Last updated: October 2016
Where did all the tax go?
Apple is the most profitable company in the world. In 2015 it made US$53.4 billion in profits, the biggest annual profit in corporate history. That’s more than the combined profits of the second and third most profitable companies in 2015 – JP Morgan and Berkshire Hathaway. And three times more than the profits of oil giant Exxon Mobil. Every second in 2015 Apple made a profit of $1693.
But Apple’s good fortune has not been spread far and wide. According to the New York Times, Apple has engaged in increasingly aggressive tax avoidance for at least a decade. A US Senate investigation in 2013 found that Apple had stashed some US$100 billion in Ireland without paying taxes on much of it anywhere in the world. The Senate report showed that Apple had paid an effective corporate tax rate of just 2% in Ireland.
And now Apple is crying foul over the ruling in Europe that it received illegal tax breaks from Ireland and must hand over €13 billion (US$14.5 billion). The Irish parliament voted in September 2016 to appeal the ruling, wanting to maintain its status as a low-tax regime for multinationals.
Apple CEO, Tim Cook, called the decision “political crap” and said Ireland was being “picked on”.
“Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe … We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don’t owe them any more than we’ve already paid.”
Since 1991, Apple managed to avoid almost all the tax it would have paid from sales across Europe, the Middle East, Africa and India by recording all profits to a subsidiary in Ireland. Ireland endorsed a split of these profits which meant that only about 0.003% of the profits (or €50 million in 2011) were taxed at all. The rest was allocated to a ‘head office’ that only existed on paper. Ireland’s corporate tax rate is low at 12.5%, but Apple paid a maximum of 1%, and as little as 0.005% in 2014.
The €13 billion plus interest demanded from Apple is 40 times bigger than the previous record for such a case and the equivalent of the annual budget for Ireland’s health service. Irish campaigners called for the windfall to be invested in public housing.
Apple should easily be able to pay the huge tax bill because it has a cash mountain of more than $230 billion (£176 billion) in cash and securities, mostly held outside the US. The tech group keeps the money outside the US because it would be forced to pay US tax charges if it repatriated the money.
In the USA, the biggest tax dodge in need of reform involves deferral, in which American companies can defer paying taxes on foreign-held profits until those sums are repatriated. American companies shift profits into foreign accounts, while they lobby Congress for tax rate cuts in exchange for repatriating the money. Currently, there is some $2 trillion in corporate profits in offshore tax-deferred accounts. Apple is one of nearly two dozen major corporations pushing Congress for a “tax holiday,” which would let companies bring back foreign-held money over the course of a year at a discounted tax rate, rather than the current rate, of 35%.
A US tax holiday in 2005 lowered the corporate tax rate to 5.25%, enticing corporations to repatriate some $300 billion. It was promoted as a way to create jobs and increase investment, but the money was used mostly for dividend payments, share buybacks (which tend to raise executive pay) and severance for laid-off employees.
Apple has always had an arrogant, we-know-better-than-you side to its culture. But over the years it has improved in some important key areas where it has now acknowledged that it was wrong. On demonstrating environmental responsibility and grappling with workers’ rights in its supply chains, it has gone from being one of the worst-rated computer companies in Ethical Consumer and Greenpeace reports, to one of the best. There is still lots to do in these areas mind you (it still scores worst for Environmental Reporting on our table and middle for Supply Chain Management), but it is demonstrating an understanding of their importance.
Its approach to tax, though, remains juvenile and profoundly irrational. Until it has a change of heart, there are those of us for whom this remains a barrier to buying its products.