WASHINGTON—American politicians have spent years salivating over
U.S. companies' stockpile of untaxed foreign profits, now more than
$2 trillion and growing.
Europe got to that money pot first.
The European Commission's ruling Tuesday that Apple Inc. must
pay $14.5 billion in back taxes to Ireland marked a sharp break
with the U.S. Treasury Department and further complicates efforts
to forge a bipartisan deal on U.S. tax policy that had seemed
plausible but remains out of reach.
To the Treasury and members of Congress, EU regulators represent
a threat partly because companies could get U.S. tax credits if
they pay more abroad, reducing future U.S. tax collections. The
U.S. is trying to protect its claim to the foreign income even
though it hasn't figured out how to tax it.
Charles Schumer of New York, the likely next Democratic Senate
leader, called the EU's actions a "cheap money grab" that targets
U.S. businesses.
In announcing their decision, European officials said they were
following long-established laws prohibiting illegal state aid to
companies.
The dispute stems in part from the way the U.S. tax system
works: It encourages companies to find as low a foreign tax rate as
they can, book as much profit as possible outside the U.S. and
leave the money overseas. That is what they have done, and such
moves are common in the technology and pharmaceutical industries
where companies transfer intellectual property outside the U.S. and
accumulate profits there.
Companies based in the U.S. owe the full 35% corporate tax rate
on their global profits. They get tax credits for payments to
foreign governments, and they don't pay the residual U.S. tax until
they bring the money home.
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 owe another $150 million to the U.S. if it repatriated the
profits. The more it pays abroad, the less it pays at home.
"At its root, the commission's case is not about how much Apple
pays in taxes," Apple CEO Tim Cook wrote in an open letter Tuesday.
"It is about which government collects the money."
But governments collect taxes at different rates and different
times, and Apple has avoided taxes on much of its European income
and delayed its American tax bill on foreign profits.
European governments should get the first chance to tax those
profits, said Ed Kleinbard, former chief of staff of the
congressional Joint Committee on Taxation.
"I see it as the United States digging in its heels, that it is
protecting its corporate champions when in fact it's claim jumping
on what is really European income," he said.
Apple had $215 billion in cash and other liquid investments
outside the U.S. in June, up from $187 billion last September. The
company says it would pay a 33% tax rate on part of that income if
it repatriated the money, suggesting it paid a single-digit rate
abroad. Mr. 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. The U.S. considered them foreign
entities not subject to immediate tax because they were registered
in Ireland.
Democrats, Republicans and U.S. corporate groups all criticized
the commission on Tuesday, with the Business Roundtable, a group of
major-company chief executives, calling the decision an "act of
aggression."
"Countries ought to be working in partnership to prevent tax
evasion and crack down on the unfair practices that have eroded tax
bases in the U.S. and around the world, but today's ruling could
make that kind of partnership more difficult," said Ron Wyden of
Oregon, the top Democrat on the Senate Finance Committee. "This
ruling could set a dangerous precedent that undermines our tax
treaties and paints a target on American firms in the eyes of
foreign governments."
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 policy changes.
The Treasury on Tuesday expressed disappointment in the ruling
after issuing warnings against such a move for months. Treasury
laid out its argument last week that European decisions against
U.S. companies undermine tax treaties, set bad precedents for
retroactive taxation and break with past practice. U.S. policy
makers have even dangled an obscure law that allows retaliatory
double taxation.
Even as they blasted the European Commission, U.S. lawmakers
said they hoped Europe's move would accelerate compromises in
Congress, including a one-time tax on foreign profits that would
encourage companies to invest domestically or distribute money to
shareholders. Under that plan, the U.S. could use the tax windfall
to rebuild roads and bridges or cut tax rates.
But partisan divides over how heavily the U.S. should tax its
own companies' foreign earnings still stymie efforts to revamp the
corporate tax code, barring a long-elusive breakthrough on that
issue and other disputes.
The U.S. hasn't decided what to do about the stockpiled profits.
There is general agreement on a one-time tax during a transition to
a revamped international tax system. But there is disagreement on
the U.S. component of the one-time tax rate, how the money should
be used and what other tax policy changes should accompany it.
Democratic presidential candidate Hillary Clinton has talked
generally about using business tax changes to pay for
infrastructure investment. 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
and likely cause even more international controversy.
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
August 30, 2016 21:35 ET (01:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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