“The difference between tax avoidance and tax evasion is: A. Whatever the IRS says; B. A smart lawyer; C. Ten years in prison; D. All of the above.”
Avery Tolar to Mitch McDeere in “The Firm”
When Gene Hackman offers this cynical verbal quiz to a young tax lawyer played by Tom Cruise in the aforementioned movie, it is appropriate that the pair are conversing in a condo on Grand Cayman’s Seven Mile Beach. Apple, the largest corporate taxpayer in the U.S. according to CEO Tim Cook, is currently holding more than $100 billion of its $145 billion cash reserves overseas to soften its U.S. corporate tax liability, according to recent reports by the Associated Press.
Who among us hasn’t despaired at our annual tax liability? The truth is the vast majority of Americans, while reluctant to pay exorbitant taxes, are fair minded and honest and willing to pay our fair share.
In terms of investing, it’s not what we make that counts, it’s what we get to keep. So tax efficient investment strategies are vital in order to optimize portfolio success for private wealth investors. And awareness of cost basis and the tax implications of buying and/or selling a security are commensurate with proper portfolio maintenance.
Problems arise when confusing tax codes present options that some access but others do not. When individuals and companies exercise those options, and interpret complex codes to their advantage, things can get testy. Especially during hard economic times, when governments are searching for methods of increasing revenues. And thorough reform of the tax code doesn’t seem likely anytime soon.
Due to some of these interpretations, the Senate Permanent Subcommittee on Investigations recently “released a report attacking Apple’s tax practices.” According to a New York Times article by Schwartz and Duhigg entitled “Apple’s Web of Tax Shelters Saved It Billions, Panel Finds,” Apple’s tax code interpretations go beyond acceptable boundaries.
“Congressional investigators found that some of Apple’s subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif.,” wrote The Times. “...by officially locating them (corporate subsidiaries) in places like Ireland, Apple was able to, in effect, make them stateless-exempt from taxes, record-keeping laws and the needs for the subsidiaries to even file tax returns anywhere in the world.”
Three of Apple’s companies are housed in Cork, Ireland, but are not required to pay Irish taxes because they “are not managed and controlled in that country.” Yet Apple asserts that the companies were not founded in the U.S., where “a company is a tax resident of the country in which it was established.” So currently Apple is not paying taxes on profits for these three companies to either country.