Tomorrow there will be two Senate hearings on taxation. The first is the Senate Finance Committee hearing on IRS inappropriate targeting of conservative groups applying for 501(c)(4) status. Although discrimination based on political belief is a serious problem, qualification for 501(c)(4) status is a relatively trivial tax matter. Donors to 501(c)(4)s are not eligible for charitable contributions. The only potentially significant benefit is tax exemption on income, and most of these groups generate little income after paying their expenses. The star witness will there be ousted IRS commissioner Steve Miller who is being unfairly badgered by Republicans.
The second is the Senate Permanent Subcommittee on Investigation’s hearing on multinationals’ cross-border profit shifting. In contrast to the Senate Finance Committee hearing, the tax policy issues that are subject of this hearing are enormous. Of all the big-money issues for corporations and the IRS, this is the largest. The committee’s star witness will be Apple CEO Tim Cook. This is the hearing I will be watching.
If things worked the way they should it would be the Senate Finance Committee holding hearings on profit shifting and the Subcommittee on Investigations would be examining IRS misbehavior. But PSI Chairman Sen. Carl Levin (D-Mich.) has been investigating tax avoidance and evasion long before the issue was getting the attention that is now common. In contrast, Finance Chairman Max Baucus (D-Mont.) has never shown any strong interest in curtailing profit shifting.
The Senate Finance hearing is likely to be a pointless repeat of the grilling Miller got in front of the Ways and Means Committee Friday. In contrast, there is likely to be news at the PSI hearing. First of all, because the committee has the powers of subpoena, we are likely to learn details of Apple’s tax planning that otherwise would be hidden from the public. Second, Mr. Cook has already revealed to the press (here and here) that he will make a new proposal to reform U.S. international taxation.
That proposal is likely to be some sort of revised version of the temporary “one-time” “tax holiday” Congress granted multinationals in 2004. Under such a proposal multinationals--who now are not bringing their foreign profits back to the United States because they would be required to up to 35 percent--would be able to bring profits home at a reduced rate if they put the funds to good use in the United States. I am guessing Cook will be proposing something like this with a holiday rate of 10 percent. It is not a terrible idea, and hopefully Cook and other multinationals will not oversell its benefits like they did the last time.
This is a very big deal for multinationals who want access to their enormous stockpiles of foreign cash. But it is not anything close to the overhaul of US rules that we now need (irrespective of whether you think rules should be tightened, as the Obama Administration believes, or they should be loosened, as business is advocated). It is just a Band-Aid on a tax system that needs a complete overhaul and if it stalls progress on real reform, it could be doing more harm than good. But we shall see.
Cook also is likely to say the following things: (1) Apple pays a lot of tax. (Yes, because it is super profitable. So what?) (2) Apple creates a lot jobs in America (No doubt.) (3) Apple does nothing illegal. (That’s never been a question.) (4) Apple did nothing wrong when it borrowed $17 billion last month instead of bringing foreign cash home and paying U.S. tax. (I agree.) (5) Apple does not shift profits out of the United States.
This last assertion, assuming he makes it, I believe is absolutely wrong and unlike the other peripheral statements it gets to the heart of the matter. Multinationals with lots of intellectual property (and who has more than Apple?) can legally shift profit out of the United States by transferring ownership of this intellectual property to “principal” companies in tax havens and then shift even more profit out of the United States by having the haven subsidiary pay Apple US a low price for that shifted IP. Apple is not evil. Apple has done nothing wrong. But in what has become common practice among US multinationals it has taken advantage of loopholes in US law to save billions in taxes through careful and oftentimes elaborate tax planning.
Another thing worth noting is that Cook is appearing instead of Apple’s director of taxes. To me this is an indication of how important it is for a company that sells directly to consumers to not have its reputation damaged with bad publicity stemming allegation that it is not paying its fair share of taxes. After public disclosure suggesting Starbucks did not pay its fair share in the United Kingdom, the coffee company made voluntary tax payments of £20 million pounds to the UK Treasury. Mr. Cook wants to keep his tax bill low. He wants to bring foreign cash home so that Apple can buy U.S. companies, buy back its own stock, and pay dividends. But most of all, he doesn’t want Apple’s loyal customers to start thinking Apple is an uncool corporate citizen.