By Tyler Seling
If the last few years have taught us anything, it would be that taxes are a point of contention for Americans. From the Occupy Wall Street undertaking to the Bernie Sanders movement in the Democratic Primaries, an enormous number of Americans have claimed that the top one percent and corporations in American aren’t paying their “fair share.”
Meanwhile, others are asserting that the current tax structure is overly burdensome on corporations and the wealthy and increased taxes would deter those already paying a majority share of tax revenue from doing business or keeping money in the United States. As a result, many American corporations have become adept at storing income overseas. According to Lynnley Browning, “U.S. companies have amassed more than $2 trillion in profit” overseas.
One such company is Apple, the tech giant that produces such beloved products as the iPhone and the Macbook. Apple recently found out that it was liable to pay an additional €13 billion (or $14.5 billion) plus interest in taxes when the European Commission determined that “Ireland had illegally slashed the iPhone maker’s tax bill between 2003-2014.”
Background on Corporate Taxes
In the United States, corporate profits are subject to double-taxation, where a company is required to pay taxes on the income it earns and then shareholders are required to pay taxes on the dividends that are paid out by the company. For the corporations’ share of the tax, there is a statutory 35% income tax, but that can rise to 39.2% after state taxes.
However, when filing their taxes, corporations (like people) are entitled to certain deductions, exemptions, and credits; this ultimately lowers their effective tax rate,  or the average rate at which a corporation’s pre-taxed profits is taxed. In 2013, the Government Accountability Office (“GAO”) estimated the average effective tax rate to be approximately 22.9%. However, each company’s individual tax rate is determined by the amount of money it earns.
One additional part of the U.S. tax system is that companies can defer taxes on their international income until they have “repatriated” that income, or brought it back to the U.S. This is primarily why companies have taken to leaving their profits overseas.
Corporate Tax Rates
In the United States, we rely on a progressive tax system that increases the tax rate as the amount of income or pre-tax profit rises – however it isn’t “perfectly” progressive. What this means is that as a corporation continues to earn profits, the amounts of money will be taxed at different rates. For the first $49,999 earned, the tax rate starts at 15%. For income ranging from $50,000 to $74,999 the tax rate is 25%; for income ranging $75,000-$99,999 the tax rate is 34%; and between $100,000 and $334,999 is 39%. Income ranging from $335,000 through $9,999,999 is taxed at 34%, while that earned between $10,000,000 through $14,999,999 is taxed at 35%, and $15,000,000 through $18,333,333 is taxed at 38%. Any income over $18,333,333 is taxed at a marginal rate of 35%. So to put it into perspective, if a company earns $21 million in profits their tax table would look like this:
As you can see, the progressive system does not just continue to climb, but it shifts the burden depending on the amount earned. However, this system does tend to have the biggest impact on the mid-size to large companies.
What did the European Commission decide?
So why would companies want to keep their off-shore earnings overseas? Well the European Commission determined “[t]hat Ireland provided Apple illegal aid through a favorable tax arrangement, which violated the European Union’s state-aid rules.” According to EU Competition Commissioner Margrethe Vestager, Ireland permitted Apple to utilize an effective tax rate of 1% of European profits, which fell to .005% by 2014. This revelation came as a part of a three-year sting of “sweetheart deals,” where the EU has targeted major corporations looking to sidestep taxes by moving profits and costs to wherever they can gain the greatest tax benefits, such as an extremely low effective tax rate.
How will this impact Apple’s US tax status?
However, this $14.5 billion tax bill may be a blessing in disguise for Apple. As Lynnley Browning explains, “Under current U.S. tax rules, specialists say Apple would probably be able to claim a foreign tax credit for the repayment, allowing it to lower its tax bill in America, where the 35 percent corporate income-tax rate is one of the world’s highest.” She further explained that “[u]nlike other industrialized countries, the U.S. taxes its multinational corporations on their global income, while allowing a dollar-for-dollar credit for the foreign taxes they’ve paid.”
The U.S. Position
In response the European Commission’s stance on Apple’s taxes, the Treasury Secretary Jacob Lew said that it was wrong for “‘Europe to be rewriting tax law retroactively, reaching into a tax base that properly should be a U.S. tax base, because its U.S. income.’” However, Secretary Lew had written an opinion piece for the Wall Street Journal stating that U.S. companies should claim such credits against their domestic tax bill for payments made to EU member states. In addition to Secretary Lew’s feelings on the matter, plenty of people in Washington have called for cutting the corporate tax rate for company’s offshore earnings, including President Obama, numerous members of Congress, and even president-elect Donald Trump.
While the issue of taxation has been a majorc issue over the past several years, including playing a primary role in this year’s election, don’t expect it to let up anytime soon. No matter the outcome of the election, it can be expected that those in Washington will continue to fight over the corporate tax rate, particularly on money earned overseas. Do not be surprised if this issue spurs some form of international agreement on corporate taxes between the EU and the U.S., or if it encourages Congress to act and pass a bill to reduce the marginal tax rate on income earned overseas. After all, Apple alone has approximately $214 billion of income held overseas waiting to be repatriated when the tax rate has improved.
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 Supra, note 3.
 Supra Browning, note 1.
 Supra, note 2.
 Supra, note 2.
 Supra Browning, note 1.
 Id., citing http://www.wsj.com/articles/europes-bite-out-of-apple-shows-the-need-for-u-s-tax-reform-1473722046.
 Supra Browning, note 1.