Apple moved to Ireland??? How the Hell does a Company Move?
Tragic Letters from the Outskirts of the New Economy
Dear Techconomist,
I heard that some companies have been relocated to dodge taxes. I recently heard that Apple moved to Ireland?! How does a Company move? Should that even be legal?
Thanks!
The 99 Percent
Dear 99 Percent,
Companies move all the time. There are a variety of reasons, and sometimes those reasons are good. Offshoring sometimes happens to take advantage of cheaper labor or lower costs throughout a supply chain. What some companies do when they offshore is very interesting though. Some companies use tax laws to their advantage — a technique that has various names but can effectively be called “base erosion and profit shifting.”
The name comes from the Organisation for Economic Co-operation and Development, which created the “BEPS” framework to deal with the problem of small countries like Nevis (home to my favorite bastard) and Luxemberg using tax loopholes to bring in tax income from companies who do not truly conduct business in those countries. Economically speaking, companies are supposed to pay taxes where they earn economic income. In the current framework, scholars agree that economic income is earned at the source activity where the additional profit exists. This means that where something is created should theoretically be where taxes are paid.
This seems simple enough. You earn profit where you perform economic activity. Great! However, there is no longer the firewall between the domestic and foreign parts of corporations that there once was. Almost every corporation has a domestic and international component, and most have international subsidiaries that also make profits, so the question becomes: which country gets what profits? Corporations go to great lengths to avoid taxes, so they will often charge a small company owned by the larger subsidiary more or less than goods or intellectual property are worth in order to move profits to a low tax country. This is now illegal, but it can be hard to know what the right price is without going through a market. Where did profits come from? Generally speaking, the answer is where the people are, but as Apple has shown in its multi-year battle against the EU, it is not always simple.
The IRS implemented section 482 of the US tax code to deal with this problem, affectionately called the “transfer pricing” section. I read it all, so you don’t have to. You should anyways because it’s a great section of the tax code. Section 482 creates rules that companies in the United States must play by to ensure the taxman gets her due. The focus of 482 is generally to ensure that profit goes where profit is due by standardizing profits across the industry in the country where market power and advantage do not exist to push those profits to the country where those things do. This essentially removes excess profits in order to ensure all profits are properly taxed. As the United States tends to have high tax rates, politicians prioritize ensuring that companies don’t try to shift profits to low tax jurisdictions.
While transfer pricing law does not make what Apple did illegal, plenty of companies have found themselves on the wrong side of a transfer pricing case and paid the price. An entire industry of tax experts exists around the idea of preventing companies from circumventing these rules by moving profits abroad. There are lots of jobs in making sure Uncle Sam gets his dinero and CEOs stay out of Rikers.
If this is really interesting to you, you are in luck! Georgia Tech has a great transfer pricing class taught by a legend of the field who has been there since the very beginning. Definitely look into it! Transfer pricing is a great way to bring in that dough, especially as a liberal arts major. Tell the professor of that class that Techconomist is substance in Luxembourg and says everything is a comparable uncontrolled price. See if he laughs or cries!
Yours forever! Hasta Siempre 99 Percent,
Techconomist
