by Kenneth Thomas
Whiny Apple Pioneered Avoidance Strategies, Books Fictional Tax Rates
If you haven’t yet seen The New York Times article on Apple, go read it. I’ll wait. It’s a blockbuster.
As I wrote last month, Apple whines about the fact that it has to pay taxes. But of course, it does much more than whine. It sets up subsidiaries in tax haven states like Nevada to avoid U.S. state taxes, and establishes foreign tax haven subsidiaries in order to avoid U.S. and other government’s taxes. Then, through the magic of transfer pricing, profits made in high-tax jurisdictions becomes taxable only in Nevada, Ireland, Luxembourg, etc. The Times reports estimates by Martin Sullivan that this saves Apple $2.4 billion a year in U.S. federal taxes alone, not to mention what it save in U.S. states or foreign countries. This is a conservative estimate, based on only 50% of its profits being due to U.S. operations. A more realistic 70% allocation of profits to the U.S. would mean that Apple’s federal tax bill would be $4.8 billion higher, according to Sullivan.
Based on extensive interviews with former Apple executives as well as accountants for other firms, Charles Duhigg and David Kocieniewski show that not only does the company practice extensive legal avoidance of its taxes, but that the firm pioneered several of the most important tax avoidance techniques out there:
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.
Not only that: Apple paid, according to The Times article, $3.3 billion in “cash taxes” on its $34.2 billion of worldwide profits, for a 9.8% tax rate, as opposed to the $8.3 billion the company’s 10-K report said it paid. As the article notes:
“The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an economist at Reed College who specializes in multinational taxation. “But for tech companies it goes from fiction to farcical.”
Some commenters on my article last month actually cited these 10-K figures as proof that nothing was amiss at Apple. As it turns out, the company’s reporting has other major gaps. Its 2011 10-K Annual Report states that it has only two “significant” foreign subsidiaries, both based in Ireland. Apparently its Luxembourg subsidiary — with over $1 billion in 2011 sales, according to The Times — is not significant. Nor are its subsidiaries in the Netherlands and the British Virgin Islands, despite their importance in keeping Apple’s worldwide taxes low. Because Apple only deems its Irish subsidiaries “significant” and does not report on any others’ existence, the Government Accountability Office report of 2008 on tax haven subsidiaries was misled into saying that the company had only one such subsidiary. We can only wonder how many other tax haven subsidiaries are omitted from companies’ SEC filings.
Here’s the kicker: Even “cash taxes” is not a figure that accurately represents a given year’s tax payments, according to The Times.
As Richard Murphy points out, while Apple’s tax strategy is no doubt all legal (“perfectly legal,” as in the title of David Cay Johnston’s great book), “It’s also profoundly unethical.” Apple largely rejects its duty to help pay for living in a civilized society, even as state (like its home of California) and national governments flounder with debt. Its behavior forces one or more of three outcomes, as I have written many times before: shifting the tax burden to others, more government debt, or program cutbacks. Apple’s behavior shows that it’s clearly okay with that.
The solution starts with Murphy’s innovative “country-by-country” reporting, which does not require the tax havens to cooperate because all the information would be supplied by the company. Then, as I noted in November, we need worldwide unitary taxation to strip out the artificiality of companies’ allocation of assets and profits. We could treat Apple’s (and Microsoft’s, and…) “ownership” of patents in Ireland as the fiction it is, and force these companies to pay their fair share of taxes.
crossposyed with Middle Class Political Economist