
To Understand the Benefits of Tax Reform, Start by Understanding Apple's Taxes - amatheus
http://fortune.com/2017/10/31/trump-tax-reform-apple-multinational-companies/
======
jaredhansen
The best way to think of the tax code is as an enormous legacy codebase whose
authors were largely unaware of one another, often working at cross purposes,
and subject to an ever changing set of requirements -- which requirements,
importantly, are at _least_ as much about social engineering as they are about
raising money.

There is a constant tension between:

\- backward compatibility ("we built our business around [tax provision]! you
can't remove it now!"),

\- expansion of the codebase to accommodate new requirements ("we must get
more $activity; let's add a tax credit to incentivize it!")

\- refactoring to better serve existing organizational goals ("we are leaking
billions of dollars because of [loophole]! we have to close it now!")

This is why things like the "flat tax" or other simplification schemes are
perennially floated, and also why they continue to get shot down: desires to
simplify and refactor run into desires to support existing worfklows as well
as current and anticipated future social goals, and they just can't get off
the ground.

This is also why I end up posting basically the same thing in every tax
thread, from the late great Martin Ginsburg, from whom I was lucky enough to
take corporate tax: " _Everything_ in the tax code is simultaneously a trap
for the unwary, and an opportunity for the well-advised."

So your own interactions with the tax code should be considered similar to,
say, an SAP deployment or something. Theoretically it's all documented and you
can figure it out on your own, but in real life an expensive consultant will
pay for herself over and over.

~~~
corey_moncure
Another thing that has always bothered me about tax code (and criminal code
but that's another story) is the explicit use of constant dollar amounts. For
instance, how the child tax credit should be $1,000, the minimum wage should
be $9.15, and the penalty for illegally parking your car should be $52.13. All
of these numbers are completely arbitrary, and if they had any justification
when they were decided, they lose their relationship to reality quickly over
time as the money supply and other economic factors shift over time.

We have computers now. Why can't we write a code where the incentives and
disincentives stay where we intend them to relative to the state of the
economy?

~~~
JPKab
Because politicians (in the aggregate) are stupid lawyers who barely passed
math, at least in the US.

They come up with ideas, and when special interests and other actors end up
completely breaking the intent by changing certain pieces, they still proceed
with implementing the broken legislation for public perception reasons of
"doing something".

See the Affordable Care Act for example. Obama wanted a public option to keep
insurance companies in check and help drive down the price-gouging from the
providers. Joe Lieberman, as the 60th Democrat in the Senate, was able to
block that by pulling his vote, allowing for a fillibuster. He wanted the
public option removed, and he got his wish.

Obama pushed the law through anyway, despite the fact that this change
completely broke the design of the law. Insurance companies now saw it as a
subsidy for new customers, which is what it was. The broken design failed to
reign in costs, which made the subsidy provided by the government inadequate
to make it affordable to the working-class, resulting in the law effectively
being a Medicaid expansion and nothing more. The prices charged by insurance
companies through the exchange were too high to ease the pain of people too
rich for Medicaid but too

Obama originally treated it as a huge victory. It wasn't. It was broken on
delivery. But hey, they "pushed something through" and "won."

Now we are getting honest assessment of it as it implodes, and the Democrats
are talking about single-payer again.

~~~
rrhd
The alternative was nothing. A flawed system that leads to single player is
still a victory.

------
fastaguy88
What a bunch of propaganda. The central theme of the article is that if Apple
could repatriate its $200 Billion, it would have more money to invest and
create more jobs. But this assumes that Apple is not investing as much as it
would like.

There is no reason to believe that Apple feels it needs to invest more. And,
if it did, it could borrow the money from its foreign subsidiaries and spend
it without paying any taxes (and charge itself whatever it wanted in interest
since it's borrowing from itself).

As the past 9 years since the Great Recession have shown, companies do not
make investments just because they have more money. They invest for business
reasons. It is true that Apple investors will be worth more if the money is
repatriated, but more jobs?? not so much.

~~~
valuearb
So if repatriated, the money disappears? It’s not reinvested in Apple or other
companies, put in the bank to be loaned out to other businesses, nor spent on
goods and services?

