Apple’s Tax Debate: Getting To The Core Of The Matter

… the recent EU decision about Apple’s tax ruling raises a number of questions that, in our view, have ramifications well beyond the domain of tax avoidance and competitiveness. These questions remain by and large unanswered in public discourse and hence, reveal large gaps in our broader understanding of tax policy and its societal implications.

On the international stage, we are seeing a battle emerge between countries and institutions over the taxable income for multinationals. In terms of its current tax structure, both Ireland and the United States are contesting the EU ruling as a unilateral decision that affronts the multilateral efforts made by global countries to revise the international tax system.

Over the past three years, countries have participated in a multilateral effort to revise the international tax system through the OECD Base Erosion Profit Shifting Project. The ruling by the EU single handedly imposes a tax, counter to the existing international tax system and calling into question international tax treaties. In this political battle, it is easy to lose sight of the actual worldwide taxes paid by firms. In fact, Apple is one of the largest tax payers in the world. Between 2003 and 2014, Apple paid $63.5 billion in taxes, reflecting an average corporate effective tax rate of 26.1%. Apple’s tax bill in 2015 alone was $19.1 billion, which is larger than the GDP of 82 different countries.

Second where is value being created? The EU has suggested that European countries can try to claim some of the €13 billion tax assessment – presumably for sales of Apple products in their local jurisdictions. If we believe that profits should be located where value is created, two key questions arise: (1) what are the value generating activities in the business, and (2) where are they located? Apple customers presumably buy the products because of the design and technology, not because a friendly sales person sells them. Nearly all of Apple’s R&D is conducted in the US, which implies that profits should be associated with the US, not the EU member states.

Third, it seems to us that the issue of taxation should be assessed in conjunction with a firm’s overall societal impacts, both the positives as well as the negatives. Although some may argue that measurement of such total value creation is problematic, and that any discretion allowed in tax policy may eventually be abused by opportunists, the fact remains that some firms are better corporate citizens than others. In this sense, from a societal point of view, there is a strong argument to be made for recognizing, rewarding and even incentivizing socially beneficial corporate behaviors through smart tax policy.

Apple is globally recognized as a leader of environmental responsibility with respect to its products, its operations and its massive supply chain. Hence, from a societal point of view, it is hard to argue against incorporating such metrics into a smart tax policy which promotes corporate transparency, responsibility and accountability.

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