Amazon and Apple’s Global Tax Issues and Financial Implications
AMAZON AND APPLE’S GLOBAL TAX ISSUES AND FINANCIAL IMPLICATOINS
By: Kyle Owens
Undergraduate Student, West Chester University of Pennsylvania
Over the past year, U.S. based firms, Amazon and Apple, have been given special considerations by Ireland and Luxembourg, respectively. In both scenarios, the companies have been taxed a mere fraction of what their taxable income is for each period. This is beginning to develop into a trend, and can have sever implications in our growing global market.
In this paper, I plan to explore why countries are giving special consideration to mega-companies like Amazon and Apple, and why this practice should immediately stop. As well, I plan to explain the short-term and long-term impact of these actions, and how the United States is affected.
In short, countries across the globe are looking to stimulate their economies by lowering unemployment, and allowing their citizens to purchase goods and services. Without employment and trade, the government will have a tough time collecting taxes that can be put toward public works to improve the country. It is very clear to see why a smaller country, such as Ireland, would be interested in luring large companies such Apple and Amazon to set-up plants and hold their money in their country.
Specifically, Ireland allowed Apple to operate within its borders, while having to pay a fraction of the minimum taxes that are set forth by the European Union. After an investigation by authorities, the U.S. based firm was found to have owed $15 billion in back-taxes (Cox). It was found by the European Commission that Apple was in fact being given illegal tax benefits, under the government’s knowledge.
A similar instance occurred in Luxembourg, this time with Amazon. In this case, the company was given illegal tax benefits by the country, which amounted to nearly $300 million in back taxes that should have been paid (Kharpal).
Strategically, it makes sense to keep one’s money and profits in an area that offers the least amount of taxation. This is why large United States companies chose to hold their cash overseas. Otherwise, the company would face tax bills of 35% on their profits (Graham). It is with this in mind, that the short and long term effects of these actions should be examined.
In the short-term, it can be said that countries chose not to collect extreme sums of money that could have benefited themselves, as well as the European Union. While many European countries begin to come out of the recession of 2008, they are looking for ways to operate under strict banking and lending laws imposed upon by the EU. Having large corporations pay their fair share of taxes will help to generate more revenue for the country, and reduce the dependency to borrow from either the EU, or countries with high reserves, such as Germany. With less demand on financing, countries like Ireland and Luxembourg can decide to invest in public projects, without getting prior approval from the EU and its members.
As well, Apple and Amazon face backlash from investors and consumers, due to their unethical practices. Each company benefited from reduced tax expenses over the years of illegal tax benefits, which led to an increase in net income for each company. With a higher net income and improved financial statements, investors are led to believe that the companies are strong and can be viewed as a strong investment option. Seeing an increase in tax related expenses and large fines upcoming, investors will be wary of the reduced income. As well, they will be curious if there are any other instances of this practice occurring across the globe, and what impact it will have upon the company.
In the long-term, this time of practice can have devastating consequences to both the country and the company. Countries who choose to provide illegal tax benefits to large companies face the risk of these benefits becoming an expectation. For example, it is possible that the ‘XY’ Corporation, a large manufacturer that is looking to produce its product overseas, will come to the negotiation table with Ireland and/or Luxembourg and expect to pay reduced tax fee, similar to the deals of Amazon and Apple. This can prove detrimental, as the company holds the bargaining leverage. If the country chooses not to accept to provide illegal tax benefits, they can choose to walk away to another country. Over the long-term, this can cause a serious impact in global investment, and can potentially force a change in the way negotiations are held.
From a company stand point, the long-term effects of illegal tax benefits can be increased scrutiny by investors and investigators. The investor and investigator will be more interested to see if their company is following global tax laws. The investor is more at risk of losing money if the company is not acting ethically, and the investor will be more likely to sell their shares in the event a scandal is uncovered. To prevent scandals and a reduction investor confidence, large companies will need to explore partnering with tax and law firms that possess the expertise to prove the companies like Apple and Amazon are operating ethically. This will lead to increased expenses, as quality firms will be more likely to charge at a higher rate.
The decision to offer and accept illegal tax benefits can provide both short and long term consequences to the parties involved. In the short-term, companies and countries alike will receive public backlash and a demand for more oversight. As well, a country like Ireland or Luxembourg is unable to afford and provide quality public works, due to the decrease in tax revenue. On the company side, Amazon and Apple face investor backlash when they either pay their respective fines, or reinstate their financial statements to show increased expenses, and reduced net income. In the long-term, countries across the globe face the risk of losing bargaining power, and will feel pressured to provide tax incentives to companies who are looking to invest and create economic opportunity within their borders. The companies will also face pressure for more oversight from investors and investigators, which can lead to the potential of firms being forced to hire more expensive accounting firms to improve public confidence. The decisions of Ireland and Luxembourg may have seemed as though they would only affect themselves, but it has made a global impact. It is important that countries remain fair and operate under their policies and law to ensure there is competition and balance in today’s global economy.
Cox, Josie. “EU Takes Ireland to Court over $15bn Apple Back Taxes.” The Independent, Independent Digital News and Media, 4 Oct. 2017, www.independent.co.uk/news/business/news/eu-takes-ireland-to-court-15-billion-dollars- fine-apple-back-taxes-latest-european-court-of-justice-a7982211.html.
Graham, John R., et al. “Tax Rates and Corporate Decision Making.” SSRN Electronic Journal, 12 Jan. 2015, doi:10.2139/ssrn.2548641.
Kharpal, Arjun, and Silvia Amaro. “Amazon Is Ordered to Pay Nearly $300 Million by EU over 'Illegal Tax Advantage'.” CNBC, CNBC, 4 Oct. 2017, www.cnbc.com/2017/10/04/amazon-eu-tax-bill-luxembourg-deal.html.