Is Apple avoiding paying its share of taxes? And why should I care?
In light of this week’s news that the EU wants Apple to pay $14 billion in back taxes to Ireland, it is a good time to consider how a company’s tax strategy affects its ability to fulfill its social contract as a global corporate citizen. And more broadly, how companies’ tax strategies might impact the ability of the capitalist system to fulfill its potential to create a more shared and durable prosperity for all.
As a global nonprofit that certifies businesses that meet the highest standards of positive overall social and environmental impact (called B Corporations), B Lab has had to think through this important and complex issue, acknowledging that there are no black-and-white answers. We offer up B Lab’s Framework for Evaluating Tax Strategies as a starting point for an important public conversation and an invitation to others to help us further refine our thinking over time.
B Lab’s framework reflects both the role that taxes play in contributing to, and the value business receives from, a healthy society. In short:
The evaluation of a tax strategy should include whether 1) the amount of overall taxes paid over time appropriately reflects the actual amount of income generated by the business; and, 2) the amount of taxes paid over time in each jurisdiction appropriately reflects the actual operations of the business in that jurisdiction.
Before thinking about how the above framework might apply to Apple’s tax strategies, let’s back up a bit to understand why this issue is so important:
Businesses create value for society beyond the taxes they pay. Businesses create jobs ― preferably high quality jobs that offer dignity, a living wage and benefits to support a family, and the opportunity to find fulfillment and build assets for long term security. Businesses can provide access to basic goods and services as well those that improve our quality of life.
However, in addition to the many different aspects of value that business provides society, business has an obligation to contribute its share of taxes. This is because business exists within the context of society; its proper role is to serve society, not the other way around. Moreover, healthy businesses can only exist over the long term in a healthy society. A healthy society depends upon public expenditures made possible by taxes. These public expenditures benefit business in both direct and indirect ways. Examples include things like national defense, local law enforcement and the enforcement of contracts, transportation infrastructure, and education, but also things that more directly bolster economic activity like pensions, health insurance, and other income support. This means, in a fractured global tax system that inevitably has its cracks, the bar for a tax strategy that fulfills social obligations should go beyond simply what is legal.
Just as there are individuals and organizations who believe that outsourcing manufacturing overseas is bad corporate citizenship, there will certainly be those who believe the same thing about any tax management strategy that results in the reduction of corporate taxes through the recognition of revenues in lower tax jurisdictions. A thoughtful critic might say that a company could manage its business without routing its revenues through a low tax market, and therefore any reasons for setting up operations in another jurisdiction are just cover for avoiding taxes. This critique, from B Lab’s perspective, dismisses legitimate business choices that include the appropriate management of tax burden, but are distinguishable from more questionable tax avoidance schemes pursued by many companies.
Again, the distinction between tax management and tax avoidance is not always black and white.
Given these complexities, there ought to be public debate about the appropriate levels of taxation and the sources and uses of tax receipts, as well as regarding effective and responsible tax strategies. As a starting place, B Lab determined that certain tax strategies would require additional scrutiny for companies seeking certification as a B Corporation, including:
- Employing a “corporate inversion” where a company’s legal domicile is moved to a low/no-tax jurisdiction while material operations remain in its higher tax country of origin;
- Employing a “Double Irish” tax strategy where corporate income can be effectively taxed nowhere;
- Utilizing a “patent box” or other method to transfer intellectual property to a low/no-tax jurisdiction and licensing back the intellectual property to reduce/eliminate local taxes; or
- Utilizing multiple shell entities or structures to reduce or minimize taxes
The public doesn’t yet know sufficient details of Apple’s tax strategy. Whether or not a company is seeking B Corp status, the public interest is served when we ask tough questions and demand thoughtful answers. And as details emerge for Apple, it is helpful to have a framework against which we can evaluate those answers.
And this isn’t just about Apple.
Many companies employ aggressive tax strategies. Asking companies to apply a framework for evaluating tax strategies will help well-intentioned CEOs and CFOs be more thoughtful about balancing the interests of their shareholders with the interests of society, help boards of directors provide better governance, and help all of us make more informed judgements about whether these companies are fulfilling their obligations as corporate citizens.
Tax avoidance is just one headline-grabbing reason why public trust in business is at an all-time low. If we want to rebuild trust in the capitalist system, we can start by giving business the frameworks and tools to demonstrate that they govern themselves to align their interests with those of society. If we want to fulfill the promise of capitalism to create a shared and durable prosperity, then indeed it is essential that business leaders set their sights higher than doing what is legal to doing what is responsible and even beneficial to society, not just their shareholders.
Asking good questions about taxes is one good place to start.