Look, I’m
of average intelligence—nah, come clean. I’m probably smarter than most people,
due more to luck than anything I’ve ever done. By which I mean that I was born
into an upper middle-class family in a good university town; the public schools
were very good, I was expected to bring home good grades and I did.
So I was
curious to know how John McCain—not known for fiery liberalism—came up
with this
statement.
“I
have long advocated for modernizing our broken and uncompetitive tax code, but
that cannot and must not be an excuse for turning a blind eye to the highly
questionable tax strategies that corporations like Apple use to avoid paying
taxes in America. The proper place for the bulk of Apple’s creative energy
ought to go into its innovative products and services, not in its tax
department.”
And
just to show you that—remarkably—bipartisanship is not dead, here’s what
Democrat Carl Levin had
to say, as cited in the same source as above:
“Apple
wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,”
said Sen. Levin. “Apple sought the Holy Grail of tax avoidance. It has created
offshore entities holding tens of billions of dollars, while claiming to be tax
resident nowhere.
OK—all
of the comments above were reported in May of this year. So why, trolling
through Facebook, did I come across a link to an article, “Apple Under
Investigation for Over 1 Billion in Tax Fraud?”
Let’s
start at the beginning (I can hear you out there singing, “a very good place to
begin….”) What Apple is
doing is what many corporations, such as Microsoft and Hewlett-Packard, are
doing, and it’s legal, if not right. Apple, yes, is based in Cupertino, California, and
presumably much of the work—creatively, administratively—gets done there.
So
you get it into your head—hey, let’s buy the new iPad! It weighs less than a
hummingbird, and is just as fast! Wow—retina display! Gazillions of apps!
You
get the picture—you’re entranced with your toy (full disclosure—charging right
next to me is a first
generation iPad, a dinosaur that refuses to die, dammit, so that I can buy
a new one….) And you probably know that the iPad was manufactured in China. But who
thought up the idea in the first place?
Obviously,
somebody in California. And that somebody was working for Apple, and his job
was to think things up. This idea—known as intellectual property—is
now owned by Apple.
Of
course, Apple could contract directly with a manufacturer in China to make that
iPad you are now holding in your hand. But that would mean that it would be
slugged with a corporate tax rate of 35% in the United States. And guess what?
They guys down in finance are howling, because that’s high, by international
standards. So what do they do?
RobertW. Wood, writing in Forbes, explains
the strategy:
Facebook sent
$700 million to the Cayman Islands as part of a “Double Irish” tax reduction
strategy. Google used the Double Irish and the Dutch Sandwich to
save billions in
U.S. taxes. The Double Irish involves forming a pair of Irish companies to turn
payments for intellectual property into tax-deductible royalty payments.
The U.S.
parent company forms a subsidiary in Ireland. The parent signs a contract
giving European rights to its intangible property to the new company. In
return, the new subsidiary agrees to market or promote the products in Europe.
Thus, all the
European income—income that previously would have been taxed in the U.S.—is
taxed in Ireland instead. Then the Irish company changes its headquarters to
Bermuda. No Irish tax, no Bermuda tax, and no U.S. tax.
Finally,
the parent forms a second Irish subsidiary that elects to be treated as disregarded
under U.S. tax law—by filing a one-page form. The first Irish company (now in
Bermuda) can license products to the second Irish company for royalties. The
net result is one low 12.5% Irish tax compared to 35% in the U.S.
Put
it this way—Apple in Cupertino send its legal guys over to Ireland where,
presumably, they work with the Irish guys. So the boys create an Irish company,
which turns around and incorporate in Bermuda. That’s lovely—not for the pink
sandy beaches or the hairy legs poking out from the famous shorts—but because there’s no income tax in
Bermuda.
Now
the guys in Apple California run off to Ireland again, and guess what they do?
They set up a company in Ireland! We now have two companies: Bermuda / Irish
and Irish / Irish.
Now
then, people in Italy and France want iPads too, so how to get it into their
hands? Well, the Irish company in Bermuda is given the rights to the plans for
the iPad—the “recipe” or the intellectual property. So the Bermuda / Irish
company allows to Irish / Irish company to make the product, market it, and
sell it all over Europe.
