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High & Low Finance: How Apple and Other Corporations Move Profit to Avoid Taxes

May 2, 2013 by Leave a Comment

A decade ago, that was a question some short-sellers were asking about Parmalat, the Italian food company that had seemed to be coining money.

It turned out that the answer was not a happy one: The cash was not real. The auditors had been fooled. A huge fraud was being perpetrated.

Now it is a question that could be asked about Apple. Its March 30 balance sheet shows $145 billion in cash and marketable securities. But this week it borrowed $17 billion in the largest corporate bond offering ever.

The answer for Apple is a more comforting one for investors, if not for those of us who pay taxes. The cash is real. But Apple has been a pioneer in tactics to avoid paying taxes to Uncle Sam. To distribute the cash to its owners would force it to pay taxes. So it borrows instead to buy back shares and increase its stock dividend.

The borrowings were at incredibly low interest rates, as low as 0.51 percent for three-year notes and topping out at 3.88 percent for 30-year bonds. And those interest payments will be tax-deductible.

Isn’t that nice of the government? Borrow money to avoid paying taxes, and reduce your tax bill even further.

Could this become the incident that brings on public outrage over our inequitable corporate tax system? Some companies actually pay something close to the nominal 35 percent United States corporate income tax rate. Those unfortunate companies tend to be in businesses like retailing. But companies with a lot of intellectual property — notably technology and pharmaceutical companies — get away with paying a fraction of that amount, if they pay any taxes at all.

Anger at such tax avoidance — we’re talking about presumably legal tax strategies, by the way — has been boiling in Europe, particularly in Britain.

It got so bad that late last year Starbucks promised to pay an extra £10 million — about $16 million — in 2013 and 2014 above what it would normally have had to pay in British income taxes. What it would normally have paid is zero, because Starbucks claims its British subsidiary loses money. Of course, that subsidiary pays a lot for coffee sold to it by a profitable Starbucks subsidiary in Switzerland, and pays a large royalty for the right to use the company’s intellectual property to another subsidiary in the Netherlands. Starbucks said it understood that its customers were angry that it paid no taxes in Britain.

Starbucks could get away with paying no taxes in Britain, and Apple can get away with paying little in the United States, thanks to what Edward D. Kleinbard, a law professor at the University of Southern California and a former chief of staff at the Congressional Joint Committee on Taxation, calls “stateless income,” in which multinational companies arrange to direct the bulk of their profits to low-tax or no-tax jurisdictions in which they may actually have only minimal operations.

Transfer pricing is an issue in all multinational companies and can be used to move profits from one country to another, but it is especially hard for countries to monitor prices on intellectual property, like patents and copyrights. There is unlikely to be a real market for that information, so challenging a company’s pricing is difficult.

“It is easy to transfer the intellectual property to tax havens at a low price,” said Martin A. Sullivan, the chief economist of Tax Analysts, the publisher of Tax Notes. “When a foreign subsidiary pays a low price for this property, and collects royalties, it will have big profits.”

The United States, at least theoretically, taxes companies on their global profits. But taxes on overseas income are deferred until the profits are sent back to the United States.

The company makes no secret of the fact it has not paid taxes on a large part of its profits. “We are continuing to generate significant cash offshore and repatriating this cash will result in significant tax consequences under current U.S. tax law,” the company’s chief financial officer, Peter Oppenheimer, said last week. A company spokesman says the company paid $6 billion in federal income taxes last year. When I asked how much it had paid in prior years, there was no answer.

There is something ridiculous about a tax system that encourages an American company to invest abroad rather than in the United States. But that is what we have.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/05/03/business/how-apple-and-other-corporations-move-profit-to-avoid-taxes.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

High & Low Finance: Congressman’s Proposal Is a First Step Toward a Tax Overhaul

February 14, 2013 by Leave a Comment

If real tax change is ever to be adopted, we are going to have to be specific on small things as well as large.

Representative Dave Camp, the Michigan Republican who heads the House Ways and Means Committee, has taken an impressive step in that direction with a proposal to make substantial changes in the taxation of financial instruments.

Mr. Camp’s proposal got relatively little attention in the media, although it has set off alarm bells in some Wall Street precincts, where it threatens to dismantle some cherished ways that Wall Street has invented to allow banks to profit by taking a cut of tax benefits they offer to customers.

“Congressman Camp’s proposal reflects his efforts to respond to the changing realities of modern financial markets,” said Mark Price, who leads the financial institutions and products group at KPMG’s Washington national tax practice.

Studying Mr. Camp’s proposal is not always easy sledding. This is an area of law that has grown exceedingly complicated, in large part because each change in the law is greeted by new tax avoidance tactics and strategies, which eventually lead to new provisions that combat those but may open the way to still more maneuvers. And on and on. Many innovations in finance accomplish nothing for the overall economy, but instead are aimed solely at gaming either tax or regulatory rules.

