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Ethics and Corporate Social Responsibility Implications of Tax Shifting Practices by U.S. Companies

Average Tax Payment of about 12.6% is about 36% of Top 35% Rate Due to U.S. Government

I have previously blogged about the use of transfer pricing techniques by U.S. companies to shift profits away from the U.S., which has the highest corporate tax rate (35%), to countries with lower tax rates such as Ireland (12.5%). As long as profits made overseas are not repatriated back to the U.S., those overseas profits remain untaxed by the IRS. Critics claim that a much lower tax rate (say, 15-20%) would encourage U.S. companies to bring the profits home in the form of investments and spur economic development and job growth.

Now we learn that the Government Accountability Office found that large, profitable U.S. companies on average paid U.S. federal income tax equaling 12.6% of their world-wide income in 2010.

"Some U.S. multinational corporations like to complain about the U.S. 35% statutory tax rate, but what they don't like to admit is that hardly any of them pay anything close to it," said Sen. Carl Levin (D., Mich.), who requested the report along with a Republican colleague, Sen. Tom Coburn of Oklahoma.

But some analysts questioned the findings by the Government Accountability Office, saying they likely understate effective tax rates in some ways.

"This is truly an apples to oranges comparison," said Peter Merrill, who heads the national economics and statistics group at PricewaterhouseCoopers LLP, and often works with big firms.

For example, the 12.6% average rate excludes taxes paid to other governments, including foreign governments. When foreign, state and local taxes are included, the average effective tax rate of large profitable U.S. companies increases to about 16.9%, the study found. What Merrill conveniently ignores is that the 35% rate is higher when all is said and done so that most analysts use a 40% effective tax rate for U.S. Companies’ overall tax liability.

One company that has been taken to task for its tax-shifting actions is Apple Inc. Apple recently “took a bite” out of its corporate tax liabilities and caused a public outcry. But the ethical issues raised by such a move do not begin or end with them alone.

The discovery that this innovative technology giant (that has successfully placed cutting edge tools in half of the homes in America) has legally avoided paying U.S. federal income tax on billions of dollars of net income has many outraged and questioning the ethics of their actions.

The company was called before a Senate committee to give an explanation under the suspicion that the company was involved in a scandalous – allegedly illegal — practice.

“During its investigations, the subcommittee found that Apple considers three key subsidiaries, all based in Ireland, to have no tax jurisdiction at all. One of those Irish affiliates, Apple Sales International (ASI), reported sales income of $74 billion over four years but paid hardly any tax. In 2011 ASI had pre-tax earnings of $22 billion but paid just $10 million in tax, a rate of 0.05%.”

In rebuttal, the company’s CEO, Tim Cook, gave an ethical rationalization for Apple’s actions as follows:  “We pay all the taxes we owe, every single dollar,” said Cook, who also insisted that Apple doesn’t rely on tax “gimmicks” and doesn’t “stash money on some Caribbean island.”

Apple is not alone and tax-shifting seems to be an art practiced by many high-technology companies. Google and Facebook have also found legitimate tax minimizing strategies that have spared them from turning over federal corporate taxes on profits. It is widely known that many other multi-national corporations are practicing similar tactics.

With a breathtaking display of international structural maneuvers, Apple found a way to shield its income earned outside of the U.S borders. With today’s muddled tax code, a good tax adviser can make all the difference in the world. And any company knows that paying more taxes than legally required does not make their shareholders happy.

Some “defenders” of practices like those followed by Apple argue that to close the loopholes is a misguided effort that will likely cause corporations and small business owners to seek to relocate their corporate entities and their corresponding jobs outside of the reach of the tax collector. This sounds like tax blackmailing to me. Go after us and we’ll leave the U.S.A., or some other misguided view of ‘corporate responsibility’.

I’m not saying companies like Apple should stay home and not operate overseas. Obviously, that would be economically devastating to the U.S. economy. I would, however, like these companies to consider that their failure to repatriate more funds to the U.S. is stifling economic growth at home and, perhaps, keeping the unemployment rate at historic highs.

Apple should pay its “fair share.” As with most issues in business, the devil is in the details of what constitutes fair share. My point is there are ethical and corporate social responsibilities implications that companies like Apple fail to see or purposefully ignore.

Blog posted by Steven Mintz, aka Ethics Sage, on July 17, 2013