The magic formula: How Apple and other major U.S. firms skip out on tax

The massive back-tax bill the European Commission slapped on Apple has put a spotlight on $2.4 trillion in untaxed earnings parked offshore by U.S. companies, a tempting target for governments seeking to strengthen their finances. While Washington lays claim to rights to tax the money, critics say it represents profits transferred out of other countries' jurisdictions by accounting tricks. They say that the companies hold the money in no-tax or low-tax havens like Ireland to ensure it stays out of the reach of fiscal authorities, Paul Handley reports for AFP.

But industrial and tech titans like Apple, Microsoft, Google, General Electric and Pfizer, also say they are waiting for Washington to cut corporate tax rates to reasonable levels before they repatriate the funds.

On Tuesday, August 30, the European Commission ruled that Ireland's deep tax breaks for Apple were “illegal” under EU rules and told the company to pay $14.5 billion in back taxes. Apple has since said it will fight the bill, and the U.S. Treasury accused EU authorities of breaking with international practice and assessing taxes retroactively. But the Treasury also made clear that Washington believes it has the right to tax the cash hoards that U.S. companies hold offshore, and that the European Commission was overextending.

"It reflects an attempt to reach into the US tax base to tax income that ought to be taxed in the United States," said Treasury Secretary Jacob Lew.

U.S. tax law allows companies to retain earnings offshore with taxes put off until the money is repatriated, and the sum out there has climbed quickly over the past decade, Handley reports. According to a July report by Boston-based Audit Analytics, the top 1,000 U.S. companies held $2.43 trillion in untaxed earnings offshore at the end of last year, double that of 2008 and up $130 billion since 2014. Companies say they want to see a lower U.S. tax rate before they bring it back; currently the top rate is 35 percent.

In 2004, Washington offered a tax holiday, cutting the rate on the repatriated funds to 5.25 percent, and attracted back some $300 billion. The goal was for the money to be invested in job-creating activities. But later studies showed most of the repatriated profits went to shareholders and corporate executives.

"Unfortunately, there is no evidence that it increased U.S. investment or jobs, and it cost taxpayers billions," assistant Treasury secretary Michael Mundaca wrote in 2011. Now the companies say they are ready to pay taxes on the money in the United States, just not at the current rate the U.S. government would assess.

"The U.S. should reform its tax system," Jenifer McCloskey, director of government affairs at the Information Technology Industry Council, a powerful tech industry lobby, told AFP. "On paper that money is owed to the United States at a certain rate of taxation. We have been working for years now to try and find a way forward with tax reform that rationalizes our system."

But with the piles of profits mounting offshore, tax activists say the companies are simply holding out for another tax holiday, and that the rules on taxation need to be reformed.

"Apple has systematically organized its Irish affairs in a way designed solely for tax avoidance," said Matt Gardner of the Institute on Taxation and Economic Policy. He said U.S. regulators "should take a page from the European Commission's book and crack down on rampant corporate tax avoidance."

Howard Gleckman of the Tax Policy Center said the Europeans are acting because the erosion of the global taxation system by multinational company activities has essentially gone too far.

"Now the ground may be crumbling from under that system," he said after the Apple ruling. "By forcing member countries to collect taxes from those US-based firms, the EU is trying to break the cycle of tax competition that has largely benefited those US multinationals. In effect, it is creating a new minimum tax for multinationals."