How does the EC figure Apple paid 0.005% in taxes?

A tale of two pie charts.

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From the European Commission press release:

Apple Sales International recorded profits of US$ 22 billion (c.a. €16 billion[1]) but under the terms of the tax ruling only around €50 million were considered taxable in Ireland, leaving €15.95 billion of profits untaxed. As a result, Apple Sales International paid less than €10 million of corporate tax in Ireland in 2011 – an effective tax rate of about 0.05% on its overall annual profits. In subsequent years, Apple Sales International's recorded profits continued to increase but the profits considered taxable in Ireland under the terms of the tax ruling did not. Thus this effective tax rate decreased further to only 0.005% in 2014.

From Apple attorney Bruce Sewell in Frankfurter Allgemeine:

That’s not true. We pay tax on our activity in Ireland at the statutory 12.5%. We are the largest tax payer in Ireland, the largest tax payer in the US and the largest tax payer in the world. We paid $13 billion in tax last year and had a reported global tax rate of 26.4%. This isn’t an argument about how much tax we pay, but where we pay it. The European Commission appears to believe that despite the fact these profits are legitimately attributable to our head office in Cupertino and subject to tax on a deferred basis, they should be taxed in Ireland. 

Bottom line: 

  • Apple assumes it will pay U.S. taxes on its European profits when it brings that money home—but only after the tax rate is reduced from its current 35% tax rate.
  • The European Commission assumes Apple will never pay U.S. taxes on those profits.

21 Comments

  1. Ken Cheng said:
    “Apple assumes it will pay U.S. taxes on its European profits when it brings that money home—but only after the tax rate is reduced from its current 35% tax rate.”

    Since Apple is booking that 35% tax rate on a majority of that foreign income, one can only assume that that is indeed the case. My limited experience in talking with Treasury upon corporate tax matters is they place credence first upon actual transactions, then upon declarations, such as signed financials. They would place little credence upon hypothetical assumptions. Since Apple has booked the balance of US corp tax on the amount of foreign income they have declared they might repatriate, then that’s the rate they would assume to be applicable, 35%.

    If there was no potential for a tax holiday, then that money would likely been repatriated already. It’s the uncertainty that causes US multinationals to delay.

    “The European Commission assumes Apple will never pay U.S. taxes on those profits.”
    Clearly, wrong, because any potential US tax holiday would be at some rate. Just look at all the various proposals from the House, Senate, Executive, etc. The last time I looked, it was House 8.75%, Senate 6.5% and Executive at 14%.

    1
    September 4, 2016
  2. Robert Paul Leitao said:
    Apple imputes and reports US tax expense on all foreign-sourced earnings not permanently dedicated for use outside the US. The tax expense is reported each quarter. The US taxes are not due for payment until the foreign-sourced earnings are repatriated or returned to the United States. As of the end of the June quarter, there was roughly $25 billion in US taxes to be remitted to the US upon repatriation of foreign-sourced earnings and this sum is carried as a liability on Apple’s balance sheet.

    What the EU commission assumes about Apple’s payment of US taxes is really irrelevant to the underlying tax issue in my view and is nothing more than a shoddy justification for the imposition of taxes retroactively. Because foreign taxes paid on foreign-sourced earnings can be taken as a tax credit against the company’s US tax expense, there may not be a material increase in Apple’s total tax expense or the amount will be far less than the additional EU tax claim.

    It’s understandable the US government believes the EU’s attempt to increase Apple’s Irish tax expense retroactively is unjustified. It would significantly reduce Apple’s US tax expense and deny this nation tax revenue on Apple’s foreign-sourced earnings that have already been reported by Apple on its quarterly filings and which are due to the US upon repatriation of the foreign-sourced earnings.

    3
    September 4, 2016
    • Jonathan Mackenzie said:
      If I’m reading this right, that means that if Apple ends up paying Ireland the $14.5b based on the EU’s calculation and a special repatriation rate were passed by the US that was at or below 12.5%, Apple could bring the money home for free (after applying the credit for taxes already paid). US would get nada.

      But obviously I expect Apple will never pay the EU’s number. And if the US can get its act together in time, Apple could bring the money home, pay the US tax, and say, “see it really was all US earnings and we paid them the tax they were due. Stuff your tax bill on money not subject to your tax.”

      And then of course there would be the very happy occasion of Apple’s restatement of liability that would make for a nice one time adjustment.

