Friday, May 24, 2013

The Real Story About Apple’s Taxes


The Real Story About Apple's Taxes

The remarkable thing about the Senate Permanent Investigations Subcommittee's report on Apple Inc.'s corporate tax avoidance is how unremarkable it is.

Because Apple is so profitable, the dollars involved will certainly attract attention (this is a Senate committee after all, so that is the point). The report alleges Apple reduced its U.S. corporate income tax by an average of $10 billion-a-year for the past four years. Since the corporate levy generated only about $240 billion in 2012, $10 billion foregone from one company is a very big number indeed.

But while it added a few interesting twists, Apple cut its taxes  with the same tools multinationals have been using for years to minimize their worldwide tax liability. And if there is a scandal, I suppose it is the very ordinariness of these transactions. Apple's tax avoidance shop, it seems, is a lot less innovative than its phone designers.  

The tactics are complicated but the strategy is simple: A company designs its business to locate as much income as possible in those countries where taxes are low. At the same time, it allocates as many costs as possible to those high-tax jurisdictions (like the U.S.) where deductions are especially valuable. A deduction is worth 35 cents on the dollar in the U.S. but only one-third as much in Ireland, where the corporate rate is only 12.5 percent.  

To achieve these twin goals, Apple mostly relied on the three golden goodies of international tax avoidance: deferral, transfer pricing, and check-the-box.

What on earth am I talking about?

Deferral allows U.S. firms to avoid paying U.S. tax on foreign income until earnings are brought back home. In practice, companies can keep these earnings offshore indefinitely and never pay U.S. tax.  Transfer pricing and check-the-box make the system even more beneficial.  

Transfer pricing is the way firms use internal bookkeeping to allocate expenses among various affiliates. For a company like Apple, nearly all the value of its products is in its patents and other intellectual property.  By charging a relative pittance to a foreign subsidiary for use of that IP, it can maximize that affiliate's profit and minimize its IP income in the U.S.

Firms are supposed to price these assets at market value. But what does that mean when it comes to, say, proprietary computer code?

Check-the-box has been around for 15 years. Originally aimed at simplifying filing, these Treasury rules allow firms to classify themselves as one of several different entities—corporations, partnerships and the like. One category, however, is a "disregarded entity"—an affiliate not subject to U.S. income tax.

Normally, firms might be subject to rules (called Subpart F) meant to prevent abuse of deferral.  But multinationals avoid these strictures by designating foreign corporations they control as disregarded for tax purposes. All they have to do is, you got it, check a box.

There is some cost to deferral. Apple, for example, recently chose to borrow $17 billion to finance U.S. investments even though it has $100 billion stashed overseas.  But if the benefits didn't outweigh the cost, companies wouldn't keep holding all that money offshore.

How did Apple do it? It set up two entities in Ireland through which it was able to funnel two-thirds of its pre-tax worldwide income. Of its $34 billion in total 2011 pre-tax income, $22 billion was allocated to these two firms. True, the Irish love to talk. But it is unlikely they bought enough phones to generate $22 billion in pre-tax income.  

Remarkably, while these firms were physically located in Ireland, they were not Irish companies for Irish tax purposes. Thus, they produced what Harvard University tax professor Steve Shay describes as "ocean income." That is, revenue that simply disappears into the deep blue.

As my Tax Policy Center colleague Chris Sanchirico notes, the committee staff found that while the income from those Irish subs was not repatriated to Apple (which would have triggered U.S. tax) it did apparently did make its way back to the U.S., where it is sitting in bank accounts of those Irish subs.  

What's the problem with all this? There is the revenue loss to the U.S., of course. But perhaps worse is  the incredible inefficiency driven by the tax code. The price of high corporate rates is the raft of deductions and credits that encourage corporations to lower their taxes rather than produce great new products.

Just imagine if Apple could replace all those tax lawyers with creative new software geeks or industrial designers. It might win back some of the market share it has been losing to Android in recent years.


