This is my third post exploring the chronicles of Ireland, Apple, the EU and the USA. In my first post, I introduced the context by noting that the EU had ruled that Ireland has violated the EU “State Aid” rules. In my second post I noted that Secretary Jack Lew believes that by imposing taxation on the profits earned by Apple in Ireland, Ireland is eroding the U.S. tax base. Put another way: Ireland would be imposing taxation on an “American company” that happened to be making profits in Ireland. Secretary Lew apparently believes that ONLY the USA has the right to impose taxation on an American company. (Perhaps Secretary Lew should develop that theory for Americans abroad too.)
That ONLY the USA can impose taxes on Apple, is a “Homelander Fantasy” or perhaps “Fairy Tale”. Other countries clearly have the right to impose taxes on profits earned in their jurisdictions. In fact, a fundamental norm of international tax is that the country where the profits are earned has the first right of taxation.)
What happens is that if the U.S. company brings its “offshore profits” back to the United States, that U.S. company will receive a tax “credit” for the “foreign taxes” paid. This means that the higher the Ireland taxes imposed on Apple, the larger the tax credit that Apple can claim. This is (presumably) what Secretary Lew means when he says that Ireland is imposing taxation on money that the U.S. has a claim to. Again: the more Ireland imposes taxation on Apple, the higher the taxes paid to Ireland. The higher the taxes paid to Ireland the lower the taxes paid to the USA. For this reason the U.S. Government has an interest in U.S. companies NOT being subject to higher foreign taxes.
But of course the U.S. tax “kicks in” once Apple brings the money back to the USA.
All, well and good, but Apple has stated that it will NOT be bringing their “offshore profits” back to the USA “any time soon”. If this is true, the USA will be getting no taxes on Apple. (So, what is Secretary Lew’s real concern?)
Mr. Cook makes confirms that Apple’s profits will not be returning to the United States (under the current rules) here:
Apple's Tim Cook to @SenCarlLevin that "What's made outside the USA, stays outside the USA". https://t.co/5Sitv18V8T https://t.co/cQZy5lRtNy
— U.S. Citizen Abroad (@USCitizenAbroad) September 2, 2016
The “Levin Inquisition” took place in May of 2014. It is well worth watching. You will achieve a much better understanding of the taxation of corporations and the International Tax rules that surround them.
Apple CEO Tim Cook Testifies About Avoiding Taxes- Part 1 of 2 https://t.co/WGxaXz0DoZ – Amazing testimony still no commitment 2 tax reform
— U.S. Citizen Abroad (@USCitizenAbroad) September 3, 2016
Part 2-Apple CEO Tim Cook Testifies About Avoiding Taxes https://t.co/5OTQPnGN8F – explains destructive US internatnioal tax policy
— U.S. Citizen Abroad (@USCitizenAbroad) September 3, 2016
While not a lawyer, I did learn a few things in my business law classes in college and know a little bit about this situation as it pertains to “American” companies operating in Japan. While the situation may very well be different in Ireland, I kind of doubt it is so different that the same bottom line would not apply.
Apple does NOT have any presence in Japan. The “Apple” stores in Japan are not “Apple” store but Apple Japan stores. Apple Japan is owned by Apple but is a separate company. This is not, as many believe, a way to skirt the law. It is a neessary arrangement to prevent violating either Japanese or American law. Under Japanese law, all businesses in Japan must operate under Japanese corporate law. The corporate laws of Japan and the US, being incompatible, an American company trying to adhere to either set of laws would invaribly find itself afoul of the laws of the other nation.
Apple Japan pays Apple various monies for licensing fees, royalties, percentage of sales, etc but all transactions in Japan are between a Japanese company and its customers, suppliers abd parent company. Thus the US has no claim upon monies esrned in Japan by Apple Japan.
The US can tax monies Apple Japan pays to Apple, but the earnings of Apple Japan are for Japan to deal with as Japan sees fit.
“The corporate laws of Japan and the US, being incompatible, an American company trying to adhere to either set of laws would invaribly find itself afoul of the laws of the other nation.”
Yes. In other words, companies are people too.
“Thus the US has no claim upon monies esrned in Japan by Apple Japan.”
Oops. Companies aren’t people after all.
Sometimes, you really make me laugh.
>So, what is Secretary Lew’s real concern?
I think you may be missing the following fact. Let say that Apple pays some amount of addition tax for any of the last 10 years. Lets say it’s $1M is extra tax that’s new and not covered by the existing tax returns.
Now immediately Apply has a $1M foreign tax credit since it has paid the tax. If it is for any of the last ten years it can carry it forward for 10 years or back one year. It can restate it’s last three years of taxes.
So if it paid any tax in the last three years on foreign income it can use that credit against some or maybe all those years.
Lets assume for the sake of argument it can’t use the credit because it paid no taxes. So it has a FTC of $1M that can be carried into 2016. It can immediately pull income from Ireland back to the US such that it cancels out that FTC and it pays no tax at all in the US. That’s likely almost $3M in money it can bring back.
The FTC is worth more not than later. It’s best used against the highest marginal tax rate you pay. It expires so using it now makes complete sense.
So there you have the missing tax the US seems flying out the window.
“Now immediately Apply has a $1M foreign tax credit since it has paid the tax. If it is for any of the last ten years it can carry it forward for 10 years or back one year.”
“It can restate it’s last three years of taxes.”
For foreign tax credits, it can restate its last ten years.
[* This used to be carried back 2 years and forward 5 years, but that doesn’t change the complexity. The IRS gives examples but not instructions for how to compute the amount each year. In 1981 I asked the IRS for instructions. In those days the IRS had an office in the US Consulate in Toronto, but they couldn’t help. In those days the IRS answered letters, but they couldn’t help either. Their letter gave another example but no instructions.
When I didn’t know that it was illegal to tell the truth on US tax returns, I declared that I didn’t understand some of the instructions. Well, the IRS and US Department of Justice and courts have taught me that it’s illegal to tell the truth on tax returns. When you have to guess an amount to be carried out to other years, well you have to guess, but you’d better not declare that you guessed. You have to sign under penalty of perjury that to the best of your knowledge and belief those numbers are true and correct. US law punishes willing perjury but not unwilling perjury. You’re required to commit perjury so you’d better unwillingly obey.]
Non-resident Americans are not Apple but oranges. If only we had any kind of collective focus on us!