Corporate Taxes: Are US Multinational Corporations really paying their fair share?

There has been extensive coverage in this blog about how US Multinational Corporations are not paying their fair share by utilizing Transfer Pricing, Inversions and Earnings Stripping to reduce their effective tax rates below the statutory 35%.

Some examples are: Pfizer tried to invert a couple of times to avoid paying the US tax rate, Apple and its Irish transfer pricing, Google with its double Dutch Irish sandwich transfer pricing, Caterpillar with its Swiss structure, and on and on.

Some of these USMNCs have argued that despite utilizing these accounting maneuvers, they still pay their fair share of taxes (See Apple CEO Tim Cook's comments on 60 Minutes).  Others question whether the USMNCs are actually paying their fair share and whether they are contributing to the overall tax gap.

In contrast to USMNCs trying to shift profits offshore to avoid US Tax, there is one USMNC that is paying its fair share.  Disney, yes that Disney, and despite negative criticism (NY Times article re Disney outsourcing tech jobs to India, and Disney caught in the LuxLeaks scandal), it appears as if Disney is actually paying its true tax liability without utilizing the accounting tricks that other USMNCs utilize to reduce their effective tax rates.

According to this Investopedia article, Disney is paying at or near the US corporate tax rate (35%) of income taxes.  For example, the author states that for 2015, Disney had pre-tax income of $13.9 billion and paid corporate income taxes of $4.4 billion.  The author, David Cay Johnston, also states that Disney earned only 1% of its profits in the U.S. and paid about "1.3% if all the corporate income taxes".

Johnston also states that one reason Disney is paying a higher rate of taxes is that Disney is keeping its Intellectual Property in the U.S. and not transferring the IP to low tax haven subsidiaries.  Johnston also criticizes Disney for not spending its profits in reinvesting in U.S. businesses but in conducting stock buy-backs.

Johnston's main point is that Congress should close the transfer pricing incentive/loophole that has permitted companies (Apple, Google, Pfizer to name only a few) to utilize transfer pricing, earnings stripping and inversions to erode the US tax base and pay less taxes.  Johnston also challenges whether the corporate tax is achieving the goals it was designed to achieve.

Maybe Johnston is correct in having Congress re-visit the utility of the corporate tax structure (a similar criticism of Bob Iger's, the Chairman of Disney).  Or maybe the IRS should be doing a better job at enforcing transfer pricing, inversions, and/or earnings stripping to prevent the USMNCs from shifting taxable income it its foreign base subsidiaries, despite its recent loss in the Medtronic case.

If you have specific and credible information about a company utilizing transfer pricing, inversions and/or earnings stripping to minimize its US taxes, contact us about filing an IRS Whistleblower claim to assist the IRS in attacking the various abusive transfer pricing applications by USMNCs.

Apple and its European Commission Troubles: hype or real transfer pricing liability for Apple

Since June 2014, The European Commission (“EC”) (European Union's politically independent executive arm, made up of 1 commissioner from each EU country) has investigated Apple, and more specifically the tax authorities in Ireland, to determine if the Irish tax authorities followed the EU rules on state aid in issuing favorable tax rulings to Apple.

As explained in the Permanent Subcommittee on Investigations (PSI) report on Apple, Apple utilizes “key offshore subsidiaries incorporated in Ireland.”  The reason Apple has utilized the Irish subsidiaries is that “Ireland has provided Apple affiliates with a special tax rate that is substantially below its already relatively low statutory rate of 12 percent,” generally negotiated with the Irish government to be at rates at 2% or less. See pg. 20.

Apple CEO Tim Cook, in his 60 minutes interview, has called the investigation “political crap” and has stated that “there is no truth behind it.”  Mr. Cook has also stated in the same interview that “Apple pays every tax dollar we owe.” 

Some news outlets (Bloomberg, Guardian) have stated that Apple could “be on hook for $8 billion in taxes”.  Bloomberg calculated this figure by stating that if the EC terminates the Irish rulings for Apple, and requires Ireland to seek recourse tax payments from 2004-2012 on profits of $64.1 billion at a 12.5% rate, that would generate $8 billion in taxes owed by Apple to Ireland.

While other news outlets (Forbes and in a recent opinion piece in Forbes) has stated that Apple isn’t on the hook for $8 billion, but that the Irish government is being investigated and that the true amounts Ireland may request from Apple, assuming the EC rules against Ireland’s rulings favoring Apple, would be more in the $200 million range, and not the $8 billion figure used by Bloomberg.  Mr. Worstall in the Forbes opinion piece states explains that the reason behind the lower figure is due to the structure employed by Apple, the Double Irish structure.  He states that some profits can be taxable in Ireland and some profits are not taxable in Ireland, so the Bloomberg calculation, which treats the entire amount of profits ($64 billion) as taxable in Ireland is incorrect.  Mr. Worstall explains that Bloomberg’s figure is wrong because it fails to account for transfer pricing even between Apple’s Irish entities, which might shield the non-Irish resident income from being taxed in Ireland.

Two noteworthy observations regarding Apple’s EC investigation are:

1. If as Mr. Worstall states, the game is transfer pricing and the prices allocable between the various Irish entities, then what about the transfer price between Apple Inc. (the U.S. entity) and AOI (Apple’s primary Irish entity identified in the PSI hearings)?  If the EC is examining whether the proper transfer pricing and applicable tax rates are at play, why isn’t the IRS examining Apple to determine if Apple used the proper transfer prices to shift the U.S. developed technologies and intellectual property to its offshore operations to pool an estimated $181 billion dollars offshore through the Irish entities instead of being taxed in the United States.
2. Panama Papers part 2.  Previously I blogged about the Panama Papers and whether U.S. corporations and individuals would be exposed.  Give the exposure Apple has gotten over its use of Irish entities, and the knowledge that other companies and individuals have utilized offshore entities to grow their wealth, why hasn’t there been more disclosures of companies and individuals in the U.S. that have taken advantage of offshore entities.  If PSI can expose Apple’s offshore structure, why couldn’t the IRS expose other companies’ offshore transfer pricing structure?

If you have specific and credible evidence of a corporation’s use of transfer pricing to avoid paying its tax liabilities you should consider filing a tax whistleblower claim.  Contact us to see if your information would permit you to receive a 15-30% award of the amount of taxes, penalties and interest collected by the IRS on your transfer pricing tax whistleblower claim.