The New York Times is out with the latest installment of its iEconomy series, which focuses on Apple, the world'smost profitable company. The article details the elaborate —and legal — ways that Apple, and other tech companies,minimize their tax bills. The piece raises several questions: IsApple to be condemned for its tax-avoidance strategies, or praisedfor maximizing profits for shareholders? (Is it even possiblefor a corporate giant to be both "evil" and"good" at the same time?) Is the real culprit thecomplex U.S. corporate tax code? Or is this just an example of oneof the world's best-performing companies taking advantage ofa globalized, increasingly digital economy to push the limits ofU.S. tax law? At a time when the cash-strapped federal and state governments arelooking for ways to boost revenue, corporate tax avoidancestrategies have taken on urgent importance. |
There's no doubtthat Apple, which is poised to set a record this year for profitsby an American company, pays less in taxes than other firms. Lastyear, The Times says Apple paid a global cash tax rate of only 9.8% — $3.3billion on profits of $34 billion — compared to a tax rate of24% for Walmart, which the paper says is about average. Apple avoided paying $2.4 billionin federal taxes last year, the paper said, citing research byformer Treasury Department economist Martin A. Sullivan.(There's some dispute about the way The Times analyzed the tax numbers, but the paper stands by its reporting, aspokesperson told me Monday.) What's not in doubt is that Apple is off to a staggeringyear, and it's looking for every available way to hold on toits ballooning profits.
Last week, the company reported quarterly earnings of $11.6 billion, compared to $6 billion oneyear ago, on revenue of $39.2 billion, a 59% increase over lastyear. Wall Street analysts predict that Apple could earn as much as$47 billion in profits during its current fiscal year. ( More : Apple Profit Soars 94%, Stock Up 7% ) Among the major findings from The Times story : Apple has subsidiaries in low-tax U.S. states like Nevada —where the corporate tax rate is zero — and foreign countrieslike Ireland, the Netherlands, Luxembourg and the British VirginIslands, to help reduce its tax bill.
Profit from iPhone and iPad sales is often routed to Apple'sNevada subsidiary, called Braeburn Capital (after a type of"simultaneously sweet and tart" Apple), which theninvests the money in stocks, bonds and other investments. Some ofthe proceeds from these investments is shielded from California,where Apple is based, because Braeburn is located in Nevada, wherethere is no state capital gains tax. Tech companies like Apple, Google, Amazon, Hewlett-Packard andMicrosoft — which derive substantial revenue fromintellectual property royalties and digital products — havean easier time than wholly brick-and-mortar companies movingprofits to low-tax locations. Apple books about 70% of its profitsoverseas, where corporate tax rates are often much lower than inthe United States.
When customers in Europe, Africa or the Middle East download songsor apps from the Apple online store, the sale is booked at Apple ssubsidiary in Luxembourg, named iTunes S. r.l., which has just afew dozen employees."Taxes that would have otherwise gone tothe governments of Britain, France, the United States and dozens ofother nations go to Luxembourg instead, at discounted rates,"the paper reported. Apple pioneered an accounting trick known as the Double IrishWith a Dutch Sandwich, which cuts its tax bill by "routingprofits through Irish subsidiaries and the Netherlands and then tothe Caribbean." Hundreds of other companies have since copiedApple's method. All in all, pretty sophisticated stuff.
Apple responded to The Times piece with a lengthy statement , which touts the companies contributions to the U.S. economy. "In the first half of fiscal year 2012 our U.S. operationshave generated almost $5 billion in federal and state income taxes,including income taxes withheld on employee stock gains, making usamong the top payers of U.S. income tax," Apple'sstatement read, in part.
"Apple has conducted all of itsbusiness with the highest of ethical standards, complying withapplicable laws and accounting rules." ( More : Why Apple is Winning: Innovation, Opportunity and Execution ) So do Apple's tax avoidance practices, which have no doubtbeen intensely scrutinized by the companies lawyers to make surethey're legal, constitute evil corporate conduct? Or shouldthe company be commended for pushing the limits to maximizershareholder value? Apple is an astonishingly successful companyfilled with brilliant people. It should really be no surprise thatit's running circles around the tax man. This is clearly abad outcome for state and federal budgets, which desperately needthe revenue. But as The Atlantic ‘s Derek Thompson points out , it's not clear there's much we can do to stop it.
One thing's for sure: As the two major drivers of the worldeconomy continue apace — globalization and technology —it's clear that financial innovation, especially with respectto tax avoidance, has dramatically outpaced domestic andinternational taxation oversight structures. MORE: What Would Steve Jobs Do? PHOTOS: The Apple II Turns 35.
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