      0
      September 4, 2016
      • Robert Paul Leitao said:
        Jonathan:

        I’m not sure a foreign-sourced earnings US tax holiday would be offered at or near 12.5%. The US does have among the highest corporate tax rates among developed nations and it’s time for the issue to be squarely addressed by Congress. I would expect any repatriation tax holiday to require the immediate repatriation of dollars and payment of taxes declared but yet unpaid.

        Meanwhile, there are serious discussions between the US and its trade partners on what’s called a “territorial tax.” Under this scenario, taxes be would be paid only in the territories in which the income is earned and at the prevailing tax rates in the territories without additional corporate taxes on foreign-sourced earnings in the jurisdiction in which the enterprise is domiciled.

        One can reasonably argue the high US corporate tax rates are anti-competitive for US-based enterprises and addressing this issue through meaningful corporate tax reform would eliminate or greatly reduce the practice of keeping what is now trillions of dollars of non-US corporate earnings offshore.

        In Apple’s case, I’d much prefer more competitive US corporate tax rates than to compel the company to borrow money rather than repatriate foreign-sourced earnings. Over the past few years we’ve seen a small number of formerly US-based multinationals move their headquarters outside the US because of more favorable corporate tax structures in their new domicile.

        0
        September 4, 2016
        • Jonathan Mackenzie said:
          Robert,

          Are you skeptical about the idea of a tax holiday or the rate of 12.5%? Because your suggestion of immediately paying taxes booked is not so much a holiday as a day of reckoning.

          I think it is becoming increasingly obvious that no matter how problematic a repatriation discount is, this is becoming increasingly necessary. Corporations can hold that money overseas indefinitely while our roads and bridges crumble. Sure, we need comprehensive tax reform. Sure, an infrastructure spending bill would be good for the nations economy. But the easiest thing to do in the near term is make a deal whereby these companies can pay some of the tax they are withholding and the US can unlock a portion of these funds. To hold out and wait for comprehensive tax reform — whatever that may look like — seems to be cutting off your nose to spite your own face.

          Far be it for me to predict congress will actually take action on something, but it is becoming increasingly apparent that the highway fund needs a revenue source. This is a ground ball. Playing the waiting game with multinationals who have nothing to lose is not a good plan.

          0
          September 4, 2016
          • Robert Paul Leitao said:
            Jonathan:

            I’m certainly not skeptical about a repatriation tax discount being passed by Congress and signed by the next president. I just don’t expect a 12.5% discounted tax rate. I’m sure there will be much political wrangling in Congress over a repatriation tax holiday and I’m sure some strings will be attached if not dedicated uses for the resulting windfall of tax receipts. I believe dedicated uses such as infrastructure repair have been discussed already and as recently as last fall.

            I agree with you a repatriation tax discount is past due and is an efficacious way to bring in hundreds of billions of dollars of tax revenue to the US Treasury very quickly. Again, I’d much prefer Apple repatriating foreign-sourced earnings and remitting the accrued taxes than be compelled to borrow funds rather than pay what are exorbitantly high US taxes on income created outside the United States.

            1
            September 4, 2016
            • Jonathan Mackenzie said:
              Ken Cheng’s comment suggested three possible rates that were within striking distance of 12.5%. I don’t have any knowledge what the rate would be. But it won’t be any rate so high that the corporations will balk, or it simply won’t be passed. Tim Cook’s 15% seems an optimistic figure, but not impossible to imagine. A rate set too high will do nothing, and everyone comes around to that understanding at some point in the process, and so the final rate will be something big business can live with. I have no idea what that rate would end up being.

              But paying any back tax to Ireland effectively disqualifies a large chunk of money from any US taxes up to 12.5%. And that has to be a consideration in the next congress. And not just because of the tax money lost from Apple, but also all additional taxes at risk from all other corporations doing business in Europe who may have also participated in tax breaks from national governments. That’s not a small list. Someone in congress will see that it is imperative for the US to claim these funds now or risk forfeiting them to Europe.

              I’m interested in watching this play out, but I certainly have no expert knowledge about any part of it. Watching these kinds of issues and how they get resolved is effectively my schooling here. And what an exciting class this has become.

              0
              September 4, 2016
              • Robert Paul Leitao said:
                Jonathan:

                In my view, the points you make are the reasons the US Treasury is responding so quickly and loudly to the EU’s ruling. I’m also not an international tax expert. But from what I’ve read I don’t expect the ruling to hold up under scrutiny on appeal. As you point out, this isn’t just about Apple.

