Apple is a major part of why the United States is the world's leading innovator on new technologies, particularly those involving telecommunications and computers. The company has over 66,000 domestic employees, and a large percentage of its customers are here -- at least 40 percent, according to its latest annual report. But Apple also aggressively avoids paying taxes in high-tax jurisdictions, particularly the United States. And Apple CEO Tim Cook's recent statements are misleading about why.
In a wide-ranging interview with The Washington Post, Cook made a variety of claims about Apple's tax position -- some more true than others. Regarding the location of Apple's profits and overseas cash, Cook said, "We didn’t look for a tax haven or something to put it somewhere." He lambasted the U.S. corporate tax rate as too high and said that Apple wanted to repatriate its overseas profits, but "we’re not going to bring it back until there’s a fair rate." He emphasized repeatedly that everything that Apple does is legal.
Cook is right about that and the other numbers that he cited: Apple's tax strategies involving Ireland and other jurisdictions are perfectly legal. U.S. tax law does allow companies to stash offshore profits in foreign jurisdictions without paying any taxes on those funds. Apple is a master at this, keeping well over $200 billion in cash overseas. And the U.S. statutory corporate tax rate, combined with state and local corporate taxes, is about 39.6 percent. On paper, that is significantly higher than Ireland's 12.5 percent rate, or the OECD average. If a company can avoid paying 40 percent in taxes, then it probably will.
But it's important to note how Apple avoids U.S. taxes. Cook says that Apple has cash overseas because it does two-thirds of its business overseas. Sounds good, right? However, he neglects to mention that Apple books almost two-thirds of its profits in Ireland, not in the foreign countries where it has a large number of customers, such as China, the United Kingdom, Germany, or France. Only 3.5 percent of Apple's workers are in Ireland. The country has only 4.5 million people. Even if every Irish citizen had an iPhone (and latest estimates suggest only about 300,000 of them do), that number would still be dwarfed by the 110 million iPhones in the United States and the 131 million in China.
So if Apple has few customers and few employees in Ireland, why does it claim such a high percentage of its profits there? It's because of Ireland's 12.5 percent corporate rate and its permissive transfer pricing practices. In other words, Ireland is a corporate tax haven. And because Ireland is in the U.S. tax treaty network, it's the perfect location to use when shifting profits out of the United States. Apple did, in fact, go looking for a tax haven, and the “Celtic Tiger” was happy to oblige. The island nation's entire tax regime is designed to attract the type of shell companies that Apple uses to shift profits out of the United States to avoid paying its proper share of domestic taxes.
Cook, and other tech company CEOs, repeatedly stress in these types of interviews that everything Apple does is legal. And he's almost certainly right. Apple is taking advantage of poor IRS transfer pricing enforcement and how Treasury interprets U.S. transfer pricing law. But don't be fooled by his other insinuations. Apple's tax profile does not match up with economic reality. The company goes out of its way to locate its profits far from its true economic activity, and its only motivation for having such a high percentage of its profits and cash in Ireland is tax avoidance.