Corporate Income Tax

When looking at this whole issue, its worth understanding some history and background. The current system of tax treaties and international structuring arose from a desire by many national governments to try and maximize the tax revenue they collect. They did this by recognizing that there are constantly situations where an international corporation may be obligated to pay tax on the same revenue but numerous times. Of course, this would result in no net revenue and the corporation going bankrupt. Therefore in order to attract the good or service to their jurisdiction; try to get as much tax revenue as possible; and try to encourage the corporation to set up some of its physical structure and work force in their jurisdictions, countries like the US, UK and Ireland set up tax treaties between themselves and other countries. It is key to understanding this underlying motivation for the current system. This system arose not out of some noble desire to relieve taxpayers of the “unfairness” of double taxation or even at the bequest of the lobbyists of those taxpayers. It came out of a logical self-interest of various governments.

With this background in mind, let’s look at the Apple situation and compare it to Google and Starbucks (which are also under fire in the international media for their tax planning).

-Many US politicians and citizens want these three companies to pay US tax on its WORLDWIDE income, including income earned from foreign customers. They argue that while this may not be legally correct, it is MORALLY correct because all three companies were a) Founded, IPOed and has their headquarters in the US; AND b) The citizens of the US are suffering in a financial downturn and “deserve” this money;

-Many foreign politicians and citizens want these companies to pay more tax on the revenue generated from customers in their country. They argue that while this may not be legally correct, it is MORALLY correct because a) The company is deriving income from tax resident individuals and corporations; AND b) The citizens of these countries are suffering in a financial downturn and “deserve” this money;

-All three companies want to maximize their net revenues (“gross revenues” minus “expenses including tax” equals “net revenue”). Each company used the tax treaty network and international structuring regime to minimize their global tax burden. As part of this structure they may have to set up operations in places like Ireland; or assigned intellectual property rights to places like the Netherlands. However there are important differences between these companies;

-Starbucks needs to respond to this “Moral but not legal” obligation demand because a) it has physical facilities in the foreign country which could be picketed or damaged reducing sales; and b) There are many competitors in these countries who could easily service customer needs and decrease gross revenues. As a result, it is logical that Starbucks may consider paying more tax in the foreign country or the US than legally obligated in order to maintain gross revenues and thereby maximize net revenue.

-Google is different in that a) it does not have or need physical facilities in a given country to deliver its service; b) With all due respect to other search engines, it is not really realistically worried today about losing customers to its competitors. Therefore, the current controversy is unlikely to significantly reduce people from using its products and services. As a result, it is logical that they will not consider paying more tax anywhere than legally obligated;

-Apple derives gross revenues from various products (hardware and software) which has competitors. Some of the sales of their products and services derive from physical retail outlets and some does not. the question of whether Apple products (with their hardware and software integrated) is unique enough to avoid a drop in revenues.

The end result is that the US or foreign country push to have Google pay more tax to their country is probably doomed to failure UNLESS the US or the foreign company can show that Google did not properly operate the tax structure they set up. Whether the Reuters uncovered “UK sales team” is sufficient to undermine the Google UK tax structure is a legal question, not one that will be settled in Parliament or the courts of public opinion. As a tax lawyer, I can tell you that the Reuters revelations about UK employees is interesting enough to warrant further investigation but hardly a slam dunk that Google was offside. Investigation and adjudication will tell. If Google is currently tax-compliant then you have to look at the practical levers to force Google to pay more tax than they are legally obligated.

Starbucks sells a standard physical commodity which is readily available from other competitors and is clearly subject to pressure. “Search” is not a standard physical commodity today and whether through perception or reality, it is a far and away market leader. As a result Google is not motivated by self interest to pay more tax to maintain gross revenues. Where Apple considers itself (closer to a standard replaceable commodity or a unique product) will determine whether they will respond and volunteer to pay more tax anywhere than they are legally obligated.

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