A Senate Subcommittee chaired by Senator Carl Levin heard from three panels of witnesses today on Apple Inc.’s corporate tax payments.
Democratic senators and some news stories are making it sound like some vast tax cheating has been going on, but that’s not what the hearing actually revealed. My sense in listening for four hours is that Apple pretty well does what many or most U.S. multinationals do to legally minimize their tax payments on foreign income. No one at the hearing said the company is doing anything illegal.
The basic story seems to be that Apple uses a holding company to gather all the after-tax profits from its sales outside of the Americas. Those sales may or may not be subject to tax in the countries where they occur, but that first layer of tax is up to those particular countries. The holding company is apparently not taxed as an entity in any country, but Apple says that its investment earnings are taxed in the U.S. to the Apple parent company.
The purpose of Apple’s corporate structure that the senators focused on seems to be to avoid double-taxation of its foreign earnings. That goal makes sense because the U.S. is one of few major countries left that does not have a territorial corporate tax system. Essentially, Apple and many other companies are trying to create a home-made territorial tax system so that they can remain competitive in foreign markets. Thus, they are doing the job that Congress should have done in reforming the U.S. international tax system.
Note that Apple holds such a big pile of cash abroad in a holding company mainly because the U.S. applies such a high corporate tax rate to profit repatriation. A major goal of tax reform is to slash America’s absurdly high corporate tax rate so that companies can bring home their piles of foreign cash and invest it here. With such a reform, the issue of whether or not investment earnings of foreign holding companies were taxed would become far less important.