Do Apple's Tax Practices Reflect Irresponsible Capitalism?

On Tuesday, Apple’s CEO Tim Cook came to Washington to testify in front of a Senate panel examining how Apple used “loopholes” to avoid paying billions of dollars in U.S. taxes.

Apple is not the first or the only company to use these tax strategies to minimize its tax payments, but just like with the Foxconn episode, the company found out once again that being very successful and profitable also has its price in terms of higher accountability demands.

The reports on Apple’s tax avoidance and Cook’s testimony once again brought up the question of tax fairness and what it means nowadays when we expect companies to be responsible for the impacts of their decisions and activities on society.

To further explore this issue from a CSR perspective, we tried to answer some key questions that hopefully shed some light not just on Apple’s behavior, but also on the practice of taking advantage of tax loopholes in general.

Are Apple’s tax practices legal?

Yes. No one is disputing the fact that Apple complied with the law. Tim Cook even went further, suggesting that "we not only comply with the laws, but we comply with the spirit of the laws.”

Are Apple’s tax practices fair?

This is the point where the dispute begins. According to the Detroit Free Press, Senator Carl Levin, who led the hearing, “painted the company’s strategy in terms of fairness to other taxpayers, saying smaller companies or individual taxpayers wouldn’t have the ability to park profits overseas and avoid paying U.S. taxes on them.”

Yet, when asked by Senator John McCain if Apple’s tax practices give the company some advantage over smaller companies located strictly in the U.S., Tim Cook replied, “…Honestly, I don't see it as being unfair. I am not an unfair person. That's now who we are as a company and who I am as an individual.”

So who is right, Levin or Cook?

The answer depends on the beholder’s perspective – if you’re looking at Apple’s tax practices from stakeholders’ point of view it seems they’re mainly in favor of just one group of stakeholders – shareholders, which might look unfair to other stakeholder groups. If you’re looking at it from shareholders’ point of view, I guess you see nothing wrong or unfair about it.

Can we actually expect Apple to pay more taxes?

This is the $9 billion question in this case. The forefront of this debate (about corporations in general, not just Apple) seems to be in the UK now, where companies like Starbucks, Amazon and Google are accused of avoiding paying large corporate tax bills.

On one side of the ring you can find Google’s CEO Eric Schmidt, who wrote earlier this month on the Observer: "While profit has become something of a dirty word, it's important to remember that many corporations reinvest their profits in research and product development, which in turn tends to lead to job creation, further economic growth and, ultimately, more tax.”

On the other side of the ring you find all of Britain’s top politicians. Labour leader Ed Miliband said, in response to Schmidt’s article, that Google should pay more tax, engage in "responsible capitalism." "Do the responsibilities of the company simply lie in obeying the letter of the law," he said. "My answer to that is no."

UK Prime Minister David Cameron, also supported this approach, saying that “actually there are lots of things that are within the law [that] we don’t do because actually we have some moral scruples about them and I think we need this debate about tax too… I think it’s fair then to say to business, you know, we’re playing fair by you; you’ve got to play fair by us.”

Should tax fairness be part of corporate responsibility?

I believe tax fairness is no different than other social and environmental challenges companies deal with. After all, why should there be a difference between demanding companies to ensure a safe working environment and fair wages to garment workers in Bangladesh and asking them to pay fair share of taxes? In both cases we ask them to go beyond their legal responsibilities and fairly balance the needs of their stakeholders.

But isn’t it too much to ask from a company like Apple that already pays a lot of taxes and contributes significantly to the American economy?

If you ask Senator Rand Paul, the answer would probably be yes. Yet, $9 billion is no small change and as Cook himself said in his testimony "much of our innovation takes place in one zip code… Cupertino, California…” So, if Apple’s brain operates on American soil and enjoys the benefits American society provides it with like education and infrastructure, shouldn’t it be interested in a balanced relationship with its American stakeholders? After all, even the most prosperous brain isn't worth much in a declining body.

So what’s the bottom line - is Apple the good guy vilified by an incompetent Congress or a bad guy using gimmicks to avoid paying taxes?

Most of all, Apple is simply "the guy," working mainly, if not solely, under traditional "single bottom line" assumptions. This approach has worked pretty well for the company so far with only few glitches here and there (Foxconn, IPEAT), but I believe that won’t last for much longer.

Sooner or later, Apple will have to address the fact that the rules of the game are changing and that working only to maximize your shareholders’ value, while avoiding the interests of your stakeholders, is no longer an acceptable practice, even if you’re Apple.

[Image credit: textlad, Flickr Creative Commons]

Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and the Parsons The New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.