Taking a Bite out of #Apple: Senate Hearings Mostly Worthwhile

The Senate's Permanent Subcommittee on Investigations, part of the Committee on Homeland Security held a hearing on international taxation of domestic companies. The prop to illustrate all this evil was Apple, the electronic device manufacturer. I am not sure why this subject was not in the jurisdiction of the Senate Finance Committee, the only Committee that can suggest changes in tax policy.

The Chairman of the Subcommittee, Carl Levin (D., MI) believes Apple and other multinational firms like them are overly creative with their tax practices using such horrible words of description like “tax avoidance." Of course, tax avoidance is not a crime nor is it even a violation of our tax law. There were a number of real purposes for the hearing including beating up on big business, casting sinister motives on companies that use the law to their advantage, and of course, the rabid greed of liberals for more taxes, more taxes and more taxes, no matter what the source

The real culprit in all of this is not Apple. It is the corporate tax code itself. Stuck on high rates, it provides the ultimate incentive for creative but legal tax planning to minimize the government’s bite (out of the Apple, of course)

The taxation of income of multinational business is quite complexed. Indeed, there have been many companies who have played the game quite well. The biggest tax benefit is found under the current U.S. rules where a U.S. multinational is not taxed on active foreign income earned through a controlled foreign corporation until the earnings are distributed back to the domestic parent company. This is commonly referred to as deferral and deferral has been under attack by liberals for years. The law also allows a domestic corporation owning 10% or more of the stock of a foreign corporation a credit for foreign income taxes paid with respect to earnings received as a dividend in respect of that stock. The foreign tax credit has also been a big target, mostly because it is heavily used by the oil and gas industry.

In the case of Apple, it used Irish and American tax law to pay little or no corporate taxes on a big chunk of its overseas income. However, the investigators for the Committee found that Apple did not do anything illegal. Some may thing this is horrible, immoral, or un-American but Apple is not obligated to pay anymore than the minimum tax imposed whatever the system.  

The hearing did have a positive use. It shows the antiquated system of laws applied to American businesses engaged in global commerce. There is no question these policies need a through makeover. The real issue becomes-what next? How to deal with all the deferral, how to put in place a structure that does not put the U.S. in a competitive disadvantage? Suggestions abound, the most promising are those put forth by House Ways and Means Committee Dave Camp (R-MI). Unfortunately, his innovative way is opposed by the Obama Administration because not enough taxes will be raised. Heard all that before.

Corporate tax reform is needed but still along way to go. For Apple, they made a good defense of their situation while recognizing the need to change the system