By Richard Rubin
WASHINGTON -- American politicians have spent years salivating
over U.S. companies' stockpile of untaxed foreign profits, now more
than $2 trillion and growing.
This week, Europe got to that money pot first.
The European Commission's ruling that Apple Inc. must repay
$14.5 billion to Ireland represents a major threat to a bipartisan
U.S. tax agreement that has long seemed plausible but always sat
just out of reach.
U.S. lawmakers said Tuesday they hoped the move in Europe would
accelerate potential compromises in Congress, including a one-time
tax to free up otherwise inaccessible cash so companies could
invest in domestic projects and get money to shareholders. Under
that plan, the U.S. could use the windfall to rebuild roads and
bridges, cut tax rates or both.
But bitter partisan divides over how heavily the U.S. should tax
its own companies abroad continue to stymie efforts to revamp the
corporate tax code, barring a long-elusive breakthrough.
The commission said Apple used Irish rulings to pay an
artificially low tax rate on money that it earned all over
Europe.
To the U.S. Treasury and lawmakers in Congress, European
regulators represent a threat in part because companies could get
U.S. tax credits for increased payments abroad. The U.S. is trying
to protect its claim to the cash even though they haven't figured
out how to tax it yet.
U.S. companies have been accumulating foreign profits outside
the reach of the Internal Revenue Service because of the way the
U.S. tax system works. Companies headquartered in the U.S. owe the
full 35% U.S. corporate tax rate on the profits they earn around
the world. But they can get foreign tax credits for payments to
non-U.S. governments, and they don't have to pay the residual U.S.
tax until they bring the money home.
For example, consider a U.S. company that makes $1 billion in
the U.K., which has a 20% tax rate. The company would pay $200
million to the U.K., and it would owe another $150 million to the
U.S. if it repatriated the profits.
"Any ruling that is inconsistent with international tax
standards and harms American business abroad with retroactive
measures is inherently unfair and encroaches on U.S. tax
jurisdiction," said Sen. Orrin Hatch (R, Utah), chairman of the
Senate Finance Committee.
Sen. Charles Schumer of New York, the likely next Democratic
leader, called the EU's actions a "cheap money grab" that targets
U.S. businesses. Rep. Kevin Brady (R, Texas), chairman of the House
Ways and Means Committee, called the decision a "predatory and
naked tax grab" that highlights the need for major U.S. tax
changes.
"The EU is unfairly undermining our ability to compete
economically in Europe while grabbing tax revenues that should go
toward investment here in the United States," Mr. Schumer said.
"This is yet another example of why we need to reform the
international tax system to ensure these revenues come home."
That concern, however, doesn't mean U.S. policy makers will be
able to agree on what to do or that anything they do will calm down
the cross-border tension revealed by the Apple investigation.
"Superficially, it could be a motivation if people are concerned
about losing the opportunity to tax some of this deferred income,"
said Warren Payne, an adviser at Mayer Brown LLP and former
Republican policy director at the House Ways and Means Committee.
"But tax reform on its own is not going to protect U.S. companies
from this kind of behavior" by European regulators.
The current tax system encourages companies to find as low a
foreign tax rate as possible, book as much profit as possible
outside the U.S. and leave the money overseas. That is exactly what
they've done, and it has been particularly easy for technology and
pharmaceutical companies to move intellectual property outside the
U.S. and accumulate profits there.
Apple, for example, had $215 billion in cash and other liquid
investments outside the country as of June, up from $187 billion
last September. The company says it would pay a 33% tax rate on
part of that income if it brought the money home, suggesting it had
paid a single-digit tax rate abroad. CEO Tim Cook told The
Washington Post recently that the company won't bring the money
back "until there's a fair rate."
Until Apple changed its structure in 2015, the company used
subsidiaries that slid neatly between U.S. and Irish tax laws.
According to a 2013 U.S. Senate investigation, Ireland saw the
companies as resident in the U.S., because they were managed and
controlled from California. But the U.S. considered them foreign
entities not subject to immediate U.S. taxes, because they were
officially registered in Ireland.
"The way that the commission presented this decision in its
press release is fascinating," said Lilian Faulhaber, a tax law
professor at Georgetown University in Washington. "It calls out the
United States for not requiring Apple to pay more taxes. That is a
pretty targeted statement."
The U.S. Treasury has warned that the EU's investigation could
have a direct impact on U.S. revenue, because any taxes Ireland
collects could be credited against Apple's U.S. tax bill.
"At its root, the Commission's case is not about how much Apple
pays in taxes," Mr. Cook wrote in a letter to the company's
customers on Tuesday. "It is about which government collects the
money."
European governments should get the first chance to tax those
profits, and the U.S. is effectively trying to jump in line, said
Ed Kleinbard, former chief of staff of the congressional Joint
Committee on Taxation.
"The fact is that this revenue that's at stake here, this pot of
gold that's at stake, unquestionably arose in Europe in respect of
European activities," he said.
The U.S., however, hasn't been able to agree on what to do about
the stockpiled profits or about the foreign tax system going
forward. There is a general agreement on a one-time tax on those
profits as part of a transition to a revamped international tax
system.
But there's disagreement on what that tax rate should be, how
the money should be used, what the new system should look like, and
what other tax policy changes should accompany it.
Democratic presidential candidate Hillary Clinton has talked
about using business tax changes to pay for infrastructure
investment, but she hasn't specified how that should work.
Republican presidential candidate Donald Trump has proposed a 10%
tax on the accumulated profits.
House Republicans envision a transformed tax system that bases
corporate taxes on the location of sales, which would favor U.S.
exporters, tax imports and likely cause even more international
controversy.
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
August 30, 2016 13:15 ET (17:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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