Companies like Apple will bring back billions if there's a 'tax holiday,' but last time it was a 'disaster'
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Apple CEO Tim Cook on Thursday continued to rail against the European Commission for Competition's ruling that the company got a special deal from Ireland to avoid taxes, which is against EU rules.
The commission is ordering Apple to pay $14.5 billion in back taxes. Apple and Ireland strongly disagree with the ruling and plan to appeal. In an interview with RTE, Ireland's public broadcaster, Cook called it an "invalid, politically-based ruling."
And he said something else that raised some eyebrows.
"We provisioned several billion dollars for the US for payment as soon as we repatriate it, and right now I would forecast that repatriation to occur next year," Cook told RTE's Paschal Sheehy.
That means Apple may bring some of the billions it earned selling Macs and iPhones in countries like Germany and Ireland back to the US, where it would be subject to US taxes.
Apple has a whopping cash pile of roughly $230 billion, but most is kept overseas to avoid paying US corporate taxes. Only about $16 billion of Apple's money is held in the US.
Cook didn't say how much it might return to Apple's home country, but he's been a vocal critic of US tax policy.
The company was among those that joined a lobbying effort to push for a one-time tax "holiday" to bring some of that money home at a lower tax rate.
But the last time the US tried this, it didn't work out so well
It was 2004. Apple was riding high on iPods — not iPhones — and Congress passed the American Jobs Creation Act. It had many provisions, but one of them was a one-time tax break for companies that keep a lot of their foreign profits overseas.
Instead of paying the normal US corporate tax rate, that year they could pay just 5.25%.
And they did. In droves.
According to a paper by Chuck Marr and Chye-Ching Huang at the Center on Budget and Policy Priorities:
- Pfizer brought back about $37 billion.
- Merck repatriated nearly $16 million.
- Apple repatriated $755 million.
In sum, about $300 billion made it back to the US in 2005, up from an average of roughly $60 billion in the years before.
Congress hoped that the tax holiday would bring in lots of revenue that could be used to create jobs, repair roads, and generally improve the US economy.
Instead, despite Congress' efforts to prohibit it, the companies spent a lot of their savings on dividends and stock buybacks. And many of the companies that benefited the most actually cut thousands of jobs shortly after.
Pfizer, for instance, cut 10,000 jobs that same year, according to the paper. Ford repatriated $850 million and then laid off 10,000 workers in the US.
"Repatriations did not lead to an increase in domestic investment, employment or R&D—even for the firms that lobbied for the tax holiday stating these intentions and for firms that appeared to be financially constrained," wrote the authors of another major study on the effects of the tax holiday.
That paper from the National Bureau of Economic Research, "Watch What I Do, Not What I Say," says that for every dollar companies brought back to the US, there was a $1 increase in shareholder payouts.
"For several years, it was considered to be a disaster," Marr told Business Insider.
His own analysis suggests that tax holidays have little economic benefit. And some right-leaning think tanks, like The Heritage Foundation, agree.
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Marr said that most of the companies that benefit from tax holidays are big multinationals with lots of "intangible profits" — think patent-heavy tech and pharmaceutical companies.
Most still have plenty of cash in the US, despite keeping foreign earnings on other continents. That means they're not cash constrained and don't necessarily need to bring money back to the States to invest in research or workers. In fact, many companies repatriate money anyway at the higher rate, such as when they shut down an international division.
"If you give a holiday, you're giving it to companies that would [have] done it anyway," Marr said.
And there's another hazard. By making these occasional tax holidays, rather than a permanent change to corporate tax policy, companies can lobby Congress to give them a temporary break, bring some money back to the US, and then go back to their old ways of keeping money overseas until the next holiday comes around.
And companies like Apple are hoping that they'll get some kind of corporate tax cut soon.