iTaxes: The European Commission's Apple Ruling Exposes Repatriation Pitfalls

By Bodle, Jonathan R. | Texas International Law Journal, October 1, 2017 | Go to article overview

iTaxes: The European Commission's Apple Ruling Exposes Repatriation Pitfalls


Bodle, Jonathan R., Texas International Law Journal


Table of Contents

Abstract.401

Introduction.402

I. Understanding Untaxed Corporate Offshore Earnings.405

A. International Corporate Taxation.405

B. Transfer Pricing and Organization Structure.406

C. The Offshore Tax Base.408

II. European Commission Ruling......409

A. Apple Ruling.....409

B. Apple's Response.......411

1. Litigation......412

2. Apple's Other Options.....413

3. Incentives for Other Countries.415

III. Trump's Proposal.....415

A. Deemed. Repatriation......415

B. Response to Deemed Repatriation.....416

1. Litigation......416

2. Apple's Other Options.....417

3. Incentives for Other Countries........418

C. Part of Broader Reform.......418

Conclusion.419

Introduction

Should the United States change their approach to taxing the offshore earnings of U.S.-based Multinational Corporation's (MNCs)? The 2016 presidential candidates-and indeed, former President Barack Obama-have provided conflicting answers of their own.1 One piece of the puzzle is the taxation of already-earned, untaxed corporate offshore earnings.

MNCs have invested significantly in tax avoidance practices, shielding themselves from unfriendly U.S. corporate tax rates.2 The 2016 presidential candidates expressed serious concern about this. In fact, the juxtaposition of corporate tax avoidance and the concept of fairness in the American income tax system was repeatedly highlighted during the 2016 election cycle.3 Yet even where their model of tax-related fairness may differ, each party's presidential nominee appreciated the value of a corporate tax base that included offshore earnings.4

Meanwhile, U.S.-based MNCs continue to boost offshore earnings.5 U.S.-based MNCs boost those earnings by taking advantage of deferral provisions in the U.S. tax code that permit MNCs to delay paying taxes on foreign earnings until those earnings are brought back to the U.S.6 Recent estimates suggest that over $2 trillion dollars in corporate offshore earnings belonging to foreign subsidiaries of U.S.-parented MNCs have gone untaxed by the U.S.7 This monumental figure constitutes a highly coveted U.S. tax base.8 However, since a repatriation holiday in 2004, few earnings have made their way stateside. This indicates insufficient incentive for those MNCs to bring offshore earnings home.9 Among those MNCs amassing stockpiles of cash overseas is Apple, Inc., and despite Tim Cook's public statements suggesting that some portion of the money may come into the U.S., there is no timetable for when, if ever, the vast majority of Apple's untaxed offshore earnings will be repatriated.10

Instead of waiting for MNCs to repatriate earnings, or for Congress to authorize another repatriation holiday, President Donald Trump has proposed a 10% deemed repatriation tax.11 The tax is designed to raise revenue from the currently untouchable tax base.12 While Mr. Trump's proposal is vague, public comments from the campaign trail suggest that he seeks to tax all existing offshore earnings.11 "Deemed" repatriation, after all, treats offshore earnings as though they are in the United States, "whether or not they come home."14

A recent ruling by the European Commission (EC) regarding taxes paid (or not) by Apple, Inc. to Ireland addresses a similar issue.15 The EC seeks to force Apple to pay back taxes on earnings stashed in Ireland, where Apple paid an effective tax rate of .005%.16 The EC's ruling has come under fire from the U.S. government.17 Any back payment would presumably, through the mechanism of the foreign tax credit, be counted against, and thereby reduce, the U.S. tax base.18 Concern that the EC's ruling against Apple is only the first of many against U.S.-based MNCs hastens the need for some mechanism to recoup a percentage of those MNC's offshore earnings for the U.S.19

Both Trump's deemed repatriation proposal and the EC's Apple ruling suggest a trend towards targeting MNCs' accumulated offshore earnings with an isolated tax. …

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