Tax Analysts Blog

Tim Cook's Disingenuous Statements About Tax

Posted on Aug 17, 2016

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.

Read Comments (5)

Sangki KimAug 17, 2016

You said what Apple is doing is legal, but "Apple's tax profile does not match up with economic reality" Then how much should Apple pay for taxes to match up with its economic reality. 12.5% or 40%. Who knows exact answers for that? I would pay 12.5% if I were Apple and had a choice.

Edmund DantesAug 17, 2016

You've made an effective case that Apple has shifted all of its foreign profits to Ireland. I don't see that as a bad thing.

You've not made any case at all that Apple has shifted its domestic profits to Ireland. What is Apple's profit from its U.S. sales? Has that profit been shifted to Ireland also? How much U.S. tax do they pay on U.S. profits? That is the real test, which you haven't answered. Also, just for the sake of completeness, how many billions in employment taxes, property taxes, and sales taxes does Apple pay?

The real test of Cook's credibility is what Apple does after the corporate rate is lowered to 15% in a Trump Administration.

Mike55Aug 17, 2016

Apple Ireland is a byproduct of the old cost sharing regs, which were designed to be a tax incentive for U.S. tech/pharma MNCs. Blaming Apple for using the old cost sharing regs is beyond silly, the rough equivalent of blaming a company for putting too much business into a FSC or DISC. You should instead blame the many administrations that failed to act despite knowing full well how cost sharing worked, and possessing the power to put an end to it at will (no legislation needed; cost sharing was purely a regulatory creation).

The real irony is that Apples gets skewered for its Irish structure precisely because it's so very tame. As a general rule the more aggressive the tax planning the harder it is to understand, and the harder it is to understand the less public outcry. This is why the typical person views Apple and Pfizer as being the poster children for tax abuse, while Caterpillar's* tax planning appears to have quickly faded from public consciousness.

*Regardless of what you conclude regarding the legality of the Caterpillar spare parts structure, it's indisputably far more aggressive than what Apple and Pfizer are getting beat up about.

Bob GoulderAug 17, 2016

It will be interesting to see whether the advent of country-by-country reporting does anything to alter corporate profit-shifting in the years ahead. The cynic in me suspects that things won't change all that much. The BEPS project was largely motivated by this common desire -- reflected at the G-20 level -- to see a multinational's tax footprint match its economic footprint. Good luck with that. If society agrees that kind of convergence is the goal, then we shall require a completely different kind of corporate tax regime ... one where the tax base is determined according to destination principles (as opposed to residence principles, like PE concept in the tax treaty context.) BEPS wasn't willing to go that far.

Sadly, we might never know whether CbC reporting has made a meaningful difference because the documents will not be made public. Personally I think a dose of transparency would be useful in this area. Although it's conjecture, one assumes that CbC reporting would reveal large amounts of income being booked in low-tax jurisdictions (e.g., Ireland, the Caymans, Bermuda) while the corresponding activity that gave rise to those profits mostly occurs elsewhere (e.g., relatively high-tax market countries). The optics of that disconnect are mildly unsavory to some folks, so CEOs like Tim Cook are forced to emphasize how the process is "perfectly legal," and how the corporation is "fully compliant."

Transparency is the first step toward addressing the issue.

Mike55Aug 24, 2016

"If society agrees that kind of convergence is the goal, then we shall require a completely different kind of corporate tax regime ... one where the tax base is determined according to destination principles"

Yes! Thank you!

It is very, very frustrating when you work in corporate tax to hear MNCs get vilified because their profits aren't located the same place as their sales or employees. I'm actually not aware of a transfer pricing methodology that allows you to allocate profits based on sales or employee headcount. This means that even in the incredibly unlikely event an MNC's shareholders voted to pay more tax than is legally required (economic patriotism maybe?), the tax department would still be hard pressed to satisfy those who want profit allocation to match their version of economic reality.

For many industries transfer pricing is an exercise in fiction writing. This is not because these industries are full of evil MNCs intent on destroying the Fisc, but because IP drives their profits. The tax laws of every major country insist upon allocating profits to wherever IP resides. IP by definition doesn't reside anywhere (being "intangible" and all), so the basic starting point for international taxation rests on a fiction for IP driven MNCs. This is a problem in the design of the tax laws, not the ethics of the MNCs that abide by them..... you can't ask someone to allocate their profits on the basis of a fictional concept, then become outraged when the fiction they come up with results in little tax being due.

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