Tuesday, May 28, 2013

Blame the Government, Not Apple, for the "Double Irish Dutch Sandwich"

Say you work your ass off, invent a product that everyone loves, and sell it to millions of people who voluntarily pay you lots of money.  Then, your business gets so big that you hire thousands of people to help meet the demand and distribute your product around the world. You stay constantly aware of the competition and invest billions in research to develop even more products to sell to your adoring customers.  Over the course of years and decades, you enrich yourself, your employees, your customers, and your investors.

Is this an example of good or evil? Should the inventor be publicly celebrated as a hero and role model of the American dream or should he be vilified and threatened?  Evidently, in modern America, it is the latter.                

The U.S. federal government has erected a byzantine tax code nightmare forcing businesses to retain legions of accountants and auditors on a full time basis to comply with and pay a confiscatory 35% corporate tax rate (more than double any other developed country).  Then, when these businesses make perfectly legal efforts to minimize this burden, they are hauled before a Congressional show trial for public haranguing and intimidation.

Recently, Apple CEO Tim Cook testified before the Senate Permanent Subcommittee on Investigations "to defend the company from accusations that it avoids tax payments by shifting profits to offshore subsidiaries in Ireland." Evidently, multi-nationals like Google and Apple "funnel profits through two linked Irish subsidiaries" by making "tax-deductible payments to a Bermudan subsidiary via a Dutch affiliate in a related arrangement known as a 'Double Irish Dutch sandwich.'"

But why do companies go to such incredible lengths to avoid taxation?  Do these companies have the right to minimize taxation and maximize their profits? Addressing the charge that corporations are "hoarding" cash overseas, Cook told the committee:
“Apple has real operations in real places with Apple employees selling real products to real customers.  Our foreign subsidiaries hold 70 percent of our cash because of the very rapid growth of our international business. We use these earnings to fund our foreign operations, such as spending billions of dollars to acquire equipment to make Apple products and to finance construction of Apple retail stores around the world.
True enough, but fortunately, he identified the real culprit, the U.S. tax code:
Under the current U.S. corporate tax system, it would be very expensive to bring that cash back to the United States. Unfortunately, the tax code has not kept up with the digital age. The tax systems handicaps American corporations in relation to our foreign competitors who don’t have such constraints on the free movement of capital.”
The article also quotes Brian White, analyst at Topeka Capital Markets, who chastised the "misguided" kangaroo court: “Although the U.S. Tax Code is written by Congress, we found the complete lack of understanding and inability to grasp simple concepts around how the tax code works as it relates to Apple (and the remainder of corporate America), nothing short of astonishing (and sad).” White specifically exposed  committee members for not understanding the concept of double taxation: “What really astounded us was the inability of Senators such as John McCain and Carl Levin to grasp the concept that Irish subsidiaries such as AOI are responsible for managing Apple’s cash as a holding company but the profits have already been taxed in other countries,” 

Fortunately, Senator Rand Paul got it exactly right when he scolded his colleagues saying:  "I'm offended by the spectacle of dragging in executives from an American company that is not doing anything illegal." He added: "If anyone should be on trial, it should be Congress." Appropriately, he suggested bringing in a "giant mirror" to hold up to Congress for creating a "bizarre and byzantine tax code" that incentivizes corporations to move money and operations overseas.

More importantly, Paul implied a moral argument by calling on the Senate to stop "harassing" Apple, which he called one of "America's greatest success stories."  He added:  "Instead of doing the right thing, we drag businessmen and women in here to berate them for trying to maximize their profits for shareholders. Apple has done more to enrich people's lives than politicians will ever do."

I agree with Senator Paul, but, I would go further and point to the philosophy underlying the U.S. tax code.  What really should be on trial is a moral code that holds production and rational profit seeking as a vice and not a virtue.  When the idea that pursuing your own rational long term self-interest is regarded as a virtue, companies like Apple and Google will be brought to Congress, not for threats and harassment, but for medals of honor.

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