The worm in Apple (and the US tax code)–offshoring of US Profits
by Linda Beale
The worm in Apple (and the US tax code)–offshoring of US Profits
Citizens for Tax Justice has focused on Apple’s ability to lower its US effective tax rate by offshoring its profits to tax havens. See, e.g., Robert McIntyre, What Apple Pays in Taxes and Doesn’t, NY Times Letters to the Editor, CTJ, How to end Apple’s offshore shenanigans, May 4, 2012; [hat tip Paul Caron at Tax Prof]. Here’s the key idea in both the letter and the report.
Since Apple’s profits stem mainly from its U.S.-created technology, most, if not all, of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore.
If we treat all of the untaxed portion of Apple’s offshore profits as really U.S. profits that were artificially shifted to offshore tax havens, then Apple’s U.S. tax rate is much lower than Apple reports. Under this approach, Apple’s 2008-10 effective federal tax rate comes to only 13.4%, and its effective federal tax rate over the last six years (2006-11) was only 12.1%. (Likewise, Apple’s revised effective state tax rate in 2008-10 was only 3.6%, instead of the 8.0% we reported in our state corporate tax study issued last December.) CTJ report.
How does CTJ know that Apple parks its profits offshore in tax havens where they are subject to minimal taxes?
Apple says that if it told its foreign subsidiaries to pay Apple the whole $54 billion offshore amount as a dividend, then Apple would owe $17 billion in U.S. federal income taxes. That reflects a $19 billion tax at 35 percent, less a $2 billion foreign tax credit (the sum of all the foreign income taxes that Apple has ever paid). Which means, with a little more arithmetic, that about 90 percent of the $54 billion in accumulated offshore profits has never been taxed by any government. Id.
This is a genuine problem for the US in the age of digitized information. Companies easily “sell” their most important intellectual property to offshore affiliates, for prices that are set by modeling and that fail to capture the obvious–that no price would actually be sufficient to purchase the company’s valuable intellectual property away from it, since the IP is in fact the basis for the company’s business. So companies offshore their profits to post-office boxes in tax haven countries and claim that the US Is no longer the source of their profits, even though the IP was invented in the US, is still used in the US and still results in most of the sales actually in the US.
There are at least two possible solutions. One would be to deny companies the ability to treat the IP they use to create their products as sold for tax purposes, and to permit only licensing for royalties to actual factories in countries that are not tax havens. Another would be to end the deferral on “active business” profits offshore. It makes no sense because it incentivizes companies to offshore as much of their business as possible.
crossposted with ataxingmatter
“Since Apple’s profits stem mainly from its U.S.-created technology, most, if not all, of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore.”
That’s absolutely absurd. On two points.
1) Much of Apple’s technology is not US-created. The chips, for example, come from ARM, a UK company which designs them just outside Cambridge. Cambridge UK that is. Even though Samsung makes them for Apple in Austin TX.
2) Assigning profits purely to IP is simply insane. Sure, some part of profits comes from IP but hasn’t anyone ever told you that execution is more important to profits than great ideas? The ability to manufacture, ship, market stuff being ever so slightly important? As, erm, Apple showed when it picked up those ideas from Xerox Parc all those years ago?
Here’s an interesting question for you. A company is manufacturing phone in China. And selling them in China and making a big profit.
Please give reasons why this process should pay tax to Uncle Sam.
For extra points, tell us why this process being managed by Samsung should not but that managed by Apple should.
“Since Apple’s profits stem mainly from its U.S.-created technology, most, if not all, of these untaxed profits are almost certainly United States profits that Apple has artificially shifted offshore.”
Gee, I guess when I buy a burrito part of the proceeds should go to Mexico. 😉
Linda Beale: “This is a genuine problem for the US in the age of digitized information. Companies easily “sell” their most important intellectual property to offshore affiliates, for prices that are set by modeling and that fail to capture the obvious–that no price would actually be sufficient to purchase the company’s valuable intellectual property away from it, since the IP is in fact the basis for the company’s business.”
A shady practice.
Linda Beale: “Another would be to end the deferral on “active business” profits offshore. It makes no sense because it incentivizes companies to offshore as much of their business as possible.”
Maybe you have the incentives backwards. Companies want to offshore their business to avoid paying taxes, and that gives them an incentive to write the law as they have to assist their friendly Congressman.
Tim
ARM does pay taxes. So does Samsung. Apple buys the components from them and so does not pay taxes on their production. Apple only pays taxes on the products that it sells.
Hi Tim:
” Much of Apple’s technology is not US-created. The chips, for example, come from ARM, a UK company which designs them just outside Cambridge.”
Apple came out with its own version of the A5 chip which is manufactured in Austin TX.
http://en.wikipedia.org/wiki/Apple_A5
You did note that I said this?
“Even though Samsung makes them for Apple in Austin TX. “
Tim, regarding your point 1, unless Apple owns the patents to ARM’s chips, this is simply off-topic. The question is what patents it holds in Ireland.
Tim:
Simply put, Samsung may manufacture them in Austin Texas; but, Apple designed them. So what is your point? Read your post.
Do you know what the fabrication and packaging technology is for a chip? Having worked in electronics and having bought mosfets (chips); I can tell you about the wafer growing process call fabrication and then the packaging side where the wafer are cut and placed together in different configurations to meet specifications.
Tim:
Beverly, JackD, and myself would call this a non sequitor which is meant to steal the thread. I apologize for answering him
Ken:
Beverly, JackD, and myself would call this a non sequitor which is meant to steal the thread. I probably should not have answered him.