Cause all three of those things create jobs.

~~~
mholmes680
I think OP's point is that its not "guaranteed" to do any of the things you
listed. If the FED raises rates, the companies may want to hold it, as an
example. Or if the best business application is to do a buyback or dividend,
you're bypassing the jobs part.

We're also talking two buckets of money. The money coming back in to the US,
and the taxes the govt collects. I think this one-time tax money in this case
is already spent with these tax cuts?

~~~
valuearb
both buybacks and dividends create jobs. in fact without buybacks and
dividends no one would ever start a business and no jobs whatever be created,
Other than sole proprietors.

~~~
namlem
Or worker co-ops.

~~~
valuearb
Problem with worker co-ops is access to capital. In a world where dividends
and buybacks were banned, where would they get capital? Not from investors,
because few sole proprietors would be wealthy enough to invest. Not from
banks, because they would be hugely capital starved without investors to fund
them.

I'd like to imagine Ford Motor company could have been a worker co-op, but
truth is it couldn't until later in life. Henry Ford raised $28,000 to start
it in 1902, nominally that's around $1M today, but it's actually far more than
that. Average income was around $450 a year, so he raised about 60 times the
average worker's annual salary. Without wealthy investors, there was no shot
at starting Ford. Once it was churning out Model Ts by the millions the
workers co-op could have succeeded, but they could never get there.

------
cletus
So if you're a US citizen or permanent resident or even just a tax resident
(which includes working here on a temporary visa), the US taxes you on
worldwide income. Any income from overseas needs to be reported (up to 3
times!) and taxed. With most countries you get credit for any taxes you paid
in those countries. State taxes work the same in that you may have to file in
more than one state and credit is given from taxes in one state to the others.
This is actually all pretty sensible albeit tedious (particularly the part
about reporting foreign assets and income).

Where it starts to go bonkers is for US citizens and PRs who live overseas.
They still have to file taxes with the IRS for all worldwide income and report
foreign assets and income as if they were present in the US. They get a
certain amount of income (<$100k) each yeah exempted from US income taxes.
Most countries do not do this.

My first problem is this: why exactly can't we treat companies the same way? I
would be all for a 20% corporate tax rate if it meant a tax on worldwide
income with credits for any taxes paid to foreign governments... exactly like
individuals are treated. Why isn't this on the table? Is it that hard?

Second problem: in this world of multinationals and particularly when dealing
with IP, companies seem to have free reign to book income in any country they
like. Like any sales in the UK (and probably the EU as a whole) are reported
to Irish subsidiaries.

To me this is fundamentally wrong. In other instances this is called transfer
pricing and is illegal. For completeness, the classic case of transfer pricing
is this:

Acme Inc buys a sofa from China for $200 in China and sells it in the US for
$1000. That's $800 taxable profit right? Not so fast. Acme Inc instead forms a
subsidiary in the Cayman Islands who buys that sofa from China for $200 and
then sells it to the parent company for $990. Now only $10 is taxable in the
US and $790 is taxed in the Cayman Islands at a zero or near-zero rate.

Now if that money is ever repatriated it's taxed. Thing is, it never is. Not
until an ill-advised tax holiday and then the whole cycle repeats.

This brings me to the third problem: to get around the fact that all their
money is offshore, companies borrow money in the US, which up until 1-2 years
ago was at zero or near-zero levels. This debt covers their expenses and saves
them from repatriating foreign profits and paying tax on them.

So why exactly don't we treat ever $1 borrow as repatriating $1 in foreign
profits and tax it?

Now that would be true tax reform. Well, if we also got rid of the noticeably
absent carried interest tax credit.

What a joke.

~~~
gok
Why won’t the US tax unrepatriated foreign income of corporations like they do
for people? One answer is that the only reason they can get away with citizens
is that they are a captive audience. Renouncing your US citizenship is
painful. Corporate re-headquatering isn’t so hard. Since a corporation can
pick a home country, why would they pick the only country in the world that
taxes money made both overseas and domestically?

~~~
cletus
It's not a question of picking a home country. If you operate in the US,
you're subject to US laws. Give companies the choice of not operating here in
the US at all or paying (at least) the US corporate tax rate on all profits
either by paying the US or by paying some foreign government (which with
double taxation would be credited towards US taxes owed).

