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No, U.S. Taxpayers Won’t Pay Apple’s $14.5 Billion Irish Tax Bill

posted September 13, 2016

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Guest post written by

Jeffery M. Kadet

Kadet, a CPA, spent 32 years in international tax practice and now lectures part-time at the University of Washington School of Law.

As White House Press Secretary Josh Earnest put it in an August 30thpress briefing,  the European Commission ruling that Apple AAPL +2.59%  must pay  €13 billion ($14.5 billion, U.S.), plus interest, in back taxes to Ireland is “not fair to American taxpayers.’’  His reasoning: Apple will be able to deduct the payments from the amount owed the United States government. Other U.S. officials and commentators —with the encouragement of Apple CEO Tim Cook (see his open letter here) —have also adopted the line that the €13 billion payment, if upheld, will fall on American taxpayers and not on Apple and its shareholders.

Is that really true? No.

The argument that U.S. taxpayers will pay might sound legally correct, but it is misleading, since it ignores what’s really been happening and is likely to happen on the U.S. tax front.

People pass by the Apple Store, Upper West Side July 27, 2016 in New York City. (Photo by Kena Betancur/Getty Images)

For those who haven’t been paying attention, the Commission essentially found that Ireland had provided illegal state aid through an advance transfer pricing ruling that allowed Apple’s Irish affiliates to pay far less than Ireland’s official 12.5% corporate income tax rate on trading income.  According to the decision, this special treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003, down to 0.005 per cent in 2014.

Ireland and Apple have said they will appeal the decision. If they lose, the €13 billion payment would potentially be a foreign tax credit that reduces dollar-for-dollar Apple’s U.S. tax payments. But that would only occur if Apple brings all its offshore money home through fully taxed dividend payments. Cook, despite his recent about-face pledging—sort of—to bring a little of the money home, has repeatedly said Apple won’t do that.

In a 2015 interview with Charlie Rose on 60 Minutes,  Cook said the money overseas wouldn’t come home, “Because it would cost me 40 percent to bring it home. And I don’t think that’s a reasonable thing to do.” He reiterated this in a Washington Post interview published on August 13. (The 40% presumably includes both the 35% federal tax and some additional for possible state taxation.)

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If past tax reform proposals are any gauge of the future, then this tax reform that we’re assuming gets enacted will give a real sweetheart deal to all the U.S. multinationals that have kept their profits overseas. In short, this means that they’ll be able to bring their earnings home not at the current 35% federal rate (less the credit for any foreign taxes they’ve paid), but rather at a much lower rate. Some past proposals have included sweetheart rates well under 10%, one being as low as 3.5% for some foreign earnings.

Say that this tax reform we’re assuming includes—conservatively—a sweetheart 10% rate. Following on the approach of past reform proposals, there would also be a credit allowed for foreign taxes paid, including Apple’s €13 billion payment to Ireland.

However—and this is key—under this approach, the portion of that €13 billion that could be claimed would be limited so that no credit could be claimed for tax related to the reduction in rate (the reduction being 25 percentage points, which is our current 35% corporate tax rate less the 10% sweetheart rate). That means Apple could only use a credit of €3.7 billion to offset its U.S. taxes (10%/35% x €13 billion). The remainder of the €9.3 billion would be Apple’s expense and not the American taxpayers’ expense.

Will there be tax reform in the future? Maybe. But don’t hold your breath. The point is that for now, in any discussion of who bears the cost of foreign taxes, a little realism should prevail. That means that until there’s tax reform there will be zero cost to American taxpayers. And after tax reform (which I’m concerned will not occur within my lifetime), any cost will likely be only a small fraction of the actual foreign taxes paid.

A final point. Perhaps we should be giving a big “Thank you” to the European Commission for the Apple decision. It seems to have encouraged Tim Cook to announce that Apple would bring a little of the money home; in an interview with Ireland’s RTE News, he even forecast that it would happen next year.

It seems pretty clear that without the Commission’s decision, Apple would not be contemplating any repatriation of profits at all.

I’m not expecting any significant percentage of Apple’s well over $200 billion foreign cash hoard to be brought home, but any amount is welcome. Why? Won’t there be a credit for foreign taxes that will reduce U.S. tax on the dividend? Yes, there will be. But the way the rules work, only a part of the €13 billion of tax paid to Ireland can be used as a credit that reduces U.S. tax.

Remember, Ireland’s official rate —the one that Apple was allowed to avoid—is just 12.5%. To keep things simple, we’ll ignore other factors including Apple’s other foreign profits and any foreign taxes Apple has paid aside from the 12.5% Irish tax. Say that Apple arranges a dividend based on $1 billion of before-tax Irish profits. On this dividend, Apple should pay roughly $225 million in federal tax, after a credit of $125 million for Irish tax paid on the $1 billion of before-tax profits. ($1 billion x 35% = $350 million less $125 million credit = $225 million.)

With this dividend inspired by the European Commission, American taxpayers are better off by $225 million for every billion dollars of before-tax Irish earnings repatriated. Without the Commission’s decision, Apple would be bringing home no money and paying no dividend with a result that the U.S. Treasury and American taxpayers would receive nothing.

Jeffery M. Kadet, a CPA, spent 32 years in international tax practice and now lectures part-time at the University of Washington School of Law.

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