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  (Source: EPA)
American gadgetmaker is accused of making profit in Italy, shuffling the money illegally to Ireland

Italy -- Europe's fifth largest economy -- is a lucrative market for U.S. gadgetmaker Apple, Inc. (AAPL), the world's most profitable tech company.  But Apple's Italian profits have come back to haunt it after prosecutors in Milan, Italy filed charges against the gadgetmaker's local subsidiary, accusing it of breaking local taxes laws for at least two of the past three years.  The investigation has not been made public, but was reported on by Reuters this week, citing "two [local] judicial sources with direct knowledge of the matter."
 
I. Apple Gets Hammered Again, Faces Italy's Biggest Tax Dodging Accusations Yet
 
Local newspaper L'Espresso was actually the first to report the potential charges, which it learned of from its own sources.  L'Espresso, a sub-brand of the Italian newspaper Repubblica, cites sources as saying the case involves $1.34B+ USD in profits which Apple shuffled out of the EU nation over the course of 2010 and 2011
 
This isn't the first time Apple has faced these kinds of accusations.
 
Ever since a 2012 report in The New York Times accused Apple of dodging billions in U.S. taxes, the electronics giant has been on the defensive, trying to fend off accusations of tax dodging in the U.S. (where CEO Tim Cook was grilled by Congress), in the UK, and elsewhere.

Apple profit
[Image Source: Today's iPhone]

To be fair, Apple's strategy -- the so-called "double Irish" tax avoidance tactic -- is hardly unique. Google Inc. (GOOG) and other top tech earners almost all heavily lean on this strategy or sheltering income in the Caribbean islands (e.g. the Cayman Islands).
 
On-paper, the general corporate tax rate in the U.S. is 35-percent, however, that figure is misleading as the convoluted U.S. tax code typically leaves a wealth of loopholes available for big businesses to lower their rates.  Consequently, the average rate for Fortune 500 tech companies was around 16 percent in 2012 [source].
 
Apple's tax avoidance was on the more flagrant side of the spectrum, though as it only paid a 1.9 percent effective tax rate on foreign earnings, which it shuffled the bulk of its profits into.  The numbers appear especially glaring given Apple's top ranking in profitability and the fact that the company has done some lobbying in the U.S. (a common route to getting "legal" tax handouts from Congress) -- but not as much as other firms like Google.
 
As an old Japanese proverb goes, "The nail that sticks out gets hammered down."
 
II. Apple Reportedly Paid No Taxes on $1.1B USD in Italian Profit
 
Apple defined itself with record setting earnings, boosted even higher with aggressive money shuffling to low tax regions -- now it's getting hammered hard.  According to both Reuters and L'Espresso's sources, Italian authorities have alleged behind closed doors that in 2010 Apple shuffled €206M ($277.4B USD) in profit out of its Italian subsidiary towards a low tax subsidiary in Ireland.  Had it abided by the law and disclosed the money it likely would have had to pay Italy's 27.5 percent corporate tax rate [source].  In 2011 Apple appeared even more emboldened, illegally shuffling €853M ($1.148B USD) out of the country, according to prosecutors.
 
The American firm refused to directly comment on its behavior in 2010 and 2011, instead saying that it always tries to follow the law and pointing out that at least it hadn't been accused of breaking the law prior to 2010.  A spokesperson remarks:

Apple pays every dollar and euro it owes in taxes and we are continuously audited by governments around the world.  The Italian tax authorities already audited Apple Italy in 2007, 2008 and 2009 and confirmed that we were in full compliance with the OECD documentation and transparency requirements. We are confident the current review will reach the same conclusion.

Apple Pizza
Apple is on Italy's cutting block over tax dodging. [Image Source: EPA]

According to the allegations, Apple's Chinese manufacturer partners ship orders to subsidiary Apple Supply International (ASI), which then sells the devices at close to the MSRP value to local retail subsidiaries in Italy, the UK, France, Germany, and other markets.  As the subsidiaries are buying the tablet at close to full price, they earn only a small cut of the profit, while the Irish company pockets most of the profit.
 
Apple's 2012 earnings have not yet been audited by Italian officials -- it is probable they may feature similar "irregularities".
 
III. The Man Who Helped Facebook, Apple, and Google Dodge Their Bills
 
Again, Apple is hardly alone here.  Italian fashion icons Domenico Dolce and Stefano Gabbana were sentenced to 20-months in prison for hiding €343.3M ($462.0M USD) in profits.  So far neither fashion executive has served any prison time, as their defense has appealed the conviction arguing in essence that the pair had no idea how their business was being run, from a financial perspective.
 
In the tech sphere Google and Amazon.com, Inc. (AMZN) are also being probed or charged with tax dodge by Italian regulators.  Google allegedly hid [translated] €240M ($323.3M USD) in profits.  Charges have not yet been filed against Amazon, although Reuters sources said it is also under investigation.
 