Imagine if the EU also did this. It would go a damn long way to ending this
absurd practice of offshoring profits.

~~~
seanmcdirmid
Oh wow, if we did that, then the EU and much of Asia would follow in
retaliation. So companies operating in the USA would have to pay taxes to the
USA, China, the EU, on all their worldwide income, insane.

Let’s not forget the problem that not all tax systems are very compatible,
they all define income differently, some of them rely more on taxes that
aren’t income based.

~~~
cletus
There's already an established principle of double taxation treaties between
countries so worst case the company would pay max((country.tax_rate for
country in company.operating_countries)).

It's also worth noting that there has been and is a strong effort to harmonize
accounting across countries (eg GAAP). Countries might tax differently but
that really doesn't matter since you're just slicing up the same pie
differently.

Don't get me wrong: this isn't simple. For one thing, once a company likes
Apple gets into a position of choosing how to divide up $20B in taxes between
countries, this gives them a lot of power. Countries will try and incentivize
them to pay taxes to them instead of someone else.

Again there is precedent for this sort of thing and arrangements can be
treated by the like of the EU or even the WTO as unfair tax subsidies. But it
could get complicated. Like what if Ireland decides to exempt Apple from sales
taxes and the UK decides to exempt Apple from payroll taxes to incentivize
them to pay taxes their instead of somewhere else?

This is one reason why it'd be important to, at the same time, establish a
minimum baseline for what taxes a multinational owes in each jurisdiction. The
fact that a company can do billions of pounds in business in the UK and report
all that income Ireland thus paying a few million pounds in taxes each year is
ridiculous.

How about this for an idea: establish how much revenue comes from each country
based on the source so if someone in UK hands you money then that money is
attributed to the UK. Divide that by total global revenue and then at least
that percentage of profit has to be taxed in that counry.

~~~
gok
> Divide that by total global revenue and then at least that percentage of
> profit has to be taxed in that counry.

So companies like Amazon which are profitable domestically but are losing
money overseas would pay taxes on profits from US sales to countries where
they're losing money?

Presumably companies would just find ways to have high revenue and little to
no profit in low tax countries.

------
flippyhead
I recently read an excellent book on this subject:
[https://www.amazon.com/Fine-Mess-Global-Simpler-
Efficient/dp...](https://www.amazon.com/Fine-Mess-Global-Simpler-
Efficient/dp/1594205515)

I was kind of amazed that a book about the tax system could be page turner --
it was very interesting!

~~~
bob_theslob646
What was so good about the book? What didn't you know before that you do know
now?

~~~
flippyhead
How ingenious the VAT is.

------
matt4077
The only actual argument this article makes is:

 _Multinationals could often put foreign cash to more profitable use in the
U.S. by making acquisitions, building plants, paying special dividends or
repurchasing stock._

But that quickly falls apart: First, Apple is in no way constrained by cash in
its investments. And even financially weaker companies could still use foreign
cash reserves as collateral to get credit at almost insignificantly low
interest rates.

More importantly: investments can be expensed. If you hire employees, their
wages reduce your profit, and therefore your tax burden. The corporate tax
only applies to profit, not revenue. Apple could repatriate those $200
billion, hire ten million employees, and wouldn't pay a dime in taxes.

Other than that, it almost seems like an effort to use these corporations'
tax-avoidance schemes as an argument to reward them. The logic in that is the
same as striking murder from the criminal code to reduce crime

~~~
valuearb
Investments can’t be expensed for tax purposes. If they repatriate $200B, they
owe the state of CA roughly $20B and the US $63B in income taxes, no matter
what they invest it in.

They could invest in hiring tons of employees and their salaries would be
expenses (mostly future expenses) l. But that’s no free ride, those employees
need to increase sales to cover their costs or the money is wasted. If my
business makes $1M this year and i pay a contractor $1M so I don’t owe taxes
this year, that contractor better build something worth more than a million or
it was s huge waste. Losing $1M to save $350K is really bad business.

Imagine if the contractors project sold for $900k next year. Great, you
deferred taxes a year, but still owe $315K on the contractor sale next year,
and you lost $100k. Net loss $65,000. Dumb, dumb dumb.

What Apple would actually do if it repatriated the $200B is

a) pay the $80B in state/federal taxes, b) pay $117B in dividends, so its
shareholders would have to pay at least $20B in state/federal dividend taxes,
for a total tax of around $100B. But it’s worse than that.

