Three years ago, Apple boss Tim Cook was emphatic. Appearing before a US senate committee, the man who runs the world’s largest company told the politicians straight: Apple had no intention of repatriating billions of dollars of profits from its international operations until the US Treasury slashed corporate taxation.
“I have no current plan to bring them back at the current tax rate,” Cook said.
It was a response – one of many – that rankled with the committee’s chair, Carl Levin. Leaning forward, the tough septuagenarian senator from Michigan glared at Cook over the top of his glasses: “It is not your intent to bring them home unless we reduce our tax rates? Is that correct?”
Cook repeated: “I have no current plan to do so at the current tax rates.”
It was a charged exchange that laid bare the impasse between corporate America and Washington. At that time, Apple had amassed about $100bn in cash – income from its foreign operations – all of which was being carefully held outside America, beyond the reach of the US tax authorities.
Since then, every three months, Apple has given Wall Street an update on the size of this cash pile, and each time the figure has grown by several billion. At last count, six weeks ago, the figure stood at $215bn (£162bn).
If Apple were to bring that money back to the US, however, it would be taxed at about 40%, one of the highest tax rates in the world. “Apple serves its shareholders by keeping these funds overseas,” the Californian technology firm told the senators.
By using a long-standing loophole in the tax code, Apple, in common with many other multinationals, can continually defer US taxes on these offshore earnings for as long as they are kept outside America.
This is a quirk of US law that has had a dramatic, and increasingly unsustainable, impact on the corporate world. It has meant that many of the richest firms in the US are amassing huge, untaxed offshore cash piles. In recent, years that trend has been accelerated by America’s booming leading tech firms and their worldwide success.
According to ratings agency Moody’s, US companies, excluding banks, had an estimated $1.2 trillion in cash overseas at the end of last year. Just over half of that sum – $630bn – is estimated to be held by Apple and other tech companies, among them Silicon Valley firms Microsoft ($96bn), Cisco ($57bn), Google ($43bn) and Oracle ($45bn).
Barack Obama promised he would get corporate America to bring profits home, as have both the Republican and Democrat candidates vying to succeed him. Quite how to do so, however, has divided Washington for decades.
And if the result has been intransigence, few have complained very loudly. The impasse has suited corporate America well, allowing its biggest international businesses to enjoy years of ultra-low tax bills.
Last week, however, the dramatic intervention of Europe’s competition commissioner Margrethe Vestager appeared to steal the reform initiative from Washington.
In a decision that for many years tax experts would have thought unthinkable, she ruled that a significant slice of Apple’s offshore wealth had been illegally won. The iPhone maker, Vestager found, had been benefiting from a sweetheart tax deal agreed behind closed doors with Ireland a quarter of a century ago. That deal had resulted in Apple avoiding €13bn in taxes over 10 years, she said: those back taxes, plus interest, would have to be repaid.
Cook was furious. He insisted that the income had already been taxed in Europe. “The commission is now calling to retroactively change those rules,” he protested last Tuesday. Two days later he was still raging — calling Vestager’s decision “invalid” and “crap” — but he also had a surprise announcement. During an interview on Irish radio, he started talking about repatriating cash held overseas and paying US tax. “Right now, I would forecast that we repatriate next year,” he said. “We [have] provisioned several billion for the US for payment [of tax bills] as soon as we repatriate.”
There has been no further elaboration, but it is a marked change in tone from Cook, who now needs all the support he can muster from allies on Capitol Hill. Hints that Apple might be more willing to pay tax in America might be just the kind of message US politicians wanted to hear.
The Apple boss certainly has friends in high places. Recent months have seen him host fundraising events for both Democratic presidential candidate Hilary Clinton and Republican house speaker Paul Ryan.
For all that, however, few US politicians have come out fighting hard to defend Apple’s Irish tax arrangements. There have some generalised warnings from US Treasury secretary Jack Lew that the commission’s move could have a “chilling effect on US-EU cross-border investment” and that Washington would have to “consider potential responses”.
But as global leaders gather in Hangzhou, China, on Sunday for the latest G20 summit, there are little signs of Apple’s €13bn back-taxes penalty causing a full-blown crisis.
Behind the scenes, dissatisfaction over corporate America and its untaxed offshore cash is growing. Politicians may not yet have figured out what they intend to do about this issue, but the last 18 months have provided a few stark reminders that there is a lot at stake.
Last November, many in Washington were surprised to see Pfizer, one of America’s largest drug makers, unveiling plans for a record-breaking $160bn deal – a so-called “tax inversion” transaction which would see it merge with a smaller, foreign rival and shift its headquarters outside the US.
The Pfizer bid was just the latest, and largest, in a wave of such inversion deals. Such transactions are designed to allow multinationals greater freedom to use their swollen cash reserves without triggering US tax bills.
In the end, however, the Obama administration moved quickly enough to introduce tougher rules to discourage inversion deals, thwarting Pfizer’s plans. But it was yet another wake-up call: corporate America’s untaxed offshore cash pile was a problem that needed fixing.
Most tax reform experts concede Apple’s Irish tax arrangements are hard to defend as fair. Pascal Saint-Amans, head of tax at the Organisation for Economic Co-operation and Development (OECD), who last year secured unprecedented agreement on reforms to tackle tax avoidance, is among the critics.
“The Apple case is a great illustration of the most aggressive tax planning that is out there… [It produced] massive profits that ended up going taxed nowhere. It is precisely because of these types of schemes that the G20 asked us to start looking at major tax reforms [three years ago].”
It is the OECD’s work on tax reform that prompted Ireland to finally close loopholes that allowed Apple and other multinationals to use “non-tax-resident” Irish companies to receive billions of dollars in income that then went untaxed. As a result, Apple unwound its use of such arrangements last year.
It now remains to be seen whether Vestager demonstrates an appetite for going after further large sums from cash-rich US corporations that have used aggressive tax structures in Europe. She already has two suspected sweetheart deals in her sights — separate tax rulings granted by Luxembourg to McDonald’s and Amazon. And she has not ruled out adding more.
Whatever the outcome, however, Washington and Wall Street have woken up to the possibility that if America is unwilling to tax the ballooning offshore cash mountains of its leading companies, others are now emboldened to do so.
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