The shameful thing is that we have a tax system that seems to allow multinational companies to choose what they want to pay.

The fact that this costs the government money is important, but that is not the critical element. Revelations about the ability of the rich and well connected to duck taxes can have a corrosive effect on the attitudes of the rest of us. If others who are better off than you can get away with not paying taxes, why shouldn’t you look for a way to cheat on your taxes?

The news in the Senate report about Apple was not that the company had found ways to shift income to low-tax jurisdictions. Lots of multinational companies do that. The news was that Apple had found a way to move a large part of its income to subsidiaries that claimed to not exist anywhere, at least when it came to paying taxes.

Carl Levin, the Michigan Democrat who heads the Senate Permanent Subcommittee on Investigations, had good reason to call that the holy grail of tax avoidance.

In that way, the Apple hearing filled a similar role to the one played by disclosures about Bain Capital, the private equity firm founded by Mitt Romney, during the last presidential campaign. It had been common knowledge that private equity firms had found ways to have most of the money earned by partners taxed at low capital gains tax rates, through what is known as carried interest. What came out last year was that some had found a way to treat all of their compensation that way.

Senator Levin, and the ranking Republican on the subcommittee, John McCain, tried to make the point, again and again, about how unfair the current system is to domestic companies, which cannot hide profits overseas, and to ordinary taxpayers, whose income is derived from salaries and investments that are automatically reported to the Internal Revenue Service.

“The general American public should not have to make up the balance as corporations avoid paying billions in U.S. taxes,” Senator McCain said.

But no other Republican senator seemed interested in that analysis. They praised Apple for avoiding taxes, saying that benefited its shareholders. Senator Rand Paul of Kentucky, a physician, suggested it would “probably be malpractice” for a chief financial officer not to do everything possible to minimize the corporate tax bill.

If that is the standard, perhaps Senator Paul, instead of apologizing to Apple for the fact that the hearing was being held, should have joined in what he called the “vilification” of the company, but for an entirely different reason. As Tim Cook, Apple’s chief executive, testified, there is a whole range of tactics Apple has chosen not to use.

“Apple does not hold money on a Caribbean Island, does not have a bank account in the Cayman Islands, and does not move any taxable revenue from sales to U.S. customers to other jurisdictions in order to avoid U.S. taxation,” he said.

I asked Jeffrey M. Kadet, who spent a career with large accounting firms helping companies to minimize their international tax payments — working in places like China, Japan, Hong Kong, Singapore and Russia — and now teaches tax law at the University of Washington, to review the subcommittee’s report on Apple.

“Apple’s basic structure and planning described in the memorandum appears to be appropriate corporate tax planning in today’s environment and is consistent with what I review with my students in class,” he said in an e-mail. “The company appears to be almost conservative in its approach of not trying to move any portion of profits on sales to U.S. customers into its overseas structure as some other groups have done.”

One such company, as the Senate subcommittee documented last year, is Apple’s archrival, Microsoft.

What Apple did was transfer rights to its intellectual property to a subsidiary that was incorporated in Ireland — and therefore not subject to immediate United States taxation — but managed in California. Under Irish law, that freed the subsidiary from Irish taxation.

Article source: http://www.nytimes.com/2013/05/24/business/making-companies-pay-taxes-the-mccain-way.html?partner=rss&emc=rss