In the past week it was announced that the European Commission completed its investigation and concluded that Apple would need to pay back a 14.5 billion dollar tax to the EU. While 14.5 billion only represents about 6% of the cash and investments Apple has on hand, the big question is what kind of precedence this might set for the future of big business overseas in light of the upcoming Presidential Election. So, in simple terms, how did this tax even happen?
This all started when Apple struck at tax deal with Ireland to locate their European Headquarters in Ireland in 1991. Ireland create tax arrangement between now two Irish companies, Apple Sales International and Apple Operation Europe. The profits that came from European sales for Apple were recorded in Ireland some of which were taxed and the majority of the profits were recorded through something called a “head office”. In simple terms, this was an offshore company that wasn’t taxed at all. The result of this sophisticated tax arrangement is rather than the normal 12.5% tax that should have been paid to Ireland, the overall corporate tax rate was 1% back in 2003 and in 2014 it was just .5% of profits. Consequently, the EC concluded that Apple should have to pay back the 14.5 billion in taxes plus interest.
Apple has appealed the ruling already, but it really begs the question as to why companies like Apple and others seek to set up these type of arrangements. As we unfold the Presidential election, you will continue to hear debates over the next several months around corporate tax rate. Many people are wondering why jobs continue to leave the United States and one large looming issues is around corporate tax rates. Here is the current corporate tax rate in America.
|Taxable Income ($)||Tax Rate|
|0 to 50,000||15%|
|50,000 to 75,000||$7,500 + 25% Of the amount over 50,000|
|75,000 to 100,000||$13,750 + 34% Of the amount over 75,000|
|100,000 to 335,000||$22,250 + 39% Of the amount over 100,000|
|335,000 to 10,000,000||$113,900 + 34% Of the amount over 335,000|
|10,000,000 to 15,000,000||$3,400,000 + 35% Of the amount over 10,000,000|
|15,000,000 to 18,333,333||$5,150,000 + 38% Of the amount over 15,000,000|
|18,333,333 and up||35%|
At a 35% corporate tax, here is where we stand according to the tax foundation (www.taxfoundation.org). Some of these statistics, you might find shocking given how little it is really discussed here in the United States.
- The United States has the third highest general top marginal corporate income tax rate in the world at 39 percent, which is the same as Puerto Rico and is exceeded only by Chad and the United Arab Emirates.
- The worldwide average top corporate income tax rate (accounting for 173 countries and tax jurisdictions) is 22.9 percent, 29.8 percent weighted by GDP.
- By region, Europe has the lowest average corporate tax rate at 18.7 percent (26.1 percent weighted by GDP). Africa has the highest simple average at 28.77 percent.
- Larger, more industrialized countries tend to have higher corporate income tax rates than developing countries.
- The worldwide average corporate tax rate has declined since 2003 from 30 percent to 22.9 percent.
- Every region in the world has seen a decline in its average corporate tax rate in the past twelve years.
While this should have very little effect in the long term on Apple, the real issue is whether more and more United States companies that are becoming worldwide companies will continue to seek locations around the world where taxes become more favorable. You see, we want what we want here in the United States today. We see people asking for higher wages, lower prices, and better deals. If you lose more than 1/3rd of your corporate profits from just federal tax alone, how can you have your cake and eat it too? No wonder Apple went for a tax structure that they paid only .5% in 2014 and now the EU wants a bite of Apple’s cash.
Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.