                I’m hopeful this incident will compel Congress and the next administration to address not only the exorbitantly high US corporate tax rates but also the issue of US multinationals being compelled to keep something in the range of $2 trillion in foreign-sourced income from being repatriated to the United States because of the exorbitantly high US corporate tax rates. As you mentioned earlier, the two issues can be addressed separately. A repatriation tax holiday would be a first step in the process of US corporate tax reform.

                1
                September 4, 2016
    • Warren Merrill said:
      You are correct pointing out that Apple has booked deferred taxes on foreign profits, but only a portion of them. If you’ll look at Apple’s 10K from last year you will find Apple specifically mentioning that they have $90B+ in undistributed foreign earnings with of course no deferred tax obligation booked, the “permanently invested outside the US” you mentioned. Apple estimates that if they were to “someday” repatriate that money they would realize an additional $30B tax expense at current rates. Apple of course has zero plans to “bring that money home”, never making any allowance whatsoever for taxes on those. profits.

      With that said Apple could of course change their mind on what to do with that money depending on the outcome of the EU situation, but that is years out.

      0
      September 4, 2016
      • Robert Paul Leitao said:
        Warren:

        As of the end of the June quarter, Apple had about $25 billion in deferred tax liabilities on the balance sheet. I believe this sum substantially or wholly represents the amount due to the US Treasury if all foreign-sourced earnings not permanently dedicated to use outside the US was repatriated.

        In my view, the EU’s ruling Apple must pay retroactive taxes to Ireland is nothing more than a money grab that won’t hold up under greater scrutiny on appeal nor pressure from the US.

        0
        September 4, 2016
        • Warren Merrill said:
          I agree that Apple has identified a certain amount of their foreign earnings as possibly being repatriated at some point. What I was pointing out is that does not apply to approx $90B of those funds primarily registered by the Irish subsidiaries. The EU may be right in part at least that Apple has no intention of ever paying corporate taxes on a substantial part of their cash to the US or anyone else.

          From the most recent 10K:
          “The foreign provision for income taxes is based on foreign pre-tax earnings of $47.6 billion, $33.6 billion and $30.5 billion in 2015, 2014 and 2013, respectively. The Company’s consolidated financial statements provide for any related tax liability on undistributed earnings that the Company does not intend to be indefinitely reinvested outside the U.S. Substantially all of the Company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the U.S. were generated by subsidiaries organized in Ireland, which has a statutory tax rate of 12.5%. As of September 26, 2015, U.S. income taxes have not been provided on a cumulative total of $91.5 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be $30.0 billion.”

          0
          September 4, 2016
          • Robert Paul Leitao said:
            Warren:

            I understand your point. I see two different issues. The first issue is Apple’s decisions to keep income generated outside the US offshore due to the remittance of taxes required at very high US corporate tax rates upon repatriation. The other issue is the ruling by the EU mandating Ireland to apply retroactively and collect $14.50 billion in taxes from Apple. The two issues due not wholly overlap. Whether or not Apple pays US taxes on the income generated outside the US that has been permanently dedicated to use outside the US in no way changes Apple’s underlying argument against the retroactive tax levy requested by the EU nor in any way in my understanding of the issue should this factor into the EU’s deliberations on the matter.

            Just because Apple doesn’t pay US corporate income taxes on foreign-sourced income permanently dedicated for use outside the US doesn’t in any way justify the EU’s demand for more tax dollars. At least that’s my understanding of the issue.

            1
            September 4, 2016
  3. John Kirk said:
    PED, I would like to tweet out a screen shot of your bottom line and link back here, but I don’t want to do it without your permission.

    Let me know if that’s okay. Thanks.

    P.S. Of course, I want to tweet that portion of your article, because I think it so succinctly explains the differences in Apple’s and the EU’s point of view.

    0
    September 4, 2016
  4. Gregg Thurman said:
    I’m not going to go into detail why the world’s tax system is so f*cked up, let me just say that taxes based on income (production), whether they be personal or corporate, are inherent;y complex, inefficient and chock full of jurisdictional inequities, as we are seeing now.

    If I did go into detail this response would be several pages long.

    Taxing consumption (sales tax, value added tax) would eliminate most, if not all, complexity, inefficiencies and inequalities, and generate tax revenue in the jurisdiction where the transaction occurred.

    https://fairtax.org

    1
    September 4, 2016
  5. Fred Stein said:
    I like the way this is framed.We need to reform our tax code, which created a $2T (Apple has 10%) wad of cash. Fix our tax code and EU issue goes away for Apple and others. The repatriated $$ would be used to fund our government, to make US investments, and to pay dividends to shareholders, who would, in turn, pay a bit more to the IRS.

    0
    September 4, 2016

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