In 1961, the six-year-old Steve Jobs probably didn’t notice U.S. President John Kennedy’s criticism of American companies’ use of foreign tax shelters. Corporate taxation had slid down the public agenda by the time the founder of Apple was achieving success, and it stayed that way for the rest of his life. But now it’s back, and Tim Cook, Jobs’ successor as Apple chief executive, has a public relations problem.
When Cook testifies on taxes before a U.S. Senate committee on Tuesday, his case will be reasonable. The company’s reported tax rate, which includes deferred taxes, was 25 percent in 2012. That is respectably high. Nor is the 17 percent cash rate (which was paid) shockingly low. Apple’s controversial Irish subsidiaries, which filed no returns despite receiving much of the company’s profit, were perfectly legal. The company has an obligation to its shareholders and customers to minimise tax payments.
Still, the world’s noses have become more sensitive to baroque tax plans, and Apple’s practices now fail the smell test. For example, it just doesn’t seem right that the Apple Operations International subsidiary did not even file a tax return, despite collecting 30 percent of global profit. It was able to take advantage of an ambiguous not-Irish, not-American legal status.
For strange and strained tax practices to work, companies need co-operative governments. The Senate committee’s memo on Apple paints of a picture of Ireland as all too eager to please, even reducing an already low statutory rate for the Apple subsidiaries which did file returns. The U.S. tax authorities come off as reluctant to test their powers.
Cook will call for tax simplification in the United States. That’s appropriate, but for global companies, something more ambitious is called for: an international deal on corporate taxes.
It could work. Cross-border tax shelters for individuals are already under pressure, and the Apple hearings are the latest sign that the public dislikes corporate dodges. The next step is an agreement to tax profit where it is actually, not legally, earned, and to limit tax lures for businesses. Free trade has been a global boon. Fair taxes would be also.