Why US Treasury is in a bind over Apple
Under tax rules in America, tech giant could claim a tax credit for liabilities in Ireland
When Apple Inc was ordered by European regulators to pay €13 billion (Dh57 billion) plus interest in back taxes to Ireland, the giant technology company seemed to be facing an expensive headache.
Turns out it’s a headache for the US Treasury Department as well.
Under current US tax rules, specialists say Apple would probably be able to claim a foreign tax credit for the repayment, allowing it to lower its tax bill in America, where the 35 per cent corporate income-tax rate is one of the world’s highest. Unlike other industrialised countries, the US taxes its multinational corporations on their global income — while allowing a dollar-for-dollar credit for the foreign taxes they’ve paid.
So if Apple claimed the credit, the US would stand to lose $14.5 billion in tax revenues, if the European regulators’ finding holds up and current rules apply.
Another quirk of the US system lets companies defer their taxes on their offshore earnings until they “repatriate” them, or bring them back to the US. Currently, US companies have amassed more than $2 trillion in profit that they’ve not yet repatriated.
Now, the foreign-tax credit is putting Treasury officials in a bind amid concern that the European Commission’s investigations into Apple and other multinationals, including Amazon.com Inc. and McDonald’s Corp., will cut into that tax base. In Apple’s case, regulators determined that Ireland offered the company an ultra-low tax rate that violated the commission’s “state-aid” rules, which are designed to foster competition among companies. Both Apple and Ireland are appealing the finding; a resolution may take years.
Treasury Secretary Jacob J. Lew said last month it’s “not appropriate” for “Europe to be rewriting tax law retroactively, reaching into a tax base that properly should be a US tax base, because it’s US income.”
Treasury officials have been wrestling with the question of whether extra payments required of companies by the European “state aid” cases would qualify for foreign-tax credits.
Politicians
President Barack Obama’s administration, members of Congress and Republican presidential nominee Donald Trump have all called for cutting taxes on companies’ offshore earnings - as a way of inducing repatriation. But they haven’t agreed on a rate: Obama has suggested 14 per cent; Trump, 10 per cent; and House Republicans propose a top rate of 8.75 per cent.
Foreign tax credits would take some of the revenue juice out of any homecoming. Under Obama’s plan, which would allow for partial use of tax credits against the reduced tax rate, Apple’s full Irish tax payment would result in a tax credit worth $5.8 billion, for example. Foreign tax credits will also play a role in the House Republicans’ plan - though their effect is less clear.
In an unusual “white paper” on August 24, Treasury officials wrote: “There is a possibility that any repayments ordered by the commission will be considered foreign income taxes that are creditable against US taxes owed by the companies in the United States.”
It’s unclear why officials used the term “possibility.” Foreign tax credits have been a fixture of tax law since 1918; they’re designed to prevent double taxation of foreign income. The hedging may have reflected uncertainty over whether European regulators would require an actual tax payment or a penalty, which isn’t creditable, tax specialists said. The European Union’s competition commissioner, Margrethe Vestager, left no doubt during an August 30 news conference. “It is not a penalty; it is unpaid taxes to be paid,” she said.
The commission’s ruling is “probably creditable,” said Michelle Hanlon, an accounting professor focused on international tax at the Massachusetts Institute of Technology.
The foreign tax credit has become a lucrative, legal way for multinational companies that have accumulated large overseas cash piles to dramatically lower and sometimes eliminate the 35 per cent US income-tax rate on the profit they send home.