This is hardly a coincidence.  According to a piece by Bloomberg, Apple, Google, and other top firms all rely on Feargal O’Rourke, an executive whom it bills as "the scion of a political dynasty who heads the tax practice at PricewaterhouseCoopers in Ireland."

Feargal O'Rourke
Feargal O'Rourke, head of tax services for PricewaterhouseCoopers LLP in Dublin, claims, "Under no circumstances is Ireland a tax haven." [Image Source: Bloomberg]

Mr. O'Rourke is cousins with Ireland's finance minister and has heavily lobbied the local government not to crack down on companies shuffling profit into the country and to keep rates low, even as international criticism mounted.  Some companies like Apple push profit to Ireland and simply register their locations as "nowhere", hence paying no taxes to Irish collectors.  

Others register in ultra-low tax rate Island nations, which Irish subsidiaries are legally allowed to shift profits to, untaxed.  Google sends most of its Irish earnings to Bermuda, allegedly.  LinkedIn Corp. (LNKD) sends its earnings to the Isle of Man.  And Facebook.com, Inc. (FB) sends its profits to the Grand Cayman island.  Either way, these approaches cut a company's tax rate to around 2 percent overall.

Google money bags
Google also dodges a lot of its tax load. [Image Source: OMG Droid]

Adding to the complexity, many companies -- Apple included -- don't even report these earnings as profits, hence their effective global tax rate appears more "fair" to members of the media in the U.S. and EU (unless you dig deep into the numbers and how the company's finance department is defining them).
 
IV. Pressure From Taxpayers and Media Grows
 
But a number of factors could put these company's days of trying to avoid paying their fair share at an end.  Italy's government has become much more aggressive in terms of tax code enforcement as the nation's fiscal situation deteriorates.  The nation's centrist Partito Democratico (PD) -- which gained a majority in recent elections -- has focused on cracking down on tax dodging as a way of fixing the nation's debt crisis.
 
In Ireland officials are facing pressure from their EU and U.S. counterparts.  A growing coalition of academics, small business owners, the media, and taxpayers at large in the U.S. and EU are growing outraged at the tax dodging by many top firms.  As Robert B. Reich, a professor of public policy at the University of California at Berkeley puts it in a comment to Bloomberg:

[Lost tax revenue] has to be made up by you and me and every other taxpayer who can't afford high-flying attorneys and accountants to shift our income into places with low taxes.

In other words, you might be paying 30 cents out of every dollar to the federal government in the U.S., but Apple only paid 3 cents.
 
One of the biggest problems about that is that it creates a massive barrier for market entry, as new firms have to try to compete against veteran companies like Apple while the government strips away a far bigger chunk of their profit.  

Bribe under table
Lobbying payoffs to politicians has resulted in small companies having to pay much more than their large competitors, making the "free market" not so free. [Image Source: i-Sight]

In other words, the free market is not so free; in the U.S. and EU it's perhaps but a rosy political fantasy, as the true market creaks under the weight of rampant manipulation by special-interest funded politicians.

There is some desire for change -- particularly in cash-strapped EU states, who can't just keep borrowing more money (like the U.S. does).  But even if these jurisdictions like Italy finally do try to shake down Apple and its peers for taxes, it's unclear whether they will succeed.

Italy is considering a so-called "Google Tax" law, which will force internet advertisers to operate local business units, which will be tax fully.  But the law has been condemned by even some critics of Irish tax dodging, who argue it overreaches by interfering with free trade.  Forbes' columnist Tim Worstall called the law "entirely illegal".

The bill has yet to become law and is currently only in the draft stage.  As Ireland is refusing to relent on its controversial policies, for now authorities in Italy and other jurisdictions can only look to use existing laws to try to force more of the profits Apple, Google, and others make off their citizens back into the country.

Sources: L'Espresso, Reuters



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RE: Ay!
By Reclaimer77 on 11/14/2013 5:47:25 PM , Rating: 2
Actually upon review, I don't have to decide anything. Because there is really no issue here.

Jason, I love him, but he has a history of going on a "tax dodge" rant when in fact no laws are being broken and all taxes owed are paid. We've seen this like tons of times here.


RE: Ay!
By retrospooty on 11/14/2013 5:54:19 PM , Rating: 2
LOL... I have to agree. I don't see where Apple did anything wrong. Funny though that your conservatism is stronger than your hatred for Apple.


RE: Ay!
By The Von Matrices on 11/15/2013 1:13:45 AM , Rating: 2
The injustice here is to the small businesses, not the governments. I think the valid issue here is that small businesses have to pay a higher effective tax rate than multinational corporations (not just Apple) because small businesses can't afford to have dedicated lawyers and accountants setting up offshore bank accounts and threading the legal loopholes to evade taxes.

All these loopholes do is preserve the status quo of multinational corporations. Argue for a flat tax code that treats all businesses fairly, but don't argue that nothing is wrong here when taxation law is clearly discouraging entrepreneurship.


RE: Ay!
By Kiffberet on 11/15/2013 8:05:40 AM , Rating: 2
That's exactly it.

