They've Seen The Enemy... and It Is Them

Apple Inc.
(Nasdaq: AAPL) CEO Tim Cook was summoned to Congress last week to face outraged legislators over his company's failure to pay corporate income taxes to any national government on more than $74 illion in overseas earnings! This is a perfect example of a situation that is simply the tip of the "offshoring" ice erg! #elow$ %'ll address what it means for your money and why the outcome may not end up at the "o vious" solution! &o$ 'pple! 'ccording to a Congressional investigation$ the Cupertino giant paid no taxes whatsoever to any national government on more than $74 illion in revenues ( a fact that 'pple doesn't dispute! 's galling as this is$ what 'pple did was perfectly legal! )sing well(documented and well(known loopholes in the )!&! and %rish tax codes$ 'pple set up %rish shell corporations that allowed them to funnel dividends and earnings from offshore investments in such a way as to not incur tax lia ilities!!!in any country! %nterestingly$ &enate aides associated with the investigation said they've never seen companies use su sidiaries that didn't owe taxes! Evidently$ they haven't looked very hard! *hat 'pple's doing is nothing new or uni+ue! 'lmost every multinational corporation operates in the same shady territory! ,ost have thousands of accountants and lawyers on staff whose sole -o is to make sure everything those companies do is tax "efficient!" .oreign su sidiaries are -ust the eginning! There's transfer costing$ loans etween su sidiaries$ options( ased compensation$ tax deductions for malfeasance$ and intellectual property offshoring (( -ust to name a few of the favorite tax dodges in widespread use today around the world$ +uite literally! .or example$ Microsoft Corp. (Nasdaq: MSFT) sends an estimated $/!40 cents on every dollar through 1uerto 2ico to pay for patent costs associated with discoveries that are "mostly" made inside the )nited &tates$ according to the %nstitute for 1olicy &tudies or "%1&" for short! ,icrosoft CEO &teve #allmer's crew stashed $0/!3 illion offshore last year alone and didn't pay a dime in )!&! taxes! That's an estimated $45!4 illion it'd owe )ncle &am if rought home! Pfizer Inc. (NYS : PF ) sells 678(478 of its drugs inside the )nited &tates ut has reported no )!&! profits in five years! The %1& estimates the pharma giant ooked $76 illion in profits offshore last year!
9ike ,icrosoft$ it paid no taxes on that money whatsoever! 'nd you'll love this!!!the company earned $46 illion from :/4/(:/4: yet still was so tax "efficient" it received $:!: illion in federal refunds over the same time period! !erizon Co""#nications (NYS :!$)$Merc% & Co. (NYS : M'()) Citi*ro#p Inc. (NYS : C)) +PMor*an C,ase (NYS : +PM)) -e.lett/Pac%ard Co. (NYS : -P0)) 1eneral lectric Co. (NYS : 1 )) 22on Mo3il Corp. (NYS :45M)) Fed 2 Corp. (NYS :F64)) and 7an% of A"erica Corp. (NYS : 7AC)!!!they're all in on it! &o are do;ens of other ig companies! <ever mind what 'pple owes! %n my mind the far igger pro lem is that Congress has known a out this for years and failed to do anything a out it!
They've Seen the Enemy...And It Is Them

*hich rings me to Congress! =on't let the histrionics fool you! They're a smoke screen! 9ike a unch of spoiled kindergarteners$ what Congress is really mad a out is that some ody figured out how to game the system in a way that they didn't anticipate!
%f % were Tim Cook$ % would have hauled a huge mirror into the cham ers$ held it up and encouraged every mem er of the in+uisition to take a good hard look at what they see! The reality of what's happening is that the )nited &tates runs a punitive$ worldwide taxation system very poorly! 's morally appalling as this situation may e$ holding a corporation to task for legal ehavior ena led y decades of ad policymaking is wrong! Our regulators and our Congress are outclassed$ outmaneuvered and out negotiated at every turn ecause they don't understand how real money works! They never have and$ in today's complicated financial markets$ it's likely they never will! *orse$ they cannot grasp the concept of responsi ility for their own actions! <or$ evidently$ do they understand the "law of unintended conse+uences" or asic economics$ for that matter! %f anything$ Congress ought to turn on itself and keelhaul every mem er who voted to implement the policies that created this mess! =emonstrate some real leadership y looking introspectively first! Then go a out actually fixing the issue and doing something that engenders the pu lic's trust instead of tromping all over it!
What This Means to Your Bottom Line