Remember, the $200B is only what’s left after paying about $25B in income
taxes to foreign governments. Your company earns $225B, and can only pay about
45% to you, and 55% ends up going to various taxes (note we ignored
VAT/Excise/Payroll taxes too).

Now do you understand why Apple doesn’t repatriate?

------
lend000
Many of the same people who get angry about the complex tax acrobatics used by
big corporations also deride people like Rand Paul who have suggested a one
page tax code.

But what about my deduction for this? What about the deduction for that?
Hundreds of thousands of pages later, that's how you end up with loopholes
that only the savvy/wealthy are able to find.

That's the kind of thinking that led to this mess. Like good developers, we
should abstract the tax code to simply define the acceptable conditions for
something to be deducted. Then, the Treasury can provide a list of 'standard'
deductions somewhere that won't attract any extra scrutiny, and which will
suffice for most purposes. Things like a minimum rent amount, minimum food
expenses, etc.

~~~
maxxxxx
I would be with Rand Paul but his proposals would mainly reduce taxes for the
wealth without making much of a difference for the average guy.

~~~
lend000
I see nothing wrong with only agreeing with a subset of a person's politics. I
support some of his tax reform ideas (especially the common theme of
simplifying the current system) not because they are perfect, but because they
would be a large non-incremental improvement on the current system.

~~~
maxxxxx
I don't think his plans would be an improvement because they would just make
inequality even larger. I don't think we need that.

------
Isamu
FTA: > But the U.S. code provides ample room for sheltering and avoiding taxes
on foreign income, a major reason it needs an overhaul. The rules essentially
divide foreign profits into three categories. One bucket of profits is more or
less taxed at the full rate of 35%. On a second bucket, the multinational can
defer paying the U.S. tax due. And a third category is excluded from all U.S.
taxation, amounting to corporate America’s biggest loophole.

> Apple generates more foreign income that any other U.S. company. In FY’16,
> it booked $41.1 billion pre-tax profits outside the U.S., or 67% of the
> $61.4 billion total.

> It’s the third category that amounts to a big tax break, and explains why
> Apple’s effective rate is well below the statutory 35%.

> Once again, if Apple had faced the full 35% rate, it would have paid $21.46
> billion in federal taxes (as well as another $990 million to the states).
> Instead, it paid $10.444 billion in cash, and accrued $5.241 billion in U.S.
> tax owed on foreign profits, but deferred to be paid later. That’s the total
> of $15.685 billion that it booked in tax expense on its income statement.
> The difference between that number and the approximately $21.5 billion it
> would have paid at the 35% rate is the almost $5.6 billion attributed
> “indefinitely invested foreign earnings under the GAAP rules.”

------
mftf
Not choosing a side, what is the justification for taxing foreign profits?

~~~
onlyrealcuzzo
Agreed. I'm being serious, I can't understand why corporations are taxed at
all. The money going to US citizens already gets taxed as income (although at
capital gains rates). Even if the money funnels through a few corporations
before it gets to the individual.

Money that would go to foreign shareholders (or foreign corporations) should
be taxed at the same rate.

If we didn't tax businesses, they'd be more incentivized to stay in the US or
even move here.

What would we lose from not taxing corporations (and adjusting capital gains
tax to make up for that)?

~~~
jandrese
You could also argue that income tax makes no sense, because the people are
going to pay sales tax or property tax with it anyway.

The more you concentrate the tax in one area of the economy, the more you
incentiveize people to try to find a way around that specific tax. Spreading
it out reduces the risk of making people behave otherwise irrationally just to
avoid paying tax.

------
bediger4000
While we may all be free marketeers and capitalists here, I think we do have
to recognize that large corporations have very different interests than
workers, managers and small business owners. We should also recognize that
Fortune is not going to print anything that's not in a large corporation's
very best interests. I didn't read this article, but it would seem that by
recognizing the source, and reading the title, we can decide not to bother
with large corporation propaganda.

~~~
jmh530
There's a difference between pro-business and pro-market. There's nothing
inconsistent with believing in free markets/rule of law and at the same time
believing that a tax system should be fair. Scandinavian countries that people
refer to as socialist are actually free market economies (in that they score
just as well as the U.S. in the Heritage Index of Economic Freedom), but have
more extensive tax and redistribution programs than the U.S.

