Americans Are Paying Apple Millions to Shelter Overseas Profits
Americans Are Paying Apple Millions to Shelter Overseas
Profits
by Andrea Wong December 7, 2016
Over the years, Apple Inc. has become the poster child
for U.S. multinationals accused of sheltering overseas profits to avoid the
IRS. What’s gone largely unnoticed is that it’s been paid more than half a
billion dollars by the U.S. government to do just that.
Taking advantage of an exemption tucked into America’s
Byzantine tax code, Apple stashed much of its foreign earnings—tax-free—right
here in the U.S., in part by purchasing government bonds, according to people
with direct knowledge of the matter. In return, the Treasury Department paid
Apple at least $600 million and possibly much more over the past five years in
the form of interest, a Bloomberg review of its regulatory filings shows.
The untold story of Apple and its taxes wends its way
from Cork, Ireland, to New York and then Reno, Nevada. But according to tax
experts interviewed by Bloomberg News, the maker of iPhones is hardly unique.
Many of the biggest U.S. multinationals have seized on the same exemption,
which lets them avoid or delay repatriation taxes by buying Treasuries with their
overseas cash. (The top 10 alone hold over $100 billion of the bonds.) That, in
effect, enables the companies to turn billions of dollars in potential tax
liabilities into millions of dollars in taxpayer subsidies—all while they
publicly bemoan the sky-high taxes that make it impossible for them to bring
the money home.
From the government’s standpoint, “it’s as if you are
paying someone to borrow a bike that’s actually yours to begin with,” said
Reuven Avi-Yonah, a professor who specializes in corporate and international
taxation at the University of Michigan Law School. “The whole thing is full of
uneasy compromises in order to dance around the reality that most of the money
isn’t actually offshore—it’s really here.”
Blurred Lines
The maneuver is perfectly legal and no one is suggesting
that it’s a big money maker for Apple or anyone else at today’s low interest
rates. If the companies sold the bonds, the cash would still be considered
foreign earnings and subject to eventual taxation. What’s more, the interest
they earn from buying U.S. debt—which helps finance government spending—is
taxable.
But if nothing else, the purchases reflect how the
distinction between what’s foreign and what’s not for multinationals often
exists only in the world of accounting.
In response to requests for comment, Apple spokesman Josh
Rosenstock referred Bloomberg to the company’s annual financial statements
filed with the Securities and Exchange Commission, without elaborating further.
In the most recent filing, Apple said it paid $10.4 billion in worldwide income
taxes for its last fiscal year.
The Internal Revenue Service declined to comment, as did
the Treasury Department, which oversees the U.S. government tax agency.
Tax Exemption
The issue of what to do with U.S. companies’ overseas
earnings—which has vexed lawmakers for years—has become more urgent with the
election of Donald Trump. As a candidate, Trump promised to get companies to
bring back some of the $2.6 trillion they hold internationally by enacting a
one-time repatriation tax of 10 percent (from the 35 percent rate).
The current exemption, spelled out in Section 956(c)(2)
of the U.S. tax code, has been in place since 1962. But over the past two
decades, global companies (particularly in technology and pharmaceuticals)
began to use it aggressively as one way to reduce the tax bill on their
burgeoning overseas profits. It states companies can repatriate income without
paying a penny in taxes—as long as it is used to buy Treasuries or other U.S.
securities like stocks and corporate bonds.
If a company decides to use the money for any other
purpose, like capital spending, it would still be subject to a 35 percent tax.
And the money reverts back to accounts designated for foreign cash if the
securities are sold. (Part of the reason companies still earmark the cash as
“held overseas” for accounting purposes.)
‘Honor System’
“It’s an honor system, a self-assessment system,” said J.
Richard Harvey, a former top tax official at the IRS and Treasury Department,
who now teaches law at Villanova University. “Many companies like Apple are
very aggressive in taking advantage of arguably, loopholes in the law.”
It’s impossible to know precisely how much taxpayer money
has been paid out to companies that have parked their cash in U.S. government
debt, simply because the multinationals aren’t required to provide detailed
breakdowns. However, based on a Bloomberg review of annual financial statements
filed with the SEC, conservative estimates suggest the 10 U.S. companies with
the most reported cash abroad have received at least $1.4 billion in interest
payments over the past five years.
Taypayer Contributions
Treasury has paid at least $1.4 billion in interest to
big multinationals since 2012
Estimated figures. See methodology below.
Apple, which has more than doubled those holdings of
Treasuries to $42 billion since 2012, received the most in interest payments
over that time, the data show. In the same span, the Treasury has paid Cisco
Systems Inc. roughly $430 million, while Alphabet Inc. (Google’s parent) has
gotten about $160 million. (The tally excludes Microsoft Corp., Qualcomm Inc.,
and Coca-Cola Co., which are in the top 10 but don’t provide a detailed
accounting of their investments.)
Ballooning Interest
The companies in the Bloomberg review, which also include
Johnson & Johnson, Amgen Inc., Gilead Science Inc. and Oracle Corp., either
declined to comment or didn’t respond to requests seeking comment.
