AAPL Apple Inc

By Richard Rubin 

WASHINGTON -- American politicians have spent years salivating over U.S. companies' stockpile of untaxed foreign profits, now more than $2 trillion and growing.

This week, Europe got to that money pot first.

The European Commission's ruling that Apple Inc. must repay $14.5 billion to Ireland represents a major threat to a bipartisan U.S. tax agreement that has long seemed plausible but always sat just out of reach.

U.S. lawmakers said Tuesday they hoped the move in Europe would accelerate potential compromises in Congress, including a one-time tax to free up otherwise inaccessible cash so companies could invest in domestic projects and get money to shareholders. Under that plan, the U.S. could use the windfall to rebuild roads and bridges, cut tax rates or both.

But bitter partisan divides over how heavily the U.S. should tax its own companies abroad continue to stymie efforts to revamp the corporate tax code, barring a long-elusive breakthrough.

The commission said Apple used Irish rulings to pay an artificially low tax rate on money that it earned all over Europe.

To the U.S. Treasury and lawmakers in Congress, European regulators represent a threat in part because companies could get U.S. tax credits for increased payments abroad. The U.S. is trying to protect its claim to the cash even though they haven't figured out how to tax it yet.

U.S. companies have been accumulating foreign profits outside the reach of the Internal Revenue Service because of the way the U.S. tax system works. Companies headquartered in the U.S. owe the full 35% U.S. corporate tax rate on the profits they earn around the world. But they can get foreign tax credits for payments to non-U.S. governments, and they don't have to pay the residual U.S. tax until they bring the money home.

For example, consider a U.S. company that makes $1 billion in the U.K., which has a 20% tax rate. The company would pay $200 million to the U.K., and it would owe another $150 million to the U.S. if it repatriated the profits.

"Any ruling that is inconsistent with international tax standards and harms American business abroad with retroactive measures is inherently unfair and encroaches on U.S. tax jurisdiction," said Sen. Orrin Hatch (R, Utah), chairman of the Senate Finance Committee.

Sen. Charles Schumer of New York, the likely next Democratic leader, called the EU's actions a "cheap money grab" that targets U.S. businesses. Rep. Kevin Brady (R, Texas), chairman of the House Ways and Means Committee, called the decision a "predatory and naked tax grab" that highlights the need for major U.S. tax changes.

"The EU is unfairly undermining our ability to compete economically in Europe while grabbing tax revenues that should go toward investment here in the United States," Mr. Schumer said. "This is yet another example of why we need to reform the international tax system to ensure these revenues come home."

That concern, however, doesn't mean U.S. policy makers will be able to agree on what to do or that anything they do will calm down the cross-border tension revealed by the Apple investigation.

"Superficially, it could be a motivation if people are concerned about losing the opportunity to tax some of this deferred income," said Warren Payne, an adviser at Mayer Brown LLP and former Republican policy director at the House Ways and Means Committee. "But tax reform on its own is not going to protect U.S. companies from this kind of behavior" by European regulators.

The current tax system encourages companies to find as low a foreign tax rate as possible, book as much profit as possible outside the U.S. and leave the money overseas. That is exactly what they've done, and it has been particularly easy for technology and pharmaceutical companies to move intellectual property outside the U.S. and accumulate profits there.

Apple, for example, had $215 billion in cash and other liquid investments outside the country as of June, up from $187 billion last September. The company says it would pay a 33% tax rate on part of that income if it brought the money home, suggesting it had paid a single-digit tax rate abroad. CEO Tim Cook told The Washington Post recently that the company won't bring the money back "until there's a fair rate."

Until Apple changed its structure in 2015, the company used subsidiaries that slid neatly between U.S. and Irish tax laws. According to a 2013 U.S. Senate investigation, Ireland saw the companies as resident in the U.S., because they were managed and controlled from California. But the U.S. considered them foreign entities not subject to immediate U.S. taxes, because they were officially registered in Ireland.

"The way that the commission presented this decision in its press release is fascinating," said Lilian Faulhaber, a tax law professor at Georgetown University in Washington. "It calls out the United States for not requiring Apple to pay more taxes. That is a pretty targeted statement."

The U.S. Treasury has warned that the EU's investigation could have a direct impact on U.S. revenue, because any taxes Ireland collects could be credited against Apple's U.S. tax bill.

"At its root, the Commission's case is not about how much Apple pays in taxes," Mr. Cook wrote in a letter to the company's customers on Tuesday. "It is about which government collects the money."

European governments should get the first chance to tax those profits, and the U.S. is effectively trying to jump in line, said Ed Kleinbard, former chief of staff of the congressional Joint Committee on Taxation.

"The fact is that this revenue that's at stake here, this pot of gold that's at stake, unquestionably arose in Europe in respect of European activities," he said.

The U.S., however, hasn't been able to agree on what to do about the stockpiled profits or about the foreign tax system going forward. There is a general agreement on a one-time tax on those profits as part of a transition to a revamped international tax system.

But there's disagreement on what that tax rate should be, how the money should be used, what the new system should look like, and what other tax policy changes should accompany it.

Democratic presidential candidate Hillary Clinton has talked about using business tax changes to pay for infrastructure investment, but she hasn't specified how that should work. Republican presidential candidate Donald Trump has proposed a 10% tax on the accumulated profits.

House Republicans envision a transformed tax system that bases corporate taxes on the location of sales, which would favor U.S. exporters, tax imports and likely cause even more international controversy.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

August 30, 2016 13:15 ET (17:15 GMT)

Apple (NASDAQ:AAPL)
Historical Stock Chart
From Mar 2024 to Apr 2024

Apple (NASDAQ:AAPL)
Historical Stock Chart
From Apr 2023 to Apr 2024