Lobbyists for one part of the financial services industry or another have gotten provisions passed to benefit their products over those of competitors, leading to demands by competitors for equal treatment.

It would be nice to report that the chairman has found a magic way to end these games, but he has not. Some on Wall Street are already talking about ways that some of his proposals, if enacted, could be abused.

Mr. Camp understands that and has called his proposal a “discussion draft,” one that is aimed at getting comments from those who would be affected.

He will get plenty of them.

One principle that the Camp proposal would establish is to provide what the congressman calls “uniform tax treatment of financial derivatives.” The definition of derivative is very wise — it includes short sales of stock as well as options, swaps and futures.

Under the Camp proposal, a derivative could create only ordinary gains or losses no matter how long it was held. And changes in value would be subject to tax every year, as the market price changed, whether or not the investor sold. There could never be a long-term capital gain involving a derivative, and therefore the investor could never qualify for the preferential tax rate on long-term capital gains.

There are many tax-oriented strategies to create differing tax treatments for what are actually offsetting investments. The idea is to have a loss treated as ordinary income, and recognized as soon as possible, while the offsetting gain is delayed and then treated as a long-term capital gain if that is possible.

The Camp proposal would establish a general rule that both arms of an offsetting strategy will be taxed as ordinary income or loss on a mark-to-market basis at the end of each year. So if one position made money while the other lost, they would wash each other out. There would be little reason to enter into many such transactions. And derivatives — except those that businesses use in ways that qualify for hedge accounting — will automatically be marked to market.

One type of product that appears to be targeted is so-called exchange-traded notes. They are devised to be alternatives to other investments, but with better tax treatment. Consider a mutual fund that invests in the stocks in the Standard Poor’s 500. If you buy shares in that fund, dividends will be distributed to you each year, and you pay taxes on them even if you reinvest them in the fund. But if a bank issues a “note” tied to the total return on the same index, you will not owe taxes until you sell the note. The effect is to defer taxes on the dividend income.

To get that tax break, you pay a fee to the bank that issued the note, and you take the credit risk. If the bank fails, you will suffer no matter how well the index does.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/02/15/business/congressmans-plan-is-first-step-to-a-tax-overhaul.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

France Proposes an Internet Tax

January 20, 2013 by Leave a Comment

The idea surfaced Friday in a report commissioned by President François Hollande, which described various measures his government was taking to address what the French see as tax avoidance by Internet companies like Google, Amazon and Facebook.

These companies gather vast reams of information about their users, harnessing it to tailor their services to individuals’ interests or to direct customized advertising to them. So extensive is the collection of personal details, and so promising the business opportunities linked to it, that the report described data as the “raw material” of the digital economy.

“They have a distinct value, poorly reflected in economic science or official statistics,” the report said.

Google generates more than $30 billion a year in advertising revenue, including an estimated €1.5 billion, or $2 billion, in France. Yet, like other American Internet companies, it pays almost no taxes in France. That state of affairs upsets France’s policy makers, as public finances have been stretched thin and French Internet companies struggle to gain traction.

“We want to work to ensure that Europe is not a tax haven for a certain number of Internet giants,” the digital economy minister, Fleur Pellerin, told reporters in Paris on Friday.

But getting Google and other U.S. technology companies to pay more corporate taxes on their profits in France could take a long time, the report acknowledges, because this will require international cooperation.

In the meantime, France has discussed a variety of other taxes. Under the predecessor to Mr. Hollande, Nicolas Sarkozy, the government proposed a levy on Internet advertising. But that idea languished after local companies complained that it would affect them more than Google. Mr. Hollande’s government is also overseeing talks between Google and French online publishers, who want the search engine to pay them for linking to their content.

The report published Friday said a tax on data collection was justified on grounds that users of services like Google and Facebook are, in effect, working for these companies without pay by providing the personal information that lets them sell advertising.

The report says tax rates would be based on the number of users an Internet firm tracked, to be verified by outside auditors. The authors did not recommend tax rates or estimate how much money such a levy could raise.

Google said in a statement that it was reviewing the nearly 200-page report.

“The Internet offers huge opportunities for economic growth and employment in Europe, and we believe public policies should encourage that growth,” the company said.

The new tax would require legislation, which the government said could be introduced by the end of the year. But other revenue-generating proposals championed by Mr. Hollande have encountered difficulty. A plan for a 75 percent income tax rate on earnings of more than €1 million a year was rejected by the highest court in France, which called it discriminatory.

Any proposal to generate taxes from the gathering of personal information could also draw scrutiny from the French privacy regulator, which has raised concerns about the amount of data that companies like Google and Facebook collect.

Article source: http://www.nytimes.com/2013/01/21/business/global/21iht-datatax21.html?partner=rss&emc=rss

Filed Under: Global Business Tagged With: , ,