Rotten Apple? Think Again

The recent developments regarding Apple’s (NASDAQ:AAPL) tax deals with the Republic of Ireland seem to provide a perfect time to throw mud at the world’s largest corporation.  “Cheaters”, “Evil Big Corporation”, “Takes advantage of poor countries”, “Corporate Greed”, should I continue?

It seems these days the media is quick to jump to conclusions about what corporations do, and thus fueling public opinion.  Let’s check out the details behind Apple’s tax tragicomedy.

Background:

As it customary for big multinational corporations, the path to tax efficiency can drive location strategy.  Many companies set up headquarters in tax havens such as Switzerland, Luxembourg, Monaco, the Caribbean, or Singapore; others do some complex transfer pricing transactions; others ship out their intellectual property; while others resort to inversions.  All of these methods and many more are perfectly legal.  A country, city, or state will use tax benefits to lure companies into incorporating in them (e.g. Delaware in the US or Zug in Switzerland), while others provide benefits (e.g. lower corporate tax rates, lower city or property taxes, or offer to build infrastructure) to get them to set up a plant, office or distribution center in their jurisdiction.  It has been done for a long time, and it is a very efficient way of attracting investment.

So what’s the deal with Apple and Ireland

Ireland offered Apple a sweet deal to set up shop there and employ around 6,000 people.  Many would argue that Apple got the better part of the deal and that Ireland lost out.  But that is for Apple and the Irish to decide.  It is like you and me entering a rental agreement for $300 for an apartment, we both agree, and we sign it.  I live there  for a few years at $300 a month rent, and all of the sudden, out of nowhere, your uncle shows up and demands that I pay you $1,300 for the apartment, retroactively, and with interest.  Obviously my first reaction would be: “who are you?, where do you come from?, mind your own business!”.  Assuming you are an adult of able mind, and in legal capacity to sign a contract, and of course you own the apartment, then neither your father or let alone your uncle should have any say on what you do with it.

Well, it seems that someone forgot to tell the European Commission that the Republic of Ireland is, since I last checked a sovereign country, with a sovereign government, an independent tax authority, an independent tax regime, and independent laws.  So, what is their deal?

That is total political crap, there is no truth behind it

Tim Cook, CEO Apple Inc.

In my opinion, the European Commission don’t have a leg to stand on.  They found a way to try to inflict some pain to a large corporation, in efforts to gain popularity with the people, but they are playing with fire.

A question of sovereignty

Brexit was never about racism, it was always about sovereignty: Allow the UK to decide its own laws, its own taxes, and decide who comes, who goes, and under what circumstances.  With many other countries threatening to follow suit and have votes on their version of Brexit, the European Commission’s decision to trample on a sovereign country’s decision shows extremely poor timing.  The question is: Will the UK step up and drop their corporation tax to lure Apple to move there, since they no longer belong to the EU?

Why is this happening?

Why are so many companies moving, inverting, striking deals, relocating, etc.? The answer is quite simple: because it is worth it!  Corporate tax rates are so high in some countries like the US, that companies are willing to leave vast amounts of cash sitting totally unproductively in some tax haven rather than bringing it back, because they face a massive tax bill.  So who wins in this scenario?  Nobody!

How to solve it?

It is estimated that $4.5 trillion are sitting offshore, and companies refuse to bring them back to the US.  Corporation tax in America is 35%, so the potential tax bill is massive.  Instead of increasing taxes, and spending resources chasing people around the world to pay their taxes, countries should lower corporation tax across the board.  Drop the rate from  35 to 10% and you will see tons of money flocking back, and the government would get a pretty nice cut (in the range of half a trillion dollars), which is less than the 1.5 trillion they think they are owed, but infinitely more than the zero they are currently getting.  Furthermore, at present, big corporations hire armies of expensive tax lawyers to figure ways for them to reduce their tax bill.  And it is totally worth it, because if they manage to cut 10 or 15% of their total tax bill it is a huge return that affects directly the bottom line, and the shareholder value.  But with lower tax rates, the marginal return of every unit of tax lawyers is so small, that it is not worth the trouble.