Multibillion Apple tax bill spurs calls for reform

Lawmakers are seizing on the European Union’s multi-billion dollar ruling against Apple to push their case for tax reform.

The August ruling that Apple owes Ireland more than $14 billion in back taxes prompted lawmakers on both sides of the aisle to speak out about the need to overhaul the tax code.

{mosads}A bipartisan group of lawmakers is concerned the EU is trying to go after some of the $2.6 trillion in foreign earnings by U.S. corporations held offshore.

Right after the ruling came out, House Ways and Means Committee Chairman Kevin Brady (R-Texas) called it a “predatory and naked tax grab,” and Sen. Charles Schumer (D-N.Y.) called it a “cheap money grab.”

Many lawmakers have wanted to overhaul the tax code in 2017, and the Apple ruling and similar cases could raise pressure on Congress to act.

But many caution that serious obstacles to tax reform remain.

“The EU decision should give it a kick. But tax reform is not an easy thing to accomplish. That remains true,” said Janice Mays, a former top aide for House Ways and Means Committee Democrats who is now managing director of tax policy services at PricewaterhouseCoopers (PwC).

The European Commission (EC), the European Union’s executive body, has been investigating whether tax deals that multinational corporations received from EU member countries are improper “state aid.” When the EC issues rulings against the tax deals, it orders countries to collect back taxes from companies. Many of the companies that the commission has investigated or is currently probing are American.

In addition to Apple, the EC has ruled against arrangements between Luxembourg and Italian car company Fiat and between the Netherlands and Starbucks. It is currently investigating tax deals that Luxembourg gave Amazon and McDonald’s.

Both Apple and Ireland have said they will appeal the commission’s ruling, and the Starbucks and Fiat decisions have also been appealed.

Lawmakers on both sides of the aisle have criticized the EC, claiming that officials are imposing retroactive taxes and issuing rulings that don’t align with international tax standards.

Across the political spectrum, policymakers say the state aid cases highlight problems with the U.S. tax code. But lawmakers disagree about what tax changes to make.

The U.S. has a 35-percent corporate tax rate that applies to multinational companies’ domestic and foreign income. However, corporations can defer taxation on their foreign earnings until the money is repatriated to the U.S., and companies can keep their money offshore for tax purposes for an indefinite amount of time.

There are $2.6 trillion in untaxed foreign earnings by U.S. multinational corporations, according to an estimate from the Joint Committee on Taxation.

In an op-ed in the Wall Street Journal last month, Treasury Secretary Jack Lew said the state aid cases “threaten to erode America’s corporate tax base.”

The amount of tax revenue from the repatriation of foreign earnings could be reduced by the state aid cases. When companies repatriate their income, they get credits for the taxes they paid to foreign countries, so taxes paid abroad reduce the amount of taxes paid to the U.S.

Democrats have long had a desire to use revenue from repatriated foreign earnings to pay for infrastructure investment. They are also interested in ending corporations’ ability to defer taxation on foreign earnings.

The Obama administration has proposed “deemed repatriation” of untaxed earnings currently held offshore. Those earnings would be taxed at a rate of 14 percent. A minimum tax rate of 19 percent would be placed on foreign earnings going forward regardless of whether the income is brought back to the U.S. Under the proposal, the revenue from the 14-percent tax would be used to pay for infrastructure investment.

Schumer, who is expected to become the Senate majority leader next year if Democrats take control of the upper chamber, is interested in passing an international tax reform and infrastructure package that would be similar to Obama’s proposal. And Democratic presidential nominee Hillary Clinton is interested in paying for an infrastructure package with business tax reform, though she has not provided specifics.

Liberal senators such as Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.) also dislike allowing companies to defer taxes but think the rates on foreign earnings proposed by the Obama administration are too low. Sanders has proposed paying for infrastructure by ending deferral without lowering the tax rate on foreign earnings.

Republicans are also interested in addressing companies’ accumulated foreign earnings as part of tax reform. Under House Republicans’ tax-reform plan, accumulated foreign earnings would be taxed at single-digit rates. The blueprint does not specify how the tax revenue from repatriated earnings would be spent.

But going forward, Republicans want the U.S. to have a “territorial” tax system where foreign earnings wouldn’t be taxed. They argue that such as system would make U.S. businesses more competitive and would make it easier for American companies to invest their foreign earnings in the U.S.

“Lowering the corporate tax burden and shifting to a territorial regime with base erosion protections will help shift our economic landscape and produce fertile ground for more businesses to invest here at home,” Senate Finance Committee Chairman Orrin Hatch (R-Utah) said last month after a meeting with a European commissioner to discuss the state aid rulings.

Despite enthusiasm for addressing the issues, Democrats and Republicans are far apart on how to do so.

The differences between the parties on reforming the international tax system isn’t the only challenge to enacting tax reform in the wake of the Apple ruling.

Former tax committee staffers say that for tax reform to actually happen, there needs to be public outrage at the tax code. The Apple ruling is not providing that outrage, they said.

The ruling is “another piece in the puzzle of tax reform, but the puzzle is far from complete,” a former senior advisor on the Senate Finance Committee said.

They caution that there is a long road ahead.

“Is this final straw that breaks the camel’s back?” asked Sage Eastman, a lobbyist who previously worked for the House Ways and Means Committee Republicans.

“I don’t think so.”