Washington has a love-hate relationship with Big Tech. Witness Apple CEO Tim Cook's recent testimony on Capitol Hill, where Senators praised their favorite iGadgets while also accusing the world's most valuable company of being one of its biggest tax avoiders, laying out how Apple jumped through loopholes to save some $44 billion of otherwise taxable income. As Democrat Carl Levin, chair of the Investigations Subcommittee, put it, Apple "sought the holy grail" of tax avoidance by funneling vast earnings to overseas subsidiaries. Cook responded that Apple paid $6 billion in U.S. corporate taxes last year. Aside from the fact that Apple has amazing tax lawyers, what does it all mean? Here are four key things you need to know:
1 Corporate tax reform will be the big issue in Washington now that the deficit is off the front burner. American firms have some $2 trillion in cash on their balance sheets stashed abroad, in large part because they don't want to bring that money home and pay America's 35% corporate tax rate. (Ireland, where Apple stashed a lot of its cash, has a 12.5% official rate--though Apple paid less than 2%.) With unemployment still high and wages still flat, the government wants companies to bring that cash back to the U.S. and create jobs at home. The investigation into Apple's finances is clearly a warning shot to other U.S. multinationals.
2 It isn't just the U.S.--tax reform is coming in other major developed countries. Large government debts and shrinking public budgets mean all rich nations will be looking more closely at corporate tax avoidance. This year the U.K. is leading the G-8 under the group's rotating presidency, which added to the drama of British Prime Minister David Cameron's remarks at Davos in January that multinational tax avoiders should "wake up and smell the coffee." It was a pointed reference to Starbucks, which had recently volunteered to pay more tax in the U.K. in response to an investigation into its tax avoidance there. On May 20, Cameron announced he had written to leaders in tax havens asking for their help with this initiative. Look for this to be a big topic at the G-8 summit in June.
3 Major corporations will be pressed to do their part. In an economically bifurcated world, where companies are flush but workers are not and the historical relationship between corporate profits and local economic growth looks broken, big companies are going to be under a lot more pressure to do more for the countries in which they operate. Walmart's response to the garment-factory fire and devastating factory collapse in Bangladesh recently is an example; the U.S. retailer is now funding Bangladeshi government efforts to improve labor standards. There is a growing sense that many companies have been flying 35,000 feet over the economic troubles of the countries where they operate--and they should be forced back down to earth. Apple's tax troubles are just the beginning of a very big fight between the world's richest companies and its governments.