Apple ruling could drive US corporate tax reform
The case presses Washington to act swiftly on an outdated system
The European Commission’s ruling that Apple should pay Ireland more than €13bn in back taxes has prompted yells of outrage in the US. The US Treasury accused Brussels of “overriding national tax authority”, while the White House press secretary has fumed at the “unfairness” of the move.
Americans could usefully channel some of their outrage at the state of their own corporate tax system. At 35 per cent, its headline rate is among the highest in the developed world, and 13 percentage points above that of the EU average. Some companies pay full whack. Others — generally those large and wealthy enough to support networks of overseas subsidiaries — pay lower rates than the norm. The glaring loophole is that worldwide income is only taxed on repatriation. This leads to an absurd situation where some $2tn in US corporate profits is warehoused offshore. Apple alone accounts for a startling $200bn of this sum — much of it siphoned through the now compromised Irish conduit.
A rational reform would either tax worldwide income wherever it is generated, or else shift to the territorial system used by most of the other developed economies. Ideally it would be the former, as this would avoid beggar-thy-neighbour competition between countries while not favouring foreign over domestically generated income — and vice versa. Either way, the present mish-mash of the two shortchanges the taxpayer and gives companies perverse incentives to stash away the profits they earn abroad. The only real beneficiaries are accountants and lawyers.
The best solution would be for an OECD agreement in which countries agree to carve up the tax base so it better reflects where economic activity happens. Some of the recent work on base shifting and profit erosion has moved towards that goal. But Washington cannot simply wait on some overarching international compact.
Grand reform may still be beyond a bitterly divided Congress. But the legislature should at least act to resolve the unhelpful distinction between repatriated and unrepatriated foreign income. The headline rate needs to be brought down too. A good starting point would be the 28 per cent President Barack Obama has proposed.
Neither candidate in the presidential election has offered much of a firm prospectus. While the Republican candidate Donald Trump has fizzed with bold ideas — suggesting, for instance, a 15 per cent corporate tax rate, just 2.5 percentage points above Ireland — his thinking reportedly remains fluid. His Democratic rival, Hillary Clinton, is circumspect. She has dismissed Mr Trump’s proposals as offering help mainly to millionaires such as himself.
With so much corporate cash piling up overseas and companies continuing to shift domicile abroad through so-called “inversions”, reform cannot wait forever. The Apple case ought to spur things forward. The company’s boss, Tim Cook, has rightly observed that the EU ruling is not about how much Apple pays in taxes, but about who collects them. It is a reminder that the US taxman does not necessarily have first dibs on the income parked offshore by American companies. Not only has €13bn in tax been allocated to a reluctant Ireland by the commission; a number of other EU states are also considering slotting in their own claims.
It is in Washington’s interest to clear up these ambiguities. The first step should be to close loopholes that encourage avoidance, thus reducing the incentive for US multinationals to play off different jurisdictions. Alone among nations, the US has the heft to drive the global tax debate. For this to be felt, it needs deeds as well as words.