Christian's Chronicles

July| Vol. 22 No. 8.02 | Christian's Chronicles © 2015 – All rights reserved.

Sitting in Apple’s Nowhere Land

Who’s grilling Apple? No, this is not a culinary curiosity. It is a question about taxes, or the lack thereof, and it is a heated topic of discussion in Congress. Hot enough to warrant a hearing before a U.S. Senate committee.

While apparently everyone agrees that Apple is not doing anything illegal per se, some are disturbed by the complex and sometimes unprecedented ways in which the world’s largest company channels funds to avoid paying taxes. The issue turns on a subtle distinction between tax evasion and tax avoidance. It sounds simple enough at first glance: those who do not pay taxes that are legally required are guilty of tax evasion, while those who find ways to legally reduce the amount they owe in taxes, such as via deductions, are practicing tax avoidance within the law.

What does this have to do with Ron Jeremy?

Thus it is all a testament to American ingenuity: if you have the means to hire the experts who can implement think-outside-the-box strategies to creatively avoid paying taxes, you reap not only the rewards of a lower tax bill, but also the support of large portions of the public, too! Just scan the comments that follow any of the online reports concerning the hearings about Apple’s tax practices. Many of them are overwhelmingly in support of Apple, spouting various non-issues and distractions that seem to cut across even the polarized political divide, as though the public was confronted with a dichotomy having to choose between a company that has been a darling of consumers, and ‘those politicians’ in Congress mucking up our country. It might even be something similar to public support of athletes, celebrities, and others who can do what the rest of us cannot. We live vicariously through them, in a way, by watching from afar yet also identifying with those who are able to put into reality the things that we would like to also do, but cannot. Somehow, we are able to maintain a fantasy of accomplishing the things done by these chosen few, all the while knowing that we mere mortals probably never will. Incidentally, this may well also explain the popularity of short, fat, well-endowed, and iconic superstar of adult entertainment, Ron Jeremy. But I digress…

Never mind that despite Apple’s gererally favorable public image, the company has faced several consumer class action lawsuits concerning their privacy practices, for example; as well as controversy regarding the working conditions in factories used to manufacture its products, or the fact that it is the world’s (now second) biggest corporation in times when multinationals are viewed with skepticism, at best. Apple, apparently, still has staunch supporters.

And why should it not? Good question.

Hey, what’s going on?

True, they have not done anything illegal, so why should we condemn Apple? Well, maybe that is not the point. The focus of the hearing is to uncover the practices through which big corporations can avoid paying taxes in ways that the rest of us cannot. So let us ask another question: what is really going on?

Well, the bullet points of the story, as filtered by me based on the report by NPR, are as follows:

  • Apple has several subsidiaries, 3 of which hold over 60% of its profits
  • These companies are ‘located’ in Ireland
  • By ‘located’ we can only understand location for legal purposes. They have an address there, but nobody home.
  • In compliance with Irish tax laws, they pay no taxes in Ireland, because they are managed from California
  • In compliance with U.S. tax laws, they pay no taxes in California, USA, because they are incorporated outside of the U.S.
  • They claim to be tax residents NOWHERE in the world.

Now, in the interest of full disclosure, Apple DOES pay taxes in the U.S.; quite a bit, in fact. From what I understand, the above strategy deals mainly with Apple’s sales of iPhones in Europe. However, there are bigger issues than the full amount of taxes paid by Apple, or even this particular strategy of tax avoidance, whereby Apple, through its subsidiaries, can and does claim to be a tax resident NOWHERE.

The Big Picture

Perhaps the questions we ought to ask is how is it possible that merely through paperwork, money can be shifted around the globe and taxes can be avoided altogether? If our financial systems have become so abstract and divorced from reality that they not only allow and sanction, but affirmatively encourage such manipulation, do they continue to serve their intended purposes? Have we become so immersed in systems of abstractions, such as our monetary systems, that we forget that these entities and the institutions we’ve built around them are fictions we invented with the goal of serving the common good?

In America, we live in an increasingly electronic economy, where intellectual property and its protection are essential. Intellectual Property, or ‘IP’ – not to be confused with the IP that stands for “Internet Protocol” as in IP addresses – comes in several distinct flavors: (1) Trademarks, which identify the origin of goods & services; (2) copyrights, which protect original creative work; (3) trade secrets, which otherwise protect generally unavailable information that confers a competitive advantage; and (4) patents, which provide monopolies for novel inventions. Each of these is protected by law because it is thought that legal protection gives an incentive to investments in creativity and progress. Of greatest interest for present purposes is the last form of IP: patents.

An inventor who tinkers without success for years until finally accomplishing a breakthrough gets a patent for his invention, giving him a legal monopoly for a limited time against all others, so that he may recoup his investment and be rewarded for a useful advance that benefits all of us. We give him a fictitious property right, in a patent, so that those who copy his invention without license are held liable for ‘theft’ even though nothing was physically taken. We do this because a system that offers its resources for the enforcement of legal protections in patents is deemed to be more beneficial than allowing others to freely copy inventions.  This seems reasonable enough.

Yet, even with patents, the reality does not quite match up to the picture painted by the ideals. The truth is, patents for the most part are not owned by inventors. Instead, the men and women who actually work and create the inventions are required to assign their patents to the corporations they work for, as per their employment agreements. Thus, it is not the creative and ingenious that reap most of the rewards, but the wealthy and powerful who own the corporations, and who are able to influence even foreign governments, such as Ireland, to create tax codes to their specifications. Not only the ownership, but the use of patents is controversial, too. By its nature as a monopoly, a patent serves to exclude others. The recent controversies regarding patenting human genes and the possible impact on medicine is one example. Patents in agriculture, tying the required purchase of pesticides or other chemicals to enable growing of genetically modified crops, has been argued as monopolistic and anti-competitive.

So how does all this relate to Apple? Well, for one, Apple was involved in patent litigation that resulted in one of the largest judgments in history against it’s competitor, Samsung. If nothing else, this fact alone should be persuasive as to Apple’s interest in intellectual property; financial, legal, and otherwise. So, if Apple has such a huge stake in IP, and if presumably it derives much of its business from capitalizing on its IP, where does that occur? In Ireland, where it has but a post office for its subsidiary holding companies, or in California, where it develops and manages the intellectual property and the financial arrangements that allow Apple to capitalize on it so profitably? In other words, is there any reality to 60% of Apple’s revenues being ‘held’ in Ireland, or are these revenues more directly linked to its management operations in California? And, where and how should transactions based on such IP be taxed? What is fair?

There is a lot more to this story, and a lot more information about our financial systems, and the legal protections we provide for intellectual property. However, I have written about as much as I feel comfortable giving away freely, with a license permitting the reader to reproduce or quote any of the above so long as proper attribution to the source is made. I invite the reader to invest in his or her own intellectual property by doing the research for him or herself. Otherwise, you may take advantage of the ‘guest of honor‘ program, and I would be happy to share more, for a fee.

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