It turns out some wealthy companies are just like some wealthy hedge fund managers: They're taxed at far lower rates than nearly everyone else.
Whether or not Apple used illegal breaks to pay virtually no taxes in Europe over 11 years, as regulators there contend and the company denies, the order last week that it pay billions in back taxes highlights a worrisome divide among the world's biggest corporations: Some pay relatively little taxes, others a lot, AP reported.
Taxes paid in the US and abroad by tech companies like Apple amounted to 24% of their profits in the 10 years through 2014, according to a Credit Suisse report. Energy companies paid 41%, nearly double.
Experts say a tax system that divides companies so starkly into winners and losers raises issues of fairness, along with questions about the wisdom of using tax codes to shape corporate behavior. It may also pose a danger to investors: Are companies that have boosted earnings by shifting headquarters abroad and other maneuvers vulnerable to a tax-collector crackdown?
According to a May report by the research firm R.G. Associates, 78 of the biggest US companies—from tech stars Facebook and eBay to glass maker Corning and food giant Kraft Heinz—would have earned at least 15% less last year without the benefit of overseas tax rates far below that in the US Stocks of each of those four companies are up more than 20% in the past year.
Policing Illegal Breaks
"If you have a company that moves profits and operations around the world in a snake-like fashion, you don't know if they're going to wind up in the regulatory cross hairs," says Jack Ciesielski, head of R.G. Associates. "The European Union is getting much better at policing this."
The 28-nation bloc has launched investigations into deals struck by McDonald's and Amazon. They have ordered Starbucks to pay millions of dollars in back taxes. And in the US, the Treasury Department has been tightening rules to make it more difficult to relocate to low-tax countries.
In Apple's case, the European Union says it was so skilled at using illegal breaks offered in Ireland, that the taxes it ended up paying on every €1 million ($1.12 million) in profits amounted to just €50. The company was ordered to fork over nearly $15 billion in back taxes, plus billions more in interest.
Whatever the outcome, studies show Apple isn't the only company adept at cutting its tax bill, which is why officials are cracking down.
— No Taxes: Nearly a fifth of profitable US companies paid no corporate taxes in 2012, the latest year tracked in a March report by the General Accounting Office said.
— Biggest Winners: Drug maker Pfizer benefited the most from paying low foreign taxes last year, according to an R.G. Associates study. If it had to pay the US rate of 35% on its overseas earnings, profits would have been $3.1 billion lower, or 55% less.
The top 10 tax "winners" last year also included PayPal Holdings, whose profit would have been 41% lower, and Expedia, facing a potential profit cut of 36%.
— Industry Divide: Industries easily able to shift valuable assets abroad—think intangible stuff like patents on drugs—got the biggest boosts, according to a study by Credit Suisse. Health care and technology companies added $266 billion to their profits over 10 years, an increase of 35%, by taking advantage of lower rates abroad. Utilities, stuck with power plants in the US, got zero benefit.
US companies have been taking advantage of various foreign incentives and holidays for years now to avoid the US corporate rate of 35%, the highest in the industrialized world.
