Business
2:07 pm
Tue May 21, 2013

Apple, Tech Giants And An Industrial-Age Tax Code

Apple CEO Timothy Cook made a rare appearance on Capitol Hill on Tuesday, testifying after congressional investigators revealed that Apple avoided billions in taxes. Reporter Charles Duhigg of The New York Times and guest host Jennifer Ludden talk about how, as Duhigg writes, "technology giants have taken advantage of tax codes written for an industrial age."

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Transcript

JENNIFER LUDDEN, HOST:

Apple CEO Timothy Cook made a rare appearance on Capitol Hill Tuesday morning. Congressional investigators revealed Monday that the tech giant avoided billions of dollars in taxes in the United States and around the world. Cook testified in front of a Senate panel.

TIMOTHY COOK: Apple has enjoyed unprecedented success over the past 10 years. The worldwide popularity of our products has soared, and our international revenues are now twice as large as our domestic revenues. As a result, I'm often asked if Apple still considers itself an American company. My answer has always been an emphatic yes. We are proud to be an American company and equally proud of our contributions to the U.S. economy.

LUDDEN: Though there are no allegations of illegal activity, lawmakers say Apple has used offshore tax havens to shift a least $74 billion away from the IRS. Here to help us understand how this happened is Charles Duhigg of The New York Times. He is co-author of the Times series "The I-Economy," which explores the American economy through the lens of Apple and other technology firms. Welcome to TALK OF THE NATION, Charles.

CHARLES DUHIGG: Thanks for having me on.

LUDDEN: And you - if you have questions for Charles, you can email them to us at talk@npr.org. Charles Duhigg, Apple is the most profitable technology company in the world, top corporate taxpayer in the U.S., but as we just heard from Tim Cook, increasingly they're based overseas. In fact, I think that's the majority of their income, he said, is from overseas.

DUHIGG: Well, a majority of their sales occur overseas. But what's important, and this is an important distinction that the Senate was - panel was making today, is that although they might sell something, Apple might sell an iPad or an iPhone in, say, Greece, that device was designed in Cupertino, California. The marketing campaign came up in Cupertino, California. The research and development, the executive decisions around it occurred in California.

And so a fundamental question that there's a disagreement on is should those activities - should that sale in Greece be taxed in the United States? Because most of the economic activity that resulted in it occurring happened in the U.S. And Apple takes advantage of American universities and American patent laws and American court systems to protect a sale that even happens in Greece.

LUDDEN: So is that what Cook means when he refers to the U.S. having an industrial tax code in a digital era?

DUHIGG: That's exactly what he means. The last time that we had major revisions to the U.S. tax code was in the 1980s, when the Internet was kind of just something that, you know, some people in computer labs used. The corporate taxes were written for sales of big machines, things you could touch, cars. We live in a world now where Apple and other companies sell things that don't really exist. Right? They sell digital downloads, a song on iTunes.

And the question is, if you buy a song in iTunes and you're in Portugal and you buy it from it from a computer server that's located in France, but it was recorded by an artist who's sitting in New York, and the bank accounts that take your money and process it in that account and do the accounting is in Ireland, and the guy who set up the whole company is living in California - well, where did that sale really take place? Who should collect the tax dollars on it?

There's a fundamental disagreement between Congress, which said the U.S. should collect taxes on that because the guys who came up with the idea and the women who came up with the idea live in California and work in California, and Apple, who said, look, if it happened overseas, if the end consumers in Portugal, then we shouldn't have to pay taxes in California on it.

LUDDEN: Hmm. OK. So lots to explore here. He's actually calling for a big tax overhaul, but let's figure out first how they did this. You mentioned Ireland. Tell us how Ireland figures into this tax evasion strategy.

DUHIGG: So Apple worked on a deal a couple of decades ago with Ireland where Ireland promised to tax them at very low rates if they routed a lot of their transactions through companies setup in Ireland.

LUDDEN: What does that mean, routed transactions though?

DUHIGG: Well, take that iTune sale that I just mentioned, right? At some point there's a dollar that's generated or a euro or a pound. And Apple has to decide who they're going to assign that dollar to, where the company is - that they assign that dollar to on their books is going to be located. Now the dollar goes from, say, Portugal, right to New York. But Apple can say, look, we want to assign it to a company that's based in Ireland. And so technically, that dollar is assigned to Ireland. And Ireland said, we're going to give you a special tax deal. No more than 2 percent tax is on that.

But it gets even slipperier from there because the U.S. has a rule that says a company is going to be taxed on where an activity occurs. So for instance, if you're going to make something in Ireland, we're going to let Ireland tax you on it. Ireland says, we're going to tax you based on where control occurs. So even if you make it in Ireland, if the guys making the decisions live in California, we're going to let the U.S. tax you on it.

This is a loophole that Apple was able to take advantage of because they said to Ireland, look, control is in California, and they said to the United States, look, we're making it in Ireland. So as a result, no one should tax us. And tens of billions of dollars not only weren't taxed by anyone in the world, but Apple didn't even have to file tax returns on those revenues. They essentially kind of slipped through these loopholes in the tax code.

