SEPT. 1, 2016 — How crazy is this? The European Commission has ruled that Apple received unfair tax breaks from Ireland, and so must pay billions in back taxes — even though some top Irish officials insist that they don’t want the money. Meanwhile, U.S. officials are angry at the European Commission, arguing that the long-delayed crackdown violated international norms — and that Apple’s billions should ultimately go to the U.S. Treasury. Apple officials appear to agree with the U.S. position, but they manage their books in a way that keeps the money out of the Treasury’s reach.
Welcome to the topsy-turvy world of multinational corporate bookkeeping. It’s like Hollywood accounting, only instead of stiffing the talent, the object is to stiff the government. In Apple’s case, that meant registering two subsidiaries in Ireland essentially to collect revenue from the company’s sales outside the U.S. while paying taxes to … no one. Ireland didn’t tax the vast majority of that revenue because it wasn’t earned there, and the countries where the sales were made didn’t tax it because the money belonged to a company registered in Ireland.
Granted, these profits were subject to U.S. taxation — at least in theory — because the Internal Revenue Service imposes its levies on the global income of U.S. multinationals. By contrast, every other developed nation taxes only the money earned within their borders. The IRS doesn’t actually collect taxes on foreign earnings, however, until the money is brought back into the United States. That creates a powerful incentive for companies to park the cash overseas indefinitely, which large U.S. multinationals have done to the tune of $2.4 trillion.
Apple’s tax avoidance strategy may be entirely legal, but it’s outrageous enough to have drawn bipartisan rebukes in Congress. Sadly, lawmakers have paid only lip service to the problem. While Congress has been stuck in endless debates over how to respond, the European Commission has been launching investigations into the strategies used by a number of multinationals — many of them U.S.-based — and levying penalties.
Which is not to say the commission is right; Ireland apparently treated Apple no more favorably than other multinationals. Nor is it fair to Apple to impose 12 years’ worth of tax liability ex post facto.
The real problem is the country-by-country inconsistency in tax policy that allows companies to stash profits beyond any nation’s reach. The situation cries out for a common international approach to recognizing where multinationals earn revenue — for example, by agreeing to apportion revenue according to where a company makes sales. Meanwhile, the United States is only encouraging tax gamesmanship by clinging to a unique (and uniquely punitive) approach to taxing multinationals. Surprisingly, a bipartisan consensus is emerging on how to bring the U.S. system more into line with the rest of the world’s. The longer it takes for Washington to act, however, the more European authorities will be tempted to grab the money first.