL) offshore tax practices spur lawmakers to reform U.S. tax laws or will all this publicity just inspire more corporations to take advantage of these same loopholes? It’s a well-known fact that Apple has an overseas cash hoard of approximately $102 billion. However, many lawmakers seemed surprised to know how Apple was avoiding paying taxes on some of its overseas holdings.
Apple is taking advantage of the differences between American and Irish tax laws. U.S. law stipulates that a company is subject to taxes in the country in which it was incorporated. On the other hand, Ireland’s tax laws only apply to companies that are controlled and managed in the country. By establishing subsidiaries in Ireland that are controlled and managed from Apple’s headquarters in California, Apple was essentially able to create a subsidiary that is a tax resident of nowhere.
Apple’s Irish subsidiaries also own a large portion of Apple’s intellectual property rights. This means that royalties from overseas sales must be paid to the Irish subsidiaries. Only royalties from sales in North and South America go to Apple’s U.S.-based headquarters. This arrangement has helped the Cupertino-based company accrue an overseas cash pile of $102 billion.
In the U.S., Apple would have to pay an estimated corporate tax rate of 35 percent on its cash reserves. However, U.S. companies are not required to pay this tax until the cash is actually repatriated. This is why Apple recently chose to fund its capital return program by issuing $17 billion in bonds rather than simply returning its overseas cash to America.
CEO Tim Cook told the Senate that he would like to see this corporate tax rate lowered to “a single-digit number.” He believes that this would induce more U.S. companies to repatriate overseas earnings as well as encourage companies to invest more money into U.S-based operations.
However, it is unclear if a lower tax rate would prompt companies to reinvest their earnings into the U.S. economy, especially since these tax maneuvers appear to completely legal and mainstream. Rather than moving cash back into America, it is likely that many companies would simply continue to try to dodge the new lower tax rate as much as the previous higher tax rate.
In this sense, the lawmakers that are grilling Apple’s CEO might want to spend their time taking a closer look at the U.S. tax code rather than scrutinizing the finances of one of America’s most successful companies. After all, without making changes to the current tax law, lawmakers are merely drawing more attention to Apple’s creative tax accounting and perhaps inspiring another U.S. company to take advantage of this glaring corporate tax loophole.
Here’s how Apple has traded so far this week.
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