Original Page: http://feedproxy.google.com/~r/taxpolicycenter/blogfeed/~3/MRQ4gQX7emo/

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Tuesday, May 21, 2013

CCH Weekly Report from Washington, D.C.


CCH Weekly Report from Washington, D.C.

The House Ways and Means Committee held the first hearing examining the IRS's conduct in dealing with the applications of certain conservative groups seeking tax-exempt status in the wake of the Treasury Inspector General for Tax Administration's (TIGTA) report that Service personnel specifically targeting for review applications for tax-exempt status from organizations with the words "Tea Party" and "Patriots" in their names. IRS Acting Commissioner Steven T. Miller resigned and is being replaced by Office of Management and Budget Controller Daniel Werfel, who agreed to serve through the end of the fiscal year.

Congress

Small Business Tax Reform. The Small Business and Pass-Through Entity Tax Reform Discussion Draft proposed by House Ways and Means Committee Chairman Dave Camp, R-Mich., won approval from tax experts testifying before the House Subcommittee on Select Revenue Measures on May 15 (TAXDAY, 2013/05/16, C.1 ). Witness suggested changes to the draft, including expanding cash accounting to more small businesses and allowing a safe harbor for inventory tracking. Lawmakers heard opposing views of the proposal to shift to a unified regime for pass-through entities.

IRS Tax-Exempt Controversy. On May 17, Treasury Inspector General for Tax Administration (TIGTA) J. Russell George testified before the Ways and Means Committee regarding the TIGTA report concerning oversight by the IRS of groups that apply for tax-exempt status (TAXDAY, 2013/05/20, C.1 ). The report found that the IRS used inappropriate criteria, based on names and policy positions, to identify specific groups applying for tax-exempt status (Reference No. 2013-10-053 ; TAXDAY, 2013/05/16, T.1 ).

IRS

Oversight Board. The IRS Oversight Board issued a statement in response to the TIGTA report (TAXDAY, 2013/05/17, I.3 ). "The use of inappropriate criteria to identify organizations applying for tax-exempt status indicates, in the Board's opinion, a breakdown in the business processing system of the IRS," the Oversight Board said. In related news, President Obama also called for accountability in the IRS (TAXDAY, 2013/05/14, I.1 ).

New Acting IRS Commissioner. President Obama announced on May 16 the appointment of Werfel as IRS acting commissioner, effective Wednesday, May 22 (TAXDAY, 2013/05/17, W.1 ). The appointment follows Miller's resignation in the wake of intense pressure focused on the Service's improper targeting of conservative political groups that were seeking nonprofit status (TAXDAY, 2013/05/15, I.5 ).

IRS Furlough Days. The IRS will be closed on May 24, June 14, July 5, July 22 and August 30, 2013. On those days, no IRS offices will be operating, IRS employees will be furloughed without pay, no tax returns will be processed and no compliance-related activities will take place (IR-2013-51 ; TAXDAY, 2013/05/16, I.4 ). However, taxpayers should continue to file their returns and pay any taxes due, and the Electronic Federal Tax Payment System (EFTPS) will operate as usual.

June 2013 AFRs. The IRS has provided various prescribed applicable federal rates (AFRs) for federal income tax purposes for June 2013 (Rev. Rul. 2013-12 ; TAXDAY, 2013/05/20, I.1).

RTRP Test Fees. Fee amounts collected for scheduled registered tax return preparer (RTRP) test appointments that were canceled due to the court-ordered injunction are being refunded (TAXDAY, 2013/05/17, I.4 ). Also being refunded are fees collected from return preparers who tested on or after January 18, 2013, the date the test was enjoined.

RTRP Regulations. Karen Hawkins, director of the IRS Office of Professional Responsibility (OPR), spoke in favor of the IRS's authority to regulate unenrolled tax return preparers, which the IRS has designated as RTRPs (TAXDAY, 2013/05/15, I.5 ). Hawkins believes that the U.S. district court's decision in S. Loving, DC D.C., 2013-1 ustc ¶50,156 (TAXDAY, 2013/01/22, J.3 ) is incorrect.

