We are the victim of our own choices. A complicated strategy, called “inversion” or “The Double Irish Strategy,” allows US companies to avoid paying taxes in the US. In case you are wondering, this is how it works:
The Double Irish strategy requires at least three companies to work. The U.S. company (company A), licenses its intellectual property to a subsidiary based in Ireland. This first Irish company (B) is legally based offshore, in a tax haven such as the Bahamas or Cayman Islands, for instance. This company licenses the patent rights to a second Irish company (company C). The second company receives income from the first Irish company (B), but its taxes are low because of royalties and fees paid to the first Irish company (B). These royalties and fees are deductible expenses, so no taxes are paid on them. The U.S. company doesn’t pay any Federal taxes on the income from the Irish companies because the earnings were not made in the U.S. [Definition from Visualeconomics]
From what we understand, Apple did a bargain basement deal with the Irish Government and got away with about 2% in taxes, 10.5 points lower than Ireland’s actual corporate tax rate, which again is lower than the tax rate in the US which is 35% of income.
To cut a long story short, the EU, of which Ireland is a member, is now claiming that Ireland had no right to offer a low-ball tax rate to Apple as their discount dealings undercut other EU members’ policies.
Does this mean that Apple will have to pay back taxes on Ireland’s normal corporate tax rate of 12.5% – still one of the lowest in the world – which in this case would involve a payment of around $14.5billion? Jim Kramer of CNBC suggests that it is too late for the EU to ask for this now. However, as important as Kramer is to us in the US as a stock diviner, I doubt his influence stretches to the EU.
Where do the players in this scenario go from here? Too early to tell. So, let’s go to the ticker tape and see what the stock did today. In the coming months, we will see what transpires. Apple is one of the most profitable companies in the world but this may give it a knock.
It should be emphasized that Apple has not done anything underhand; they have done everything legally and correctly and it is everyone’s right to avoid excessive taxes. If there is anyone to blame, it is the Congress of the United States. Time after time, over decades, people have been recommending reducing the corporate tax rate and nothing but posturing has been the result.
Once again, it is time to remind Congress that the clock is ticking and the longer they dilly-dally and fail to enact adjustments to the American Corporate Tax System the worse it will be for the American citizens. We could have done with these tax revenues which have gone overseas to bring down the national debt, increase salaries and fix the US infrastructure, but is anything happening? Nooooooo….