The interest payments have ballooned as they’ve amassed
more and more Treasuries with their overseas profits. Together, these 10
multinationals, which control almost 20 percent of all the cash held abroad by
American corporations, have boosted their investments in government bonds to
$113 billion from $67 billion over the past five years, data compiled by
Bloomberg show.
Blaming U.S. companies for following the tax code,
however complex or flawed, is misguided, says Richard Lane, a senior analyst at
Moody’s Investors Service.
“If these companies don’t need the money in the U.S.,
there’s no incentive to give Uncle Sam” that money in taxes, he said. “What
sane chief financial officer, who’s doing their fiduciary duties to
shareholders, would pay money to some entity for no good reason? If there’s a
moral issue, I’m not sure whether there’s immorality to that.”
Nevertheless, the purchases shed light on how
multinationals have blurred the definitions of onshore and offshore earnings.
In Apple’s case, more than 90 percent of its $238 billion
cash hoard is considered “overseas” in its accounting statements. Most of it
belongs to the Cupertino, California-based company’s Ireland units. But like many
multinationals, Apple’s cash sits in custodial accounts with U.S.-based banks
such as JPMorgan Chase & Co. and State Street Corp., said people with
direct knowledge of the matter, who asked not to be identified because they’re
not authorized to speak on the issue.
Apple typically directs Wall Street bond dealers and big
money managers like BlackRock Inc. and Pimco to buy Treasuries at debt auctions
and in the secondary market on behalf of its Irish subsidiaries, all from a
nondescript, three-story building in Reno, Nevada—a state with no corporate
taxes, the people said. That’s where its internal investment firm, Braeburn
Capital, is housed. Apple established the unit in 2005 to manage its cash and
short-term investments.
Tax Haven
As for Ireland, Apple isn’t alone. Nine of the 10 U.S.
companies with the most cash abroad have foreign subsidiaries there.
Over the years, lax Irish regulations have encouraged
multinationals to pursue aggressive accounting practices that enabled them to
shift much of their profits to those subsidiaries and minimize U.S. tax
liabilities, according to tax experts.
In one of the more notable examples that’s drawn
particular scrutiny, companies will book a disproportionate amount of revenue
as “offshore” by claiming the underlying technologies are owned by their Irish
units—even if the intellectual property originated in the U.S.
Apple went even further. According to a 2013 report by
the U.S. Senate Permanent Subcommittee on Investigations, it exploited gaps in
U.S. and Irish laws so that it didn’t have a tax home anywhere.
The company is already in hot water with the European
Union. Regulators ordered Apple to pay $14.5 billion in back taxes in August
after concluding it paid an effective tax rate of 0.005 percent in 2014 because
of preferential Irish treatment. Last week, Apple called the EU decision
“seriously flawed.”
Fundamental Disagreement
In November, Ireland filed an appeal against the ruling
after repeatedly saying the country “fundamentally disagrees” with the
analysis.
“They don’t want to pay taxes, but they’re using the U.S.
financial system to benefit from our laws, security, productivity and all the
rest of it,” said Elise Bean, the former chief counsel who led the Senate probe
into Apple’s tax practices. “They’re using the money to buy U.S. Treasuries,
which is so ironic.”
Using Irish subsidiaries to funnel all that cash into
Treasuries may help explain a bond-market curiosity that’s emerged in recent
years: how Ireland, a nation of less than five million, managed to amass $271
billion of U.S. government bonds, based on data compiled by the Treasury, and
become America’s largest foreign creditor, after China and Japan.
Whatever the case, the need to address companies’ untaxed
profits may be one of the few things Republicans and Democrats can agree on.
During the campaign, both Trump and opponent Hillary Clinton proposed one-time
tax breaks on overseas earnings (a so-called repatriation tax holiday) to help
fund competing infrastructure plans.
‘Really Foolish’
Yet absent a wholesale tax overhaul to close the
repatriation loophole, such one-offs are Band-Aids that will only make things
worse over time, according to H. David Rosenbloom, an attorney at Caplin &
Drysdale and the director of the international tax program at New York
University School of Law.
He pointed to a similar 2004 tax holiday under President
George W. Bush, which ultimately led companies to accumulate more profits
abroad after it expired. Almost all the repatriated cash during that time was
used for shareholder rewards and executive bonuses—rather than investment and
hiring in the U.S. that many companies promised.
Last time, “it just encouraged companies to send more
money abroad and wait for the next amnesty,” he said. “It would be really
foolish to do.”
With assistance from Yun Li and David Kocieniewski
Graphics by: Blacki Migliozzi and Christopher Cannon
Edited by: Michael Tsang
Source: U.S. Securities and Exchange Commission,
Bloomberg reporting
Methodology: Based on conversations with people with
direct knowledge of the matter, estimates for the interest paid by the top 10
multinationals were made by taking the amount of Treasuries they held with
their overseas cash during each fiscal year, and then taking the average
interest rate on two-year U.S. notes sold at auction in each of those periods.
The calculations assume the securities are held to maturity. The data exclude
Microsoft, Qualcomm and Coca-Cola, which are among the top 10, but don’t
provide a detailed accounting of their investments. Oracle, which holds $48
billion in cash abroad, has minimal investments in U.S. government debt.
Comments
Post a Comment