Apple: No tax gimmick left behind

Tim Cook did Steve Jobs proud at this week’s Congressional hearings into Apple’s tax avoidance practices. During his testimony the CEO pulled a mind trick or two out of his iPocket, rivaling even the late Apple visionary in his ability to weave reality distortion fields.

The Senate report released prior to Cook’s testimony detailed Apple’s “complex web” of offshore entities set up to avoid paying taxes. Yet in his testimony before a Senate subcommittee, Apple’s CEO defended the company, saying Apple uses “no tax gimmicks.”

Puhleeze — long before the world was swooning over iPhones and iPads, Apple pioneered the accounting sleight of hand known as “double Irish with a Dutch sandwich.” A New York Times in-depth report this week traced the ways Apple, starting in the 1980s, has acted to avoid paying taxes by routing profits through Irish subsidiaries and the Netherlands, then to the Caribbean.

The subcommittee’s report revealed how one of the Irish subsidiaries set up by Apple has paid no corporate income tax to any nation for the past five years, although it reported $30 billion in net income from 2009 to 2012. Another subsidiary has paid a tax rate to Ireland of one-tenth of 1 percent or less in 2009, 2010, and 2011, far below the normal Irish corporate income tax rate of 12 percent.  Congressional staffers said Apple has negotiated an income tax rate of less than 2 percent with the Irish government, but in some cases avoids paying even that rate.

Apple is hardly the only tech company employing tax avoidance techniques — Google has been investigated by the IRS for shifting profit into offshore subsidiaries and Microsoft’s strategies for reducing its tax bills have also come under scrutiny — but as in so many other areas, Apple scores big on style points.

In the words of Senator Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, “Apple successfully sought the holy grail of tax avoidance.” Edward Kleinbard, law professor at the University of Southern California in Los Angeles and a former staff director at the Congressional Joint Committee on Taxation, was more succinct, describing Apple’s economic behavior as “unbelievable chutzpah.”

Where Cook was absolutely factual was in telling the subcommittee “we pay all the taxes we owe.” Tax avoidance, unlike tax evasion (think Lindsay Lohan or Wesley Snipes) is perfectly legal. But that doesn’t mean it’s fair or even ethical.

Why Apple alone?

An article this week on Policymic.com examines how the world’s biggest company also became the most unethical. Why single out Apple as being especially unethical? One reason, the article says, is scale: “As the world’s most valuable company, and one of its most profitable, the impact of Apple’s actions are greater and more harmful.”

Where Sen. Rand Paul saw the Senate’s questions as “bullying” and “badgering” a business success story, Policymic argues that “a second reason to single out Apple is because, as the nation’s top company, it has a greater responsibility for ethical leadership. We rightly expect visible individual leaders and corporations to hold themselves to the highest standards because they are role models for so many others.”

When role models pioneer bad behavior it serves to legitimize it, as seen by the PC World article this week that examines how small businesses can get in on the excitement of overseas tax shelters.

A tax code that allows this kind of avoidance of corporate responsibility screams for reform — a cause that Cook embraced at this week’s hearings. As the New York Times writes:

Apple serves as a window on how technology giants have taken advantage of tax codes written for an industrial age and ill suited to today’s digital economy. Some profits at companies like Apple, Google, Amazon, Hewlett-Packard and Microsoft derive not from physical goods but from royalties on intellectual property, like the patents on software that makes devices work. Other times, the products themselves are digital, like downloaded songs. It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers.

But the reform that Apple, Google, Microsoft, and other U.S. multinationals are lobbying hardest for is a tax holiday that would enable them to repatriate at a reduced tax rate some of the estimated $1.9 trillion in profits ($74 billion of which belongs to Apple) currently parked in overseas subsidies and shell corporations. What’s unclear is how such a move would benefit the domestic economy. A study by the National Bureau of Economic Research on the effects of a similar tax holiday in 2004, found that 92 percent of the repatriated cash was used to pay for dividends, share buybacks, or executive bonuses — not for research and development or investment in training or hiring. A corporate tax holiday is not reform — it’s merely another tax avoidance scheme.

The H-1B connection

It’s no accident that the same tech companies employing a phalanx of lawyers and accountants to avoid paying taxes are also aggressively lobbying Congress for immigration reform, which came to a vote in the Senate Judiciary Committee this week. Google, Microsoft, and others argue that a skills shortage in the United States necessitates higher caps for H-1B skilled worker visas. InfoWorld’s Bill Snyder has long battled that particular reality distortion, most recently with numbers released this week by Dice.com that show in 2011 the numbers of IT-related bachelor and associate’s degrees awarded jumped 9 percent and 16 percent respectively over the previous year. The argument for bringing over more workers on H-1B visas, has as much to do with an actual skills shortage as the argument for a tax holiday on repatriated corporate profits has to do with tax reform.

Whether Congress can reach a consensus on fair tax code reform is questionable, given that 30 large U.S. corporations paid more money to Congressional lobbyists than they paid in taxes. It’s a safe bet they weren’t lobbying for ways to pay a more fair or ethical share of taxes. As Jon Stewart said this week, “corporations are the only reason our tax code is so complicated in the first place. Those off-shore loopholes didn’t get carved out by poor people.”

This article, “Apple: No tax gimmick left behind,” was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest business technology news, follow InfoWorld.com on Twitter.