Apple and the United
States are crying foul over the ruling in Europe that Apple received illegal
tax breaks from Ireland and must hand over 13 billion euros ($14.5 billion), a
record tax penalty in Europe.
But Apple and the United States have only themselves
to blame for the situation.
Apple has engaged in increasingly aggressive
tax avoidance for at least a decade, including stashing some $100
billion in Ireland without paying taxes on much of it anywhere in the world,
according to a Senate investigation in 2013. In a display of arrogance, the company seemed to
believe that its arrangements in a known tax haven like Ireland would never be
deemed illegal — even as European regulators cracked down in similar cases
against such multinational corporations as Starbucks, Amazon, Fiat and the
German chemical giant BASF.
Congress, for
its part, has sat idly by as American corporations have indulged in
increasingly intricate forms of tax avoidance made possible by the interplay of
an outmoded corporate tax code and modern
globalized finance. The biggest tax dodge in need of reform involves deferral,
in which American companies can defer paying taxes on foreign-held profits
until those sums are repatriated.
Initially, deferral was a convenience for
multinationals, as they sought investment opportunities abroad.
Today, it is
the taproot of global tax avoidance. Financial engineering has let American
companies shift profits into foreign accounts, while they lobby Congress for
tax-rate cuts in exchange for repatriating the money. Currently, there is some
$2 trillion in corporate profits in offshore tax-deferred accounts; besides
Apple, Microsoft, Google, Cisco and Oracle also have large stashes. Apple is
one of nearly two dozen major corporations pushing Congress for a “tax
holiday,” which would let companies bring back foreign-held money over the
course of a year at a discounted tax rate, rather than the current rate, 35
percent.
Before the European ruling on Tuesday, the debate over
a tax holiday had pitted Republicans, who have generally favored the idea,
against Democrats, who have viewed it as an unjustified reward for tax
avoidance. The Democrats have history on their side. A tax holiday in 2005
lowered the corporate rate to 5.25 percent, enticing corporations to repatriate
some $300 billion. It was billed as a way to create jobs and increase
investment, but the money was used mostly for dividend payments, share buybacks
(which tend to raise executive pay) and severance for laid-off employees. Worse, the tax
holiday inspired multinationals to stash as much money abroad as they possibly
could in anticipation of another holiday.
The European ruling,
however, could sharply alter the terms of the congressional debate. Republicans
and Democrats alike have always assumed that foreign-held profits would one day
be repatriated. The big question was the rate at which they would ultimately be
taxed. Similarly, the Treasury assumes that deferred foreign profits will one
day be taxed when it projects future revenues — an important measure of the
nation’s fiscal health.
But the money won’t be repatriated and taxed under
American law if Europeans, in the course of enforcing their own laws against
tax havens, get their hands on it first. And that, in a nutshell, is why
members of Congress and Treasury officials are so upset about the Apple ruling.
They understand, correctly, that tax-law enforcement in Europe could reduce the
sums they expect to collect taxes on someday. What they don’t understand, or
aren’t saying, is that they brought the problem on themselves.
The way forward is not to declare a tax war with
Europe. It is for Congress to agree on a way to tax foreign-held corporate
profits. President Obama put forth a reasonable approach in 2015, when he
proposed a mandatory 14 percent tax on multinationals’ current offshore profits
— whether they are repatriated or not — and, thereafter, a new minimum tax rate
of 19 percent on profits moved offshore. An even better approach would be to
simply end indefinite corporate tax deferral, imposing American taxes on
profits when they are made.
Republicans rejected Mr. Obama’s proposal in 2015, and
there is no chance that lawmakers will engage in such a debate so close to the
election. But the next president and Congress will need to act to ensure that
at long last, American corporations pay their fair share in taxes.
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