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Published: Monday, 11/12/2012


Tax shell game

America isn’t the only na­tion that huge mul­ti­na­tional cor­po­ra­tions short­change when it’s time to pay the tax man. It’s all per­fectly le­gal, but eth­i­cally du­bi­ous.

The United States, ac­cord­ing to some ex­perts, is fac­ing a fis­cal cliff at the end of the year. Un­less some­thing is done, George W. Bush-era tax cuts will ex­pire and au­to­matic spend­ing cuts will go into ef­fect, driv­ing the coun­try into a re­ces­sion.

Europe also is in the midst of a fis­cal cri­sis, caused in part by coun­tries that spend more than they col­lect in taxes. Yet mul­ti­bil­lion-dol­lar busi­nesses are al­lowed to use le­gal strat­a­gems to avoid mil­lions of dol­lars in taxes.

In April, the New York Times re­ported that Ap­ple Inc. paid $3.3 bil­lion in taxes in 2011. That’s a lot of money, un­til you com­pare it with the com­pany’s $34.2 bil­lion in prof­its. That makes Ap­ple’s ef­fec­tive tax rate 9.8 per­cent, in­stead of the U.S. cor­po­rate rate of 35 per­cent.

Ac­cord­ing to the As­so­ci­ated Press, the tech gi­ant paid $713 mil­lion in taxes on for­eign earn­ings of $36.8 bil­lion in the fis­cal year that ended Sept. 29. That amounts to only 1.9 per­cent of the com­pany’s over­seas prof­its. By com­par­i­son, the cor­po­rate tax rate in Great Brit­ain is 24 per­cent.

Ap­ple ac­com­plishes this by fun­nel­ing prof­its through sub­sid­iar­ies in Ire­land and the Nether­lands be­fore the money lands in the Ca­rib­bean. The strat­egy is called “Dou­ble Ir­ish with a Dutch sand­wich.” In all, the com­pany has $82.6 bil­lion stashed over­seas that it doesn’t have to pay U.S. taxes on.

Ap­ple takes its tax avoid­ance strat­egy a step fur­ther than most mul­ti­na­tion­als. It sets aside some for­eign prof­its, which it says will be used to pay U.S. taxes some­time in the fu­ture. That money is then sub­tracted from prof­its, which re­duces Ap­ple’s tax bill even more, even though it could be years be­fore it finds its way to the U.S. Trea­sury.

It’s all le­gal, and other com­pa­nies do it as well. Star­bucks has paid less than $14 mil­lion in taxes in Great Brit­ain in the past 14 years. For the last three years, the cof­fee gi­ant has man­aged to re­duce its tax bill in Brit­ain to zero. Other com­pa­nies, in­clud­ing Face­book, Am­a­zon, and eBay, also wrig­gle out of mil­lions of dol­lars in over­seas taxes.

Multi­na­tional com­pa­nies have a re­spon­si­bil­ity to their in­ves­tors to max­i­mize their prof­its, so it may ask too much that they not use ev­ery sleight of hand to avoid pay­ing taxes. It is up to the na­tions in which they do busi­ness, in­clud­ing the United States. They should elim­i­nate the loop­holes that al­low com­pa­nies to turn their tax li­a­bil­ity into an in­ter­na­tional shell game.

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