LUDDEN: Purposely so, presumably.

DUHIGG: Purposely - yeah. Absolutely. Apple knows exactly what it's doing. And it should be said that although Apple, according to Congress, is more aggressive and more creative in doing this, they've done things that, as far as we know, no other company has done. Every company does some variation of this. Every company, particularly tech companies, try to lower their tax bill by finding loopholes that they can take advantage of because who wants to pay more taxes, right?

LUDDEN: Well, haven't, in recent months, European Union or European nations actually been trying to find ways to close loopholes because they've been upset, what, Google or Amazon, some other companies have been evading taxes in those countries, I guess?

DUHIGG: Absolutely, absolutely. The - particularly in Europe, there's a lot of outrage around these tactics that are being used. Companies like Starbucks, for instance, that sell lots and lots of coffee in the United Kingdom and in London have...

LUDDEN: Even in France.

(LAUGHTER)

DUHIGG: Even in France. Have managed to say, although we sell a lot of coffee here, because of the accounting tactics we use, we actually show no profits whatsoever in the U.K. And so we don't have to pay any taxes.

LUDDEN: How do they show no profits in the U.K.?

DUHIGG: By moving around, again, these revenues, right? They charge each other for intellectual property. So Starbucks will say to - and I'm using Starbucks as an example. This isn't specific to Starbucks. Starbucks will say, look, you have to pay for trademark on that little insignia that's on the cup. And that trademark costs 99 percent of the - of what the customer pays for the coffee, and you have to send that to the British Virgin Islands. And in the British Virgin Islands, there's no taxes.

So as a result, they show a loss in the United Kingdom even though they're making a lot of money there. This has caused outrage among legislators in Europe and also among consumers. So companies like Starbucks have actually said, we are going to volunteer to pay more taxes because we're afraid that either legislators are going to pass laws against us or the consumers are going to stop buying from us because they're so upset. So U.S. is a little bit different, though, right? We don't see as much outrage from consumers around tax avoidance strategies.

LUDDEN: Why is that, do you think?

DUHIGG: I, you know, it's something unique about American exceptionalism. America is different from Europe in a lot of ways. I think a lot of people resent having to pay taxes themselves. And so when they see a company like Apple that's rightfully lauded for creating these amazing devices, when they see Apple find a clever way to avoid paying taxes, they say, there's American ingenuity at work.

(LAUGHTER)

DUHIGG: I wish that I was as good as them. Or maybe they own shares of Apple, and they feel like Apple avoiding taxes puts more money in their pocket. Who know?

LUDDEN: Does it? Does it?

DUHIGG: There's a good question as to whether it does or not. You know, a lot of other companies are calling for what's called a tax repatriation holiday. They have a whole bunch of money overseas, and they say, we want to bring that money back to the United States, and we think Congress should give us a short-term tax break in order to do it. The argument that...

LUDDEN: Hasn't Steven Cook of Apple been calling for that for a while?

DUHIGG: Well, actually, Apple, today, said that they don't want a repatriation holiday. They want the tax rate to come down permanently. It's a very bold thing to do, to say, look, we want you to fix the problem for good, not just come up with a Band-Aid solution because in the past when we've tried this repatriation holidays, they have not created more American jobs. It has not created more American growth or productivity.

What it has done is it's resulted in bigger bonuses for executives, bigger payouts for shareholders. And so the big debate that's going on is what change is actually going to occur?

LUDDEN: OK. Before we get to that, you say there's not so much outrage in the U.S. but, you know, isn't there in - elsewhere maybe in the business community - I mean, you've got someone who sells shoes. Presumably, they have to pay taxes in all those shoes, and they can't do this kind of manipulation that a digitally based company could do. Isn't there this apparent inequality?

DUHIGG: Absolutely. And that's a big question that's happening, right? It appears to many people that because the tax system is outdated that it's biased towards companies like Amazon, like Apple, like Microsoft that manufacture digital goods as opposed to non-digital goods, the types of things like shoes and cars that you can actually touch. And that's a big problem, is that the companies that have to produce those things, that have to compete Amazon and Apple say, look, we're effectively paying more taxes. And we know that that's true.

Wal-Mart, for instance, pays about 30 percent of its profits in U.S. taxes because Wal-Marts owns stores, and those stores sell actual things. That's compared with Apple who pays anywhere from 7 percent to 20 percent of their profits in taxes. So Apple has a real advantage against Wal-Mart because it just gets to keep more of the money that it collects. But Apple's argument is if you look - Apple isn't really competing with Wal-Mart. Apple says, we're competing with Samsung.

And in South Korea, their tax code is more favorable towards corporations. So if you want us to be globally competitive, you need to be - we need to be as - we need to have a tax system that's as favorable towards corporations as South Korea does.

LUDDEN: This line, Corey emails in: Can everyday people learn from Apple and move money around to evade taxation?

(LAUGHTER)

DUHIGG: Unfortunately, individuals can't do this unless you're very, very rich. It's very complicated and very expensive to set up these tax avoidance systems.

And so if you're running a hedge fund or you own a big company, then sure you can do it. But if you're just an individual, chances are low that you're going to be able to.

