Project Zero Corporate Taxes

February 5th, 2015 by Phil Mattera

bad-appleGoogle’s Project Zero works on computer security, but that name could more be more accurately applied to the efforts of high-tech giants and other large U.S. corporations when it comes to federal tax policy: they want to pay less and less, and ultimately nothing at all. President Obama’s new tax reform proposal could end up assisting the business campaign.

Obama is endorsing the long-standing business proposal for a reduction in the statutory rate (from 35 to 28 percent) while at the same time offering an even lower rate (14 percent) on repatriated foreign profits being held abroad and a 19 percent rate on future overseas business income (minus foreign taxes paid). The revenue from the tax on accumulated offshore earnings would be earmarked for infrastructure projects.

Much of the reaction to the plan has framed the offshore provisions as a big tax hit on companies such as Apple, Microsoft and Citigroup. The Business Roundtable accused Obama of seeking “steep tax increases on businesses that will negatively impact their competitiveness.”

This view make sense only if you take as the norm the current effective tax rate imposed on these cash hoards, which is zero. In reality, that cash — which in the case of Apple alone exceeds $130 billion — should be seen as the ill-gotten gains of systematic international tax dodging and thus hardly worthy of preferential tax treatment.

This was made clear with respect to Apple in a 2013 report by the Senate investigations subcommittee that described a wide array of loopholes and tricks used by the iPhone producer. Nonetheless, CEO Tim Cook came to Capitol Hill and testified that Apple was not using gimmicks but simply managing its foreign cash holdings prudently. Sen. Rand Paul was taken in by this deceit and declared that Apple was owed an apology.

Too many members of Congress are willing not only to accept the legitimacy of offshore cash hoards but also to go along with misguided schemes to “incentivize” companies to bring some of that money back home. Last month, Sen. Paul and his Democratic colleague Barbara Boxer called for a “tax holiday” that would allow the repatriation of foreign profits with a tax rate of only 6.5 percent. This would be a replay of 2005 holiday that brought some $300 billion back to the United States, but it turned out that very little of the money was used to stimulate investment and job creation, as proponents had promised. Instead, much of it was spent on corporate stock buybacks.

Although he is not using the term, Obama’s 14 percent proposal amounts to the same kind of dubious tax holiday scheme. His higher rate is being regarded in business circles as simply an opening offer that corporate lobbyists will bring down to “reasonable” levels.

The corporate position on repatriated profits looks all the more unreasonable in light of the recent financial performance of leading offshore cash hoarder Apple. The company has more money than it knows what to do with. In January it reported quarterly profits of $18 billion, thanks to the sale of a ridiculous number of iPhones. This was a record not only for Apple but was the biggest quarterly net in corporate history.

Apple may not be sure how to use that windfall, but like many other large companies it is certain what it does not want to do: pay its fair share of taxes.

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