Change the law. But governments are in the pockets of all the big companies around the world, so that will never change.

The only way to do it, is remove corporation tax altogether, and make up the difference by taxing individuals on the products they buy.


RE: Ay!
By Rukkian on 11/15/2013 11:14:44 AM , Rating: 2
Getting rid of the corporate tax would probably be the only thing that would truly help. You would also have to remove all lobbying rights, as they now have nothing to lobby for. In the end, consumers pay for any taxes they pay in the first place. This would actually go a big step towards a truly free market, as companies would have to compete on their products merit, not on tax lawyers and lobbyists.


RE: Ay!
By retrospooty on 11/15/2013 11:50:20 AM , Rating: 2
A nice thought, but they would still lobby for legal favors, patent wins, favorable rulings etc. Taxes are just one of many dirty dealings in DC.


RE: Ay!
By JasonMick (blog) on 11/15/2013 3:08:34 PM , Rating: 3
quote:
The injustice here is to the small businesses, not the governments.
You hit the nail on the head here.

Just to clarify. I'm not say Google, Apple, <insert your favorite corporate entity here> did anything wrong, because in reality every company's sole function is to maximize the profit within the law. It's the same story as the smartphone patent wars. If Apple can use the law to ban everyone that's not "evil" any more or less than the basic premise of a business is evil -- it's just a competitor using the tactic.

But there IS a major problem in both cases -- the law.

The law is what is evil, wrong, etc. here.

The current law is structured such that large entities are by all appearances charged an overly high rate, but can effectively bribe politicians (well in the U.S. as least) to lower their rates dramatically -- often nearly to zero.

Not all companies do this, but if not they should -- it's legal after all. But I also say it SHOULD NOT be legal.

The issue is that -- as the Berkley Professor said -- is that we end up paying the bills, and small business are left with a major competitive barrier if they want to compete in a niche where a large company with lobbying presence resides.

To that end, this is essentially:
A. Wealth redistribution (taking from the masses, giving to the wealthy
B. Market manipulation

I think both Reclaimer and Retro if they think about this for a while would say that both A) and B) are unacceptable and antithetical to any true conservative ideology.

The problem with any "flexible" tax code is that it inevitably leads to a system that favors the most powerful/wealthy few.

What is needed is a flat tax, in which profit is taxed on a consistent percentage.

I'm all for a lower corporate tax rate -- maybe 10-15 percent?

But I think the exact same tax rate should apply to individuals and small business as well.

If Apple and Google are paying 2 cents on every dollar of profit, and I'm paying 30 cents, yes I have a big problem with that.

In a sense perhaps in the EU this is somewhat of a thornier issue as Italy likely does not have the power to "FORCE" Ireland to stop acting as a tax shield for American companies who do business in both regions.

But the American government is who deserves the blame as it's allowing this to happen. It should:
A) Adopt a fair flat tax rate.
B) Pressure Ireland and other allies to adopt a similar rate or face sanctions

Between these two things, companies would be forced to pay their fair share and countries like Ireland would be forced to abandon these tactics, which really don't benefit the locally economy that much anyways.

Of course I doubt that will ever happen, given that the federal government is in the pocket of big money lobbyists -- unless people realize this and vote for regime change.


RE: Ay!
By retrospooty on 11/15/2013 3:43:15 PM , Rating: 2
Totally agreed.


RE: Ay!
By Reclaimer77 on 11/16/2013 8:45:06 AM , Rating: 2
quote:
B) Pressure Ireland and other allies to adopt a similar rate or face sanctions


Hi Jason, great post. I was on board with nearly everything until I got to this point. Doesn't this seem a little...I don't know - Imperialistic to you? Adopt our tax code or face punishment.

I don't see how we have a right to force Ireland or anyone else how to conduct their business when it comes to taxes.

It's never made sense to me how the United States Government views itself as the tax collector for the entire world. By what right are taxes owed to the Government for profits I've generated in other country? It's ridiculous!

The only tax reforms I would accept offhand, are those that SEVERELY reduce the overall tax burden. In other words, I want to starve this beast of a Government. It's too big, it soaks too much of our money, and I say it's time to take the milky tit away.


RE: Ay!
By purerice on 11/16/2013 7:55:15 PM , Rating: 2
Agreed on the imperialistic appearance of forcing others to agree to one's own view of proper taxation.

On that note, the US government taxes individual income tax to all tax payers making over $90-100,000, whether they repatriate that money or not. Conversely larger entities do not pay tax on any money they do not repatriate. As Jason Mick said, this is unfair and an example of favoritism and welfare in the form of redistribution of wealth, from the poor to the rich. The fact that most if not all other G20 nations refuse to tax corporations on foreign earned income is another matter.

Both of these examples of unfair taxation make US businesses and US citizens more expensive and thus less competitive on the global market which will eventually lead those at the top to permanently expatriate/relocate.

In other words, for future tax revenue if for nothing else, the US government would do good to itself to simplify and equalize the tax code.


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