Whiny Apple Pioneered Avoidance Strategies, Books Fictional Tax Rates
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
Don’t know about “fair share”
and while you make a case the Apple is not entirely honest, I can’t entirely fault a “person” for avoiding taxes where it can… especially if that person is a soulless corporation (by definition) with only the bottom line as it’s moral compass.
but they serve as an illustration that the fault is in our selves, or our congress… we need to write the laws without the loopholes. indeed, we need to write the laws so that offshoring is treated as something like aid to the enemy… which it is. the corporations now have the same economic role, at least, as foreign countries… in the time when people understood the value of a protective tariff.
Who is this “we” you’re blaming? I don’t have millions of dollars to lobby Congress and legislatures here and abroad to pass laws enabling this sort of tax avoidance. As Richard Murphy says in another post (and I said in my March post), Apple isn’t independent of the game but helps creat it (http://www.taxresearch.org.uk/Blog/2012/04/30/why-apple-cant-be-excused/). And they have a lot more to do with creating it than you and I do.
As I noted with my post on CVS, it is not just the fed corp taxes that these companies are not paying, it’s all the local stuff too. I read that Texas just gave Apple $21 million to build there. This years RI report showed (ending 6/2011) that CVS received 78% of the $22.7 million in tax incentive program funds. $13.4 million from the Job’s Development Fund alone.
We have to start framing this as it is: corporations of size are not paying taxes. Time to use the old “family budget discussion around the kitchen table” concept. I say this because everyone I have told about CVS not paying property taxes, their first response is a look of astonishment. They just can’t believe that they do not have to pay property taxes.
“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.”
Here is Apple’s 10-K
On page 43 you will see “provision for income taxes” of $8.3 billion.
On page 46 you will see “cash paid for incomes taxes, net” of $3.3 billion.
Yes, there is indeed a difference between these sums but note one thing. Apple did not claim to have paid $8.3 billion in taxes. They claimed to have made a provision for taxes of that amount.
So, what explains the difference between the two numbers?
The corporate income tax is paid in arrears. As it must be of course, because you’ve got to calculate your profit before you can work out how much tax you’ve got to pay.
Thus the $3.3 billion actually handed over in cash in 2011 is relating to the profits in 2010. And the $8.3 billion provision for 2011 is the amount that will be handed over in 2012. And yes, you do have to put such amounts into your accounts as provisions.
Now, is Apple also dodging taxes in all sorts of inventive ways? Sure it is.
But this particular criticism doesn’t wash I’m afraid. It comes originally from the Greenlining Institute and they simply cannot read a set of accounts.
“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.”
That’s also very odd. Zero percent of manufacturing is done in the US and only 36% of the sales are there. So why a 70% profit allocation?
Tim, thanks for the clarification. However, as the Times article points out, even the $3.3 billion can cover multiple years, so there is no guarantee that $3.3 billion is what it paid for 2010. Provisions, of course, is fictional, since it will water down the actual payment by deferring its taxes on oversease profits and other tax maneuvers.
I am advocating that 3-factor apportionment be applied fully to global companies, not just up to the water’s edge. Manufacturing is not one of the three factors: sales, assets, and employment are. And while Apple has a lot of intangible assets in Ireland, they were all developed in the U.S. and I doubt the Irish subsidiaries paid an arm’s length price for that IP. The 36% US sales figure is also questionable, as the article points out w/r/t 20% of all iTunes sales taking place “in” Luxembourg. For 70% of profits being from the US, see Sullivan’s linked article, top of p. 778, which is not based on 3-factor apportionment.
“However, as the Times article points out, even the $3.3 billion can cover multiple years, so there is no guarantee that $3.3 billion is what it paid for 2010.”
You are still misunderstanding. The $3.3 isn’t what it paid for 2010. It is the amount, without any doubt whatsoever, that was actually paid, in 2011.
If you want to talk about how that isn’t enough, given $30 billion in profit in 2011 then fine, let us do so. Or even on $12 billion (is that right?) in 2010.
But if we are going to have that conversation then we will be talking about the timing of tax payments. And once we do that then I shall win.
Corporations, like individuals, have to pay estimated taxes. Their taxes for 2011 will primarily be cash outflows in 2011 unless they have a truly massive tail on their sales, and staggering year over year increases.
ah, Kenneth, I was talking, of course, about the mythical WE the people.
not sure what you would win. except points in a debate about the tax law and accounting details.
i think you all make a mistake if you look at this as a moral issue.
the question ought to be “does the country need to collect more taxes? if so, what is the “best” way to do that?”
i would argue that complex tax codes and “loopholes that accountants can drive a brinks truck through might not be efficient or effective.
i’d also argue that if Apple doesn’t like the taxes, they can move to china and pay an import tax on anything they want to sell in the U.S.
I don’t think that in the long run it matters whether we collect the taxes from the corporations or from the people. but we would still need policies to prevent concentrations of wealth that are dangerous to a democracy, or crippling to the people.
What am I misunderstanding? Your first comment said, and I quote: “Thus the $3.3 billion actually handed over in cash in 2011 is relating to the profits in 2010.” Now you’re saying it’s not? Of course, my point was that indeed it is not. We don’t know what the right denominator is, so we don’t know what its actual tax rate is.
The 18% (3.3/18.5) tax rate calculation for Apple’s FY 2010 you do on your blog (http://www.forbes.com/sites/timworstall/2012/04/18/apples-9-8-tax-rate-entirely-mind-gargling-nonsense/) could only be correct if: a) none of the $3.3 billion paid in FY 2011 is for FY 2009 or earlier; b) every jurisdiction where Apple pays taxes structures estimated payments the same way as the U.S. does. However, since we don’t know how much of its actual cash taxes paid in FY 2011 were paid in the U.S. and how much in each other country, there is no way of knowing if this is the case. So there are some shaky foundations to your calculation, too.
As you point out on your blog, Apple says its effective tax rate for FY 2011 is 24.2%. This is of course its fictional tax provision of $8.3 billion divided by its FY 2011 pre-tax profit of $34.2 billion. So Apple doesn’t seem to think there is anything illegitimate about making statements regarding its FY 2011 tax rate based on the data in its 10-K for FY 2011. Maybe the Greenlining Institute (which I had never heard of before) isn’t doing anything so illegitimate either.