Sunday, April 29, 2012

Forget Warm and Fuzzy When It Comes to Apple, Inc. – It is Just Another Corporation Using Loopholes and High Powered Advice to Avoid U. S. Taxes

What Exactly Did You Expect?

The leading cause of Apple’s amazing level of profitability is its technology.  That technology is truly astounding, and the money Apple earns from it is certainly reasonable given their investment in technology and the fact that they make products people want, but do not need to buy. 

But another part of Apple’s success is its image.  All of us still think of it as a friendly little company that grew out of a couple of guys tinkering with electronics in a family garage.  But the truth is that Apple is now a global conglomerate.  It pursues its businesses and seeks profits as aggressively as any company in the world.  It defends its intellectual property rights with massive legal action in world wide jurisdictions.  And it pursue a policy of absolutely minimizing its tax liabilities by taking advantage of world wide tax provisions which can be manipulated into turning a high tax bill into a low tax bill.

Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.

Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan. As it stands, the company paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent. (Apple does not disclose what portion of those payments was in the United States, or what portion is assigned to previous or future years.)

While Apple’s tax strategies are very sophisticated and complicated, the reason they are able to employ such strategies is very easy to understand.  Because Apple operates world wide, and because their major assets are intangible intellectual property, Apple (like Google and others) is able to use accounting to generate its income away from high tax countries and place the earnings in low tax countries.  Really, conceptually it is that simple.

For instance, one of Apple’s subsidiaries in Luxembourg, named iTunes S.à r.l., has just a few dozen employees, according to corporate documents filed in that nation and a current executive. The only indication of the subsidiary’s presence outside is a letterbox with a lopsided slip of paper reading “ITUNES SARL.”

Luxembourg has just half a million residents. But when customers across Europe, Africa or the Middle East — and potentially elsewhere — download a song, television show or app, the sale is recorded in this small country, according to current and former executives. In 2011, iTunes S.à r.l.’s revenue exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of iTunes’s worldwide sales.

The advantages of Luxembourg are simple, say Apple executives. The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through Luxembourg. Taxes that would have otherwise gone to the governments of Britain, France, the United States and dozens of other nations go to Luxembourg instead, at discounted rates.


Inside the United States the same concept works to move income away from high tax states and into low tax states.

When someone in the United States buys an iPhoneiPad or other Apple product, a portion of the profits from that sale is often deposited into accounts controlled by Braeburn, and then invested in stocks, bonds or other financial instruments, say company executives. Then, when those investments turn a profit, some of it is shielded from tax authorities in California by virtue of Braeburn’s Nevada address.

Since founding Braeburn, Apple has earned more than $2.5 billion in interest and dividend income on its cash reserves and investments around the globe. If Braeburn were located in Cupertino, where Apple’s top executives work, a portion of the domestic income would be taxed at California’s 8.84 percent corporate income tax rate.

But in Nevada there is no state corporate income tax and no capital gains tax.

Now this is not to single out Apple, what they are doing appears to be legal and is no different than what other companies are doing.  Like everything else Apple does, though, they just seem to do it better than other companies. 

The solution to tax avoidance and having companies like Apple pay a fair tax rate is to have a world wide tax regime so companies cannot ‘tax shop’ to nations with the lowest rates.  But that is not going to happen, so yes, the tax world will be unfair, like this.

Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan. As it stands, the company paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent. (Apple does not disclose what portion of those payments was in the United States, or what portion is assigned to previous or future years.)

By comparison, Wal-Mart last year paid worldwide cash taxes of $5.9 billion on its booked profits of $24.4 billion, a tax rate of 24 percent, which is about average for non-tech companies.

And notice that Wal-Mart’s tax bill of 24% is not all that high, but that doesn’t mean that Mitt Romney and the gang at Republican headquarters don'y want to cut it.  Why?  No real or justifiable economic or policy reason, it's because they want to, that’s why.

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