Irish
/ Irish runs over to China and gets a whole bunch of people to work for nothing
(or thereabouts) and produce the iPad. Of course, even with the market and
distribution and manufacture, Irish / Irish is now sitting on a huge pot of
money because guess what? Everybody in Europe has to have an iPad.
And
that’s bad, because Ireland could now come after Irish / Irish. So that’s when
Bermuda / Irish steps in, and asks for a huge royalty payment—very fair, they
did give the right to Irish / Irish to produce and distribute their idea,
right?
So
after that big payment, Irish / Irish now has to pay very little money to the
tax authorities in Ireland, and Bermuda / Irish is sitting on a huge sum. And
as long as that money stays in Bermuda, it’s not taxable anywhere in the world.
There
are several other things to consider. First, the Bermuda / Irish company has no
employees and not even an office in Bermuda—everything is run out of the US,
and the board meetings are in California (gee—I wonder where it could be!)
Second, Apple went to the tax authorities in Ireland and negotiated a “sweetheart”
deal with them—Apple pays just 2% taxes on its Irish / Irish company, not the
(still low) 12.5%.
Third,
the sum of money we’re talking about is huge; here’s
what the Permanent Subcommittee on Investigations says:
Ireland
asserts tax jurisdiction only over companies that are managed and controlled in
Ireland, but the United States bases tax residency on where a company is incorporated.
Exploiting the gap between the two nations’ tax laws, Apple Operations
International has not filed an income tax return in either country, or any
other country, for the past five years. From 2009 to 2012, it reported income
totaling $30 billion.
Lastly,
what Apple is doing is nothing special, in the world of business. In 2011, The
New York Times
reported that GE paid no taxes in the US, despite making 5 billion bucks in
their domestic market. Knowing the Times to be a hotbed of fire-breathing radicals, I
turned to the more conservative Forbes for the answer. And here
it is:
Its
finance arm, GE Capital, lost a lot of money during the financial meltdown
(roughly $30 billion) and it’s still carrying those losses forward and
deducting them from current income. As GE spokesman Gary Sheffer wrote in his
response to the Times
story: “Without these financial crisis losses at GE Capital, GE’s tax rate
would have been near the average of other multinational corporations.” He
added, “In short, when you lose money, you don’t pay taxes.”
But
that’s not all. Because according to the law, when you make money overseas, you
don’t pay taxes (until the money comes in to the country). But when you have a
loss overseas? That can be deducted from your US taxes. Here’s Forbes again:
Overseas
profits stay overseas, beyond the arm of Uncle Sam. But when losses happen,
like in the credit crunch, they can be netted against U.S. profits. Just
another balancing act in the global marketplace.
Now
then, all of this came out in a subcommittee hearing in May. So why was my
friend publishing a link to a recent article?
Well,
it turns out that the Italians—better known for amore / fashion / opera than high
financial probity—are charging that Apple is tax avoiding them! Why? Because
Apple Italy channeled all its profits to Apple Irish / Irish which had to pay
enormous sums to Apple Bermuda / Irish which pays no taxes to Bermuda or to the
United States but which is owned and operated by Apple / Cupertino /
California.
There
is a reader of this blog who has quite distinct views to my own. He honors me
by reading and commenting, and I welcome his views. My intention—throwing him a
bone—was to post the video below about the squatting going on in a 45-storey
unfinished condominium in Caracas. I was going to point out that it is
completely outrageous for people to expect the government to provide you
housing, food, water, health care for free. Also, that it’s outrageous to squat—to
assume that you have the right to move into a building just because you have
nowhere to live.
I
would also point out that in Puerto Rico we have a substantial core of people
who don’t work, who are living on welfare; generations of people who have lived
on what’s called the mantengo. It’s crazy and outrageous.
Those
people are maintained by the handful of people who still have jobs, and who get
a W-2 form at the
end of the year. And come April 15, you’re pretty much stuck. As it happens, I
don’t have a W-2 form, but I do have a good idea for a company. Here’s what I’m
gonna do…
Start
a company that will incorporate individuals that will be located in Ireland but
will then be incorporated in Bermuda but will be operated and managed out of
Viejo San Juan. Your employer will have to pay the company in Ireland, which
will have to pay the company in Bermuda, which, come to think of it, I may have
to move to.
Right—small
price to pay for easy money!