'nd that rings me to the 'merican pu lic$ and to investors in particular! 's tempting as it is to go along with the witch hunt$ investors etter e careful what they wish for! CEOs have one -o and one -o only!!!to maximi;e profits! That means they not only need to develop$ design$ uild and sell products and services$ ut create tax(efficient organi;ations$ too! %ndividuals have the same -o $ al eit on a very different scale! ,ore importantly$ oth have the right to pay the minimum amounts of taxes allowed y law! 9et's not forget that 'pple's margins are o scenely high and that those same profit margins were eing lauded as the stock rose to $7/7!/7 per share last &eptem er! %f Congress decides to close down these loopholes$ chances are good that they're going to do it in such a way that what comes to the ottom line is going to change 'pple's ottom line dramatically! <ot to mention the ottom line of every other .ortune 7// firm! Take proposals from &en! Carl 9evin$ =(,T$ and &en! #ernie &anders$ %(>T$ for example! The former is championing the Cut )n-ustified Tax 9oopholes 'ct$ which would nail down executive options compensation pay$ end several oil and gas su sidies and treat foreign su sidiaries controlled from the )nited &tates as )!&! entities for tax purposes! The latter has put the Corporate Tax =odging 1revention 'ct on the ta le! &anders' proposal would end tax deferrals on offshore profits while also taxing glo al profits for )!&! corporations! *hile oth ills are expected to raise nearly half a trillion dollars in additional taxes or more over the next 4/ years$ % figure they're good for at least a 6/8(478 reduction in ottom line profits if they pass! That likely translates into a u;; cut of at least the same amount in stock prices! <ever forget that stock prices are a function of earnings and profits! Take those away through punitive legislation and guess what!!!prices will fall! =e t markets could implode$ too! Our entire e+uity pricing system is uilt upon the efficient use of de t! %f you force cash reserves to e used for taxes$ de t to e+uity ratios go haywire$ as does operating leverage! 2eturn on e+uity ratios$ return on cash$ and price to earnings ratios!!!they'll all change! 9onger term$ the effects would pro a ly e good$ ut the short(term ad-ustment will e a ear ( pun a solutely intended!
'nd finally$ if you think offshoring or the practice of moving usinesses to other -urisdictions is galling now$ wait till Congress starts fixing things!
Money Has No Borders

,oney is mo ile and those who control it are$ too! % can think of no etter way to eviscerate what's left of the 'merican industrial machine than to punitively change the tax code in response to misplaced social pressure applied retrospectively! .ixing it is another matter entirely ?and adly needed@! 'nd any time there are ig changes$ new winners and losers emerge! Aou lose the dinosaurs and you end up with homo sapiens! =on't e surprised to see a num er of corporations give up their )!&! status as the situation develops! 2egardless of the legislation they manage to pass$ the est CEOs will already e well out ahead of any legislation Congress can dream up! &o will their profits$ which % expect to actually grow as sophisticated tax(minimi;ation ecomes an even more important element of +uarterly performance!
If a Man Can ream

%n case you're wondering how % would fix all this!!!% would do the same thing many CEOs would! %'d implement "single company accounting$" so everything is rolled up worldwide! <o more fancy engineering and transferring assets from one pocket to the next to avoid taxes! %'d also change corporate reporting so that any ody could verify how much corporations are actually paying in taxes every year! 's o noxious as 'pple's situation is$ people don't understand that corporations are not re+uired to disclose their actual tax ill! &o for all the hulla aloo$ no ody really knows what corporate tax rates are or aren't! <ot you$ not me and not the government! The 4/(Bs every ody looks to as a proxy reflect only the current portion of taxes due! %f the government wants a real handle on this they need to re+uire disclosure of federal taxes paid for a given year! Congress could legislate this overnight if it wanted to! 'nd finally$ %'d cut all the tax expenditures! 'ccording to the C'O$ the )!&! government spends as much as it takes in! 2epealing things like accelerated depreciation$ perpetual income deferrals for foreign profits$ research credits$ and special exemptions for low(income housing could put nearly $:// illion ack on the ooks! Every year! %mmediately! 't the end of the day$ if we're going to go after individuals for higher taxes ?which % don't agree with y the way@$ then it's only fair we go after corporations$ too! Dust do it the right way! 'elated Articles and Ne.s:

They've Seen The Enemy... and It Is Them

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Apple Inc.

They've Seen the Enemy...And It Is Them

What This Means to Your Bottom Line

Money Has No Borders

If a Man Can ream

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