Illinois Disaster Relief. Victims of severe storms, straight-line winds and flooding that began on April 16 , in parts of Illinois may qualify for filing relief from the IRS (IL-2013-28 ; TAXDAY, 2013/05/16, I.3 ). The president has declared the counties of Cook, DeKalb, DuPage, Fulton, Grundy, Kane, Kendall, Lake, LaSalle, McHenry and Will as federal disaster areas.

Carbon Dioxide Capture Credit. The IRS has released the 2013 inflation adjustment factor for the carbon dioxide (CO2) capture credit (Notice 2013-34 ; TAXDAY, 2013/05/15, I.1 ). The 2013 inflation-adjusted credit applies to the amount of qualified CO2 captured by a taxpayer at a qualified facility and disposed of in secure geological storage.

Medical Loss Ratio Rules. The IRS has issued proposed regulations that provide guidance to Blue Cross and Blue Shield organizations, and certain other health care organizations, on computing and applying the medical loss ratio added to tax code by the Patient Protection and Affordable Care Act (P.L. 111-148 ) (NPRM REG-126633-12 ; TAXDAY, 2013/05/13, I.1). The regulations are proposed to apply to tax years beginning after December 31, 2013.

Criminal Investigations 2012 Report. IRS Criminal Investigations (CI) has released its annual report for fiscal year 2012, highlighting gains in enforcement actions and penalties imposed on convicted tax criminals (IR-2013-50 ; TAXDAY, 2013/05/13, I.4 ). The 28-page report summarizes a wide variety of CI activity on a range of tax related issues during the year ending September 30, 2012.

Schedules M-1 and M-3. The IRS has announced on its website that corporations and partnerships with $10 million to $50 million in total assets at the end of the tax year will be permitted to file Schedule M-1 for tax years ending after December 31, 2014, rather than Schedule M-3, Parts II and III. Part I, lines 1-12 will continue to be required of these taxpayers (TAXDAY, 2013/05/13, I.5 ).

Code Sec. 336(e) Regulations. The IRS released final regulations allowing an election to treat the sale, exchange or distribution of at least 80 percent of the voting power and value of the stock of a target corporation as a sale of all of the target's underlying assets (T.D. 9619 ;TAXDAY, 2013/05/13, I.6 ). The regulations provide the terms and conditions for making such an election and the consequences of the election.

By Stephen K. Cooper and Jennifer J. Rodibaugh, CCH News Staff


Original Page: http://www.cchgroup.com/wordpress/index.php/tax-headlines/federal-tax-headlines/cch-weekly-report-from-washington-d-c-79/?utm_source=rss&utm_medium=rss&utm_campaign=cch-weekly-report-from-washington-d-c-79

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AICPA - Overview on Due Dates Legislation


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Overview on Due Dates Legislation 


Background

 

·         Taxpayers and preparers have long struggled with problems created when Schedules K-1 arrive late, sometimes within days (before or after) of the extended due date of their personal returns and up to a month after the extended due date of their business returns.  Late Schedules K-1 make it difficult, if not impossible, to file a timely, accurate return. 

·         An example of the problem is when an individual partner receives a late Schedule K-1 as an investor in a limited partnership.  The partnership return is due on April 15th.  Individual returns are also due on April 15th.   The partnership return includes a Schedule K-1 that must be delivered to each partner so they can prepare their personal returns.  The partnership completes its return and delivers the Schedule K-1 to the partner on April 15th.  The individual partner does not have enough time to incorporate that information into their personal return and still file "on time".  So, they have no choice but to file for an extension.  

 

·         Extended return due dates have been recently changed pursuant to new regulations which now require all Schedule K-1 issuers (along with C corporations) to file calendar-year returns by September 15.  This has helped Form 1040 filers taking advantage of the extended due date because they get their Schedules K-1 one month before the October 15 extended filing due date. 

 

·         However, original/initial return due dates for partnership returns are still problematic because they are due the same date (April 15) as trust and personal returns and one month later than corporate returns.  Individuals, trusts and corporations may all be owners of interests in partnerships.

