US Better Get Started With Tax Reform

Published on: 12:45PM Aug 31, 2016

~~The European Union earlier this week ruled that Apple Computer will owe about $14.5 billion in back taxes due to their "cozy" arrangement with Ireland.  The current tax rate in the US is 35% and the tax rate in Ireland is 12.5%.  Most would assume that Apple was paying at least 12.5% to Ireland, however, they were able to set up the arrangement where there effective tax rate was only about 2% in some cases.

The US has been eagerly awaiting for the return of these "profits" back to the US so they can apply the 35% tax rate to this income.  Apple and other companies are in no hurry to send this money home since they know the IRS will grab 35%.  However, with the ruling by the EU, the amount that will be subject to tax in the US will be much lower than 35%.  This is due to the money being tax by the EU would now allow Apple and other companies to offset US income taxes with a Foreign Tax Credit (FTC).  A FTC allows companies to offset dollar-for-dollar the amount of taxes paid overseas (there can be some adjustments).

As an example, assume that Apple Computer had $40 billion on profits held in their Irish Company.  Let's assume they paid $1 billion in tax on this money.  If this money was sent home now, the IRS would collect about $14 billion of tax.  However, if the EU assessed a tax rate of 25% on this money, the IRS would only collect $4 billion in taxes.

Therefore, if the EU gets their taxes from Apple and others; the EU has effectively "grabbed" the tax money before the US can get their hands on it.  As you can guess, this has everyone from Congress and the IRS very unhappy.  Without major tax reform, this money is likely to stay oversees and if the EU ends up winning; the amount coming home to be taxed will be lower than they planned for. 

Therefore, this is another push for the US to do major tax reform.  Next year will be interesting (no matter who gets in the White House) and we will keep you posted.