Advice to Howard Lutnik: Policy design should start with reality
Just a little note to one of those likely to take office in January. Policy design - on whatever - should at least start from reality. This is true of the business taxation system. Therefore we’d recommend that Mr. Lutnik, likely the next Commerce Sec, start with what actually happens.
Apple….”they make the parts in China, they put the parts together in Taiwan, then they wave their magic wand and it floats over Ireland….and then it comes to America and there’s a 3% profit in America….” and, well, no.
It’s more that the parts are made in Taiwan - processor and so on, by value the parts are made outside China - and then put together in China. By a Taiwanese company, Foxconn, often enough. Then Ireland and America, well, no.
For Apple has been very clear over the years, it runs its business in two segments. Outside North America is indeed run through Ireland, inside North America does not. The business of selling iKit to North Americans operates in terms of cashflows, profits, taxation and so on, exactly as a domestic US company. It’s entirely true that some other tech companies have - how to put this delicately - more interestingly complex tax and value structures. But Apple does not.
The effect of Ireland in Apple’s system is that tax which would, or could, be paid in the UK, Germany, Indonesia and all the rest concentrates in Ireland. Ireland makes no difference at all to the tax paid by Apple on its domestic, US, business - because it’s not involved.
As a result of the changes to the US corporate income tax from the first Trump Administration those profits that pile up in Ireland are indeed now taxable in the US. With the usual insistence that foreign taxes paid reduce the US tax payable. That is, the more Apple reduces taxation paid in the UK, Germany, Indonesia and so on, by that use of Ireland, the more US corporate income tax is due.
It’s entirely possible that the US corporate income tax system should be reformed. Our preference would be abolished but that’s because we’re ideologues. But any reform or management really should start from an acknowledgement of the current reality. Apple’s Irish tax structure makes no difference at all to the amount of tax Apple pays on its North American business. They deliberately set it up so that it wouldn’t too.
As a more general point, one of the reasons that politics so often fails to change the world is that politics so often doesn’t grasp the current state of that world.
Tim Worstall