A Tale of Two Organizations

May 3rd, 2012 by under Business and the Economy, Ethics. 2 Comments.

Most people think that Apple’s headquarters is in Cupertino California, but for tax purposes the company has established a number of offices in places like Reno Nevada, Ireland, the Netherlands, Luxembourg and the British Virgin Islands (New York Times, 4/28/2012). California’s corporate tax rate is 8.84% while Nevada’s is 0. Analysts expect Apple to earn as much as $45.6 billion this fiscal year-a record for any American Business. Last year Apple paid 9.8% of its profits in taxes, $3.3 billion taxes on profits of $34.2 billion.

There is nothing illegal about Apple’s efforts to minimize its tax bills. It seems that the U.S. tax code for business harkens back to an earlier day when a U.S. company manufactured a product and sold it mostly in the U.S. In the digital age with products being downloaded and in an age of outsourcing with products built by contractors in foreign countries, it is hard for the tax code to keep up. Apple’s accountants managed to allocate about 70% of its profits overseas.

When profits overseas are repatriated to the U.S. there is a tax bill. But Apple has joined a coalition including Google, Microsoft and Pfizer to lobby for a “repatriation holiday” that would permit business to bring money home without incurring a huge tax bill; a Congressional report estimates this holiday would cost the federal government $79 billion over the next decade.

California, which really looks a lot like Apple’s home base, is struggling with more than a $9 billion deficit. De Anza Community College a mile and a half from Apple’s headquarters has cut more than a thousand courses and 8% of its faculty since 2008. It is estimated that Apple has over $100 billion in cash.

Apple is not alone. In 2010 GE reported global profits of $14.2 billion of which $5.1 came from U.S. operations. It paid no U.S. income taxes and claimed a tax benefit of $3.2 billion (New York Times 3/14/2011).

Now for the second organization, Brown University, which announced that it would increase its payments in lieu of taxes to Providence R.I. An agreement from Colonial days says that the University is “freed and exempted from all taxes” (New York Times, 5/2/2012). The School will voluntarily pay $31.5 million to Providence over 11 years. This commitment is in addition to the current $2.5 million in voluntary payments and $1.6 million in taxes on commercial property the University owns. Brown, with a $2.5 billion endowment, owns over $1 billion of property which would generate taxes of $38 million a year. Providence is at serious risk of bankruptcy.

What’s the moral of this story? All of us enjoy the benefits that are provided by local, state and federal governments. It is very easy to start a company like Apple in the U.S. We have venture capital, orderly financial markets, a highly efficient transportation system, and are relatively free of corruption. There is a robust patent and legal system to try and assure fair competition among companies. Why are companies like Apple so reluctant to help finance these benefits? Is the goal of profits or shareholder value driving their behavior? Is it executive compensation? Maybe managers at these firms that go to such great lengths to avoid paying taxes in the U.S. could learn something from Brown University that they did not learn during their college days.

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2 Comments

chris  on June 14th, 2012

I’m a little confused; it looks like Brown is willing to pay a small fraction of what it’s annual property tax bill _would_ be (if that Colonial exemption didn’t exist) — and for paying just 10-15% you are proposing that they are the good guys? It sounds to me like they’ve weighed the odds and determined that volunteering a smaller amount will prevent their exemption from being overturned.

Why is Brown reluctant to pay $38M? Clearly they could, if they were so inclined. That rather negates their moral superiority, doesn’t it?

hlucas  on June 14th, 2012

Chris,

That us is one way to look at it. There is a long tradition in the U.S. of not taxing public institutions like Universities and Churches-only their income producing property is subject to taxes. All of these organizations like Brown are non-profits, and it is unlikely that Providence would try to overturn the property tax exemption. (I would bet that Brown is one of the largest employers in the city.)

Companies like Apple and GE employ large numbers of people to minimize taxes and enter into financial transactions that have no purpose but to avoid taxes. Brown does not have to do anything to avoid taxes and instead it is volunteering to pay Providence. I think there is a clear difference, but others may disagree.