Apple Not Paying Enough Taxes on Foreign Income?

I can't believe I'm actually arguing in favor of big business, but I guess I have a different perspective from many US-based commentators. Apple's tax situation is somewhat similar to that of expatriates.

I've lived in Japan for over a decade. I pay local, prefectural, and income taxes here, which actually add up to a higher proportion of my income than if I were paying US State and Federal taxes. Also, I pay into the pension fund (similar to Social Security) but will not be able to claim that money unless I retire here. At age 60. Something I find monumentally unappealing as I become more and more disillusioned with Japan.

At least twice, in the time I've been living here, Congress threatened to take away the foreign earned income exclusion that expatriates have. In that event — unless Japan agreed to stop taxing me — I would be double-taxed, forced to pay taxes both in Japan and the US. Normally, reciprocal agreements prevent double taxation.

I would basically have three choices, none of them good:

  1. Move back to the US immediately in order to prevent having an enormous ongoing tax liability.
  2. Become a Japanese citizen.
  3. Find creative and/or illegal methods of hiding how much income I had from one or both countries so that I wouldn't have my income effectively cut to 50% of the money I earned here.

I make about 15% less than someone living in the US does for an equivalent position. Changes to the current tax agreements would take my lower middle class wage and turn it into near poverty. The "special tax break" that people who live overseas have is to make it possible for them to take a job in a foreign country without an undue financial burden, up to a point. The exclusion used to be limited to about $76,000, and now is up to $95,100, neither of which I've even had a prayer of exceeding.

No corporation would operate in a foreign country if they were required to pay taxes to both the country in which they were originally incorporated in addition to the one in which they had their overseas holdings and income, unless the financial incentive was monstrously favorable. It would kill globalized business overnight, and have an enormous impact on trade across the world.

Right now, Apple has a significant barrier to bringing any money they have overseas back home: corporate taxes up to 35 percent in the US. (If you're curious, the rate is 25.5 in Japan, nearly 10 percent lower). Little of the foreign earned income is going to be put into infrastructure and services in the US because of the tax laws. It is a disincentive to repatriating foreign income.

If the tax codes are revised to force Apple and other companies to move more income into the US solely in order to impose taxes on it, the results are not very likely to be favorable to either the companies or the US. It would, in effect, be double taxation. In the case of Apple here are a few possibilities of what they might do:

  • Increase the prices of their products to pass on the burden. Suddenly, companies based in other countries with looser tax laws toward foreign income would have a competitive advantage over a US company.
  • Move some of their operations to the US regardless of the costs or availability of the manufacturing they need. A lot of tech companies have said they've had problems finding both the capacity and the expertise they need anywhere except China. That could change, but it would take time.
  • More drastically (and again, I'm not a corporate tax lawyer, so I have no idea of the feasibility) move their home offices to another country with more favorable tax laws. This is not entirely unprecedented.

From what I've read about the hearings, there doesn't seem to be anything shady going on with regard to Apple's tax compliance. In fact, Tim Carney has asserted that the main reason they were called on the carpet was because they didn't spread enough lobbyist and special interest cash around. Big Tony Uncle Sam wants his cut. It would be a shame if something were to, eh, happen to this nice company you got here.