As part of expert testimony at today’s Senate Sub-Committee Hearing to Examine Offshore Profit Shifting and Tax Avoidance by Apple Inc., Professor J. Richard Harvey has made a compelling case that the tax system Apple is taking advantage of needs to have its loopholes closed.
Harvey — a distinguished Professor of Practice at Villanova University’s School of Law — says that while what Apple has done is acceptable under current International tax law, it still widely uses tax tricks and gimmicks to avoid paying what it fully owes.
“What Apple has done is acceptable under current International tax laws,” said Harvey. “In some extent, Apple is not as aggressive as others, but at the end of the day, Apple funnelled 64% of its earnings into Ireland… and paid very little tax on it.”
Referring to Apple’s statement yesterday, Harvey said that when he read Apple say they “do not use tax gimmicks,” he fell off his chair.
“Apple funnelled $78 billion over four years into an Irish subsidiary with zero employees. If that’s not a tax gimmick, I don’t know what you should call it.”
How Apple was able to do this, Harvey says, is due to the U.S.’s adoption of arms-length pricing, which allows companies to shift income into other countries if that income is derived from a joint effort and joint intellectual property. “It’s true for companies making a cure for cancer, or an iPhone or iPad.” In Apple’s case, they shifted their intellectual property and income derived from it to non-existent entities overseas.
So Apple entered a cost sharing agreement with its own Irish subsidiary, and paid less than 0.05% on taxes in over $78 billion in income.
“Is it right that Apple can transfer this to an affiliate with no employees and very little presence?”
Harvey suggests that Apple cut a deal off-the-books with the Irish government to pay essentially no tax in four years.
“Apple has roughly 60% of global sales outside of the U.S., but Apple only allocates 6% of profits to rest of the world. The way they accomplish this is by paying very small sales commisions in other countries to reduce their tax burden. It’s not illegal, but it’s a gimmick.”
Harvey says that the real question is what to do about all of this. Apple is doing nothing illegal, he says, but what’s legal here is an issue. “Something needs to be done when so much income can be allocated to an entity with no substance.”
Harvey’s recommendation was that Congress should demand greater transparency and higher reporting standards on U.S. multinationals about where and how much they pay taxes overseas. “It needs to be administerable.”