Bloomberg View

Bloomberg View: Don't Blame Apple for Keeping Its Money


Bloomberg View: Don't Blame Apple for Keeping Its Money

Illustration by Bloomberg View

When Apple’s (AAPL) chief executive officer, Tim Cook, bragged to a Senate committee on May 21 about his company’s culture of innovation, he probably hoped people would think of Apple’s gadgets, not its tax strategies.

That seems unlikely, at least for now. Not only has the company used loopholes to sidestep U.S. taxes on $44 billion in offshore income from 2009 through 2012, according to the subcommittee, Apple also has three Irish subsidiaries that claim to have no residence—anywhere—for tax purposes. Senator Carl Levin, the Michigan Democrat who chairs the Senate permanent subcommittee on investigations, which looked into Apple’s tax avoidance strategies, calls this alchemy. We’re inclined to agree.

Ideally, revising the treatment of overseas income should be part of a broader tax overhaul. It’s hard to separate the treatment of foreign income from the rest of the corporate tax code, which encourages companies to move their operations overseas.

Any deal on foreign-source income should meet two principles. First, if companies are allowed to repatriate foreign earnings at a reduced tax rate, they must be required to follow tighter rules that bar the kinds of strategies Apple and others use to minimize taxes. There are a variety of options, including restricting or eliminating the 1996 “check-the-box” rule, which lets a company declare a subsidiary a “disregarded entity,” thus limiting its U.S. tax liability. In the words of one tax expert who testified at the hearing, the effect of those rules could be described as “making things go poof.”

Second, any deal would need to raise significant revenue. The Joint Committee on Taxation estimates that a Levin proposal to revise the check-the-box system and related rules would increase revenue by $78 billion over 10 years.

Another revenue-raising option would impose a minimum tax on foreign income, possibly with a credit for taxes already paid to the host government. President Barack Obama called for a minimum tax, without specifying a number, in his tax reform proposal last year.

At what level should the tax be set? When Congress granted companies a temporary tax holiday for foreign income in 2004 and 2005, the money was subject to a 5.25 percent levy. Clearly, a higher level is appropriate for a permanent change. If a 15 percent rate were applied to foreign earnings now held overseas, it could generate as much as $285 billion in revenue if all the money were repatriated, before accounting for credits for taxes paid to other governments.

There’s no point castigating Apple for taking maximum advantage of existing tax law. We expect the company to redefine the possible in the devices it makes, so it shouldn’t be a surprise that Apple exerts the same determination when it comes to keeping its money.

Instead, the consternation spurred by Senator Levin’s report should be directed toward pushing Congress to adopt a fairer, more reasonable system of taxation for the foreign earnings of U.S. companies.

To read Jim O’Neill on German football and Susan Crawford on free speech and the Internet, go to: Bloomberg.com/view.


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