And that's part of the issue, is that there's actually this huge infrastructure now to help companies avoid taxes, which is very costly for companies themselves and for the country. The companies say, look, I'm going to get fired if I don't do what everyone else is doing. If the guy - if my competitor down the street is paying only 10 percent of taxes and I'm paying 15 percent, then my shareholders are going to fire me.

LUDDEN: Oh, so, this made the answering the question I had in mind, which is what are the challenges to changing the law?

DUHIGG: The biggest challenges right now are essentially trying to figure out what the changes should be, right? Everyone had a different opinion on how the tax code should change. Folks like Tim Cook and from Apple, everyone says it has to change. Everyone says the corporate tax system is broken right now.

But Tim Cook and Apple say, we think it should change in a way that makes it easier for Apple to do business. Wal-Mart says we think it should change in a way that makes it easier for Wal-Mart to do business. And those are fundamentally different businesses.

Carl Levin - the senator who was on the panel today, who is grilling Tim Cook and really laying into him - Senator Carl Levin says, look, I think it should change in a way that makes everyone pay their fair share. But what - what's a fair share? That's open for debate. And, you know, lobbyists are going to be all over trying to influence the answer.

LUDDEN: Tony has email from Hayward, California, correcting me. I've been using the word evasion, which he says is a crime. Tax avoidance is more appropriate. Can you help us understand the difference because, you know, where do you do draw the line? And I think a lot of people would hear some of the things you've described and think it shouldn't necessarily be illegal, but it is.

DUHIGG: Right. And this is an important distinction. No one has said that Apple or many other companies have broken the law. What they say is that the law is outdated. And so - and this is also part of what Apple says. Apple says, look, it's not our fault if the law isn't well written as long as we follow the law and we're doing what we can.

Now, what's interesting as that Senator John McCain, who was on the panel interrogating Tim Cook today, said that he felt that Apple was violating the spirit of the law, if not the letter of the law.

And that's a really interesting question because the fundamental question is, what do countries - like large companies like Apple owe places like the United States, right?

Apple is filled with people who graduated from publicly supported universities. Universities exist because taxpayers pay for them. When Apple wants to protect its intellectual property, it goes into U.S. courts and sues on patent violations. And those U.S. courts are supported by American taxpayer dollars.

And so the question becomes, what should a company like Apple pay to a place like America, particularly if many of its sales are happening overseas? What do they owe the place where they live simply because they live there?

LUDDEN: You're listening to TALK OF THE NATION from NPR News.

So Apple is calling for a big tax overhaul. Charles Duhigg of The New York Times, what does - do you think this will impact the likelihood of that? And what are different parties calling for?

DUHIGG: Absolutely. There's a huge debate going on about what the overhaul is going to look like. And it's inevitable that some type of change is going to occur. Right now, the United States is losing literally tens of billions, if not hundreds of billions of dollars every year in corporate taxes that they could otherwise be collecting because there's so many loopholes in our tax system.

And so everyone is going to say - going to sort of debate right now about what should be changed and how it should be change. There's some people who say that digital companies - that our economy is a digital economy now. And so as a result, our tax system should recognize the digital goods and services are different from physical goods and services. That we should tax people based on where value is created.

So use the iTunes example that I brought up before, right? If you download a song, if you purchase a computer program, it's totally unclear exactly where that purchase is happening. Maybe it's happening where the customer sits, or maybe it's happening where the server is located, or maybe it's happening where the programmer who came up with the idea is based.

The tax code is going to need to shift to come up with a definitive answer on that and say, we are going to tax that transaction right here. It might be where the customer is sitting. It might be where the server is located that's sending you the song in the first place. It might be where the songwriter lives. It might be where the computer programmer exists who made it possible to do that purchase on the Internet. But we need to have an answer as to where the taxation occurs.

LUDDEN: We just have a...

DUHIGG: And that we need to work...

LUDDEN: Go ahead. We just have a moment left. Sorry. But with that - you've reported on Apple, not just putting, you know, going overseas to evade taxes but moving operations from California to Nevada to get low, you know, no tax - state taxes in Nevada and evading high state taxes in California. Is that going to be addressed?

DUHIGG: That's exactly right. That won't be addressed by Congress but that will be addressed by states. Right - so right now, Apple moves a great deal of its economic activity technically from California to Nevada to an arm - a hedge fund called Braeburn Capital that they located in Reno, Nevada.

Now, only four people who worked for Apple live and worked in Reno, Nevada. But Apple says that many of its revenues go through Reno. It's an accounting scheme so they can get out of California taxes. And California says, that's unfair, we got to pay for our schools with those taxes because really you should pay.

LUDDEN: All right. And we got to leave it - we've got to leave it there. I realized there is so much more. Charles Duhigg has been reporting in depths on this for The New York Times. His series is "The iEconomy." He joined us from Brooklyn. Thank you so much.

DUHIGG: Thank you.

LUDDEN: Tomorrow, Neal Conan is back. It's TALK OF THE NATION from NPR News. I'm Jennifer Ludden in Washington. Transcript provided by NPR, Copyright NPR.

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