 

·         Further, business return filing schedules are still problematic because original corporate return due dates are one month prior to when the Schedules K-1 are received and their extended returns are due the same day as the extended due date of the returns of the Schedule K-1 issuers. 

 

·         Having all business and trust returns due September 15 places an undue burden on tax practitioners and taxpayers because numerous types of returns are all due at the same time.  The September 15 due date also fails to address the fact that (1) properly changing original due dates can create an incentive for a reduction in the overall number of return extensions, (2) individuals are not the only recipients of Schedules K-1, and (3) partnerships are not the only entities that issue Schedules K-1.  Ultimately, corporations and trusts with partnership interests should have time after receiving Schedules K-1 to file accurate and timely returns.

·         An AICPA Tax Division task force was formed to explore a legislative solution to the problem of the late receipt of Schedules K-1.  The task force reviewed the results of May 2008/May 2009 member surveys on this topic and various options for legislative change to include: (1) the possibility of 7-month statutory extensions; and (2) the use of staggered due dates for all taxpayers involved in the Schedule K-1 process.  In 2009, the task force and other Tax Division members held discussions with Hill staff, IRS, the National Taxpayer Advocate's Office, Treasury and others concerning the dilemma of the late receipt of Schedules K-1 by taxpayers and CPAs who prepare the Form 1040, 1041, 1065, 1120 and 1120S tax returns which include such K-1 information.  

 

AICPA Position

 

·         The Task Force approved a position that would require the filing of Form 1065 on March 15, Form 1120S on March 31, and Forms 1040, 1041 and 1120 on April 15.  Extended due dates would be 6 months later for all these forms except Form 1041, which would be extended 5 ½ months to September 30.  This would alleviate the problems mentioned above by establishing a logical set of due dates focused on promoting a chronologically-correct flow of information between passthrough entities and their owners.  It would promote the early filing of more business and personal returns and relieve workload compression surrounding the September 15 business return deadline. 


·        
On February 28, 2013, Senators Mike Enzi (R-WY) and Jon Tester (D-MT) introduced S. 420 and Rep. Lynn Jenkins (R-KS) and Joe Crowley (D-NY) introduced H.R. 901, the Tax Return Due Date Simplification and Modernization Act of 2013.


·        
On March 12, 2013, Rep. Dave Camp (R-MI), the Chairman of the House Ways & Means Committee, released a small business tax reform discussion draft that included as Part 2 – Tax Return Due Date Simplification.


·        
On March 21, 2013, the Senate Finance Committee released a tax reform options paper on simplifying the tax system for families and businesses that included as Part II.1.A. – Establish a system of filing deadlines that ensures timely receipt of reliable third-party information for taxpayers and the IRS, for example by changing due dates for returns.


Current and S. 420 and H.R. 901 Proposed Due Dates – Calendar Year Returns

RETURN TYPE

FORM

CURRENT DUE DATES (Original and Extended)

PROPOSED INITIAL

DUE DATE

PROPOSED

EXTENDED

DUE DATE

Partnership

1065

April 15

September 15

March 15

September 15

S Corporation

1120S

March 15

September 15

March 31

September 30

Trust and Estate

1041

April 15

September 15

April 15

September 30

C Corporation

1120 Series

March 15

September 15

April 15

October 15

Individual

1040

April 15

October 15

April 15

October 15

Employee Benefit Plan

5500

July 31

October 15

July 31

November 15

Exempt Organizations

990 Series, 4720, 5227, 6069, 8870

May 15

August 15

November 15

May 15

November 15

Foreign Bank Account

Reporting

Form TD F 90.22-1

June 30

October 15*

N/A

Foreign Trusts with a U.S. Owner

3520-A

March 15

April 15

October 15

Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts

3520

April 15

October 15 (with owner's tax return extension)

April 15

October 15 (can be extended separately from owner's tax return)

* Current law due date is June 30.  The AICPA supports eliminating the current June 30 deadline in favor of a single, October 15 due date.  In the alternative, we support leaving June 30 as an original due date with October 15 as an extended due date.

 




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