Don’t Use Apple Tax Law Defense Please

Apple Inc. is right to defend itself against the European Commission’s $14.5 billion fine for alleged tax underpayment in Ireland but its defense strategy and explanations should not be adopted by other high-tech companies that may come under regulatory scrutiny. The company is ignoring rising consumer, regulatory and political concerns that many high tech enterprises especially are using legal loopholes to avoid paying what they see as a “fair share” of taxes.

Recent statements from Apple CEO Timothy Cook on corporate taxes in Europe and in the United States won’t ease these concerns. Cook wrote a letter this week to the “Apple Community in Europe” vigorously asserting his belief that the company would be exonerated on appeal. His main contention was that because Apple conducts “nearly” all of its research and development in the United States, the “vast majority of our profits are taxed in the United States.” The EC’s action, he claims, represents an overreach by an organization that is more concern about “which government collects the money” rather than “about how much Apple pays in taxes.”

Cook should read the EC’s statement outlining its case against Apple again. It concluded that Ireland gave “illegal state aid” to Apple, adding the company’s “effective tax rate in 2011 was 0.05 percent. To put that in perspective, it means that for every million euros in profit, it paid just 500 euros in tax.”

Is Apple disputing these numbers or will its defense rest primarily on the concept that what it paid in taxes was approved by the Irish government? The problem with Apple’s defense is that even the profits it has recognized from foreign operations are also being shielded from taxation in the United States until repatriated to the headquarter nation. Cook has insisted he won’t do this until the U.S. Congress changed tax laws to reduce what companies must pay on profits earned in foreign countries.

“The money that’s in Ireland … is money that is subject to U.S. taxes [and] the tax law right now says we can keep that in Ireland or we can bring it back. And when we bring it back, we will pay 35 percent Federal tax and then a weighted average across the states that we’re in, which is about 5 percent, so think of it as 40 percent,” Cook said in a recent interview with the Washington Post. “We’ve said we’re not going to bring it back until there’s a fair rate. There’s no debate about it. Is that legal to do or not legal to do? It is legal to do.”

In other words, Apple believes in being compliant with the letter of the law but reserves the rights to defy the spirit of the law. Cook is entitled to preach this philosophy but it won’t win him and his company friends in many places. In fact, that attitude is already breeding resentments against the company with economists and many political leaders. It also explains the European Commission’s hardnosed approach.

Other high-tech companies should rethink their strategy on enterprise taxation and not follow Apple down this sordid path. Sentiments are changing all over the world about companies like Apple that deliberately park billions of dollars in tax-free zones, waiting for a more “favorable” environment to repatriate funds. It may not happen for several more years but it is clear that many countries are systematically closing the loopholes that encourage this kind of behavior.

In the U.S., lawmakers have shown they lack the political will to rewrite corporate tax laws that everyone believe are outdated and riddled with loopholes. Other nations have stepped up, however and are charging ahead with legislations and regulatory rulings that will remove the shields companies use to push out tax payments. Consumers are also raising questions about these corporate practices.

Apple may not have noticed this shift yet but it will become a tidal wave that will force the company and others like it to step completely out of the tax shadows.

Bolaji Ojo is editor-in-chief and publisher of EPSNews. The views expressed in this blog are those of the author alone who promises to base his sometimes biased, possibly ignorant, occasionally irrelevant but absolutely stimulating thoughts on the subjective interpretation of verifiable facts alone. Any comments should be sent to the author at bolaji.ojo@epsnewsonline.com.