How Apple avoids US taxes with shell games

by Linda Beale

How Apple avoids US taxes with shell games

Tomorrow’s Congressional hearing on the ability of major multinationals to shift profits offshore to avoid US tax (and everywhere-else tax) may finally get the attention of the American public onto a tax issue worth thinking about.

As today’s New York Times makes clear, Apple has used sophisticated tax planning to shift its assets offshore, often to employee-less shells that are run from Apple’s US headquarters. See Nelson Schwartz, Apple avoided billions in US taxes, Congressional panel says, New York Times (May 20, 2013).

Even as Apple became the nation’s most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and surprised experts, a Congressional investigation has found.

Some of these subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif., according to Congressional investigators. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless – exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.



Atop Apple’s offshore network is a subsidiary named Apple Operations International, which is incorporated in Ireland but keeps its bank accounts and records in the United States, and holds board meetings in California.

Because the United States bases residency on where companies are incorporated, while Ireland focuses on where they are managed and controlled, Apple Operations International was able to fall neatly between the cracks of the two countries’ jurisdiction.

Even John McCain seems to recognize that Apple’s offshoring gimmicks stretch the notion of what should be acceptable: “Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.” Id. Apple’s gimmicks take advantage of a tax system that does not adequately address the nature of intellectual property as the core of a company’s profit-making business nor the nature of the economic sham of claiming to sell such property to affiliates at “arm’s length prices”, when the purported affiliates are nothing but names on a tiny office door and the purported arm’s length price would never be accepted from a genuine unrelated party. As Sen. Levin noted, Apple has succeeded in avoiding taxes “creat[ing] offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.” Id.

Apple’s CEO Cook is expected to claim that Apple doesn’t use gimmicks. Id. Of course, like Clinton’s equivocations, that all depends on your definition of a “gimmick.” When you create a vast community of subsidiaries with shell companies that exist to allow you to claim your profits are earned by employee-less companies that just happen to reside where there is no tax, that is using a gimmick, even if it is one that is perfectly legal under an outdated code that has been incessantly weakened by corporate lobbyists for the last three decades, at least.

Cook is also expected to argue that the solution is just to hand over to the big MNEs what they want–tax-free repatriation of profits they have shifted offshore. That’s the same crazy idea that the Bush administration and Republicans in Congress promoted in 2004, one that essentially rewarded companies for engaging in gimmicks and encouraged even more companies to shift even more income offshore and hold it there even longer to avoid US taxes. Congress would be foolish to reward poor social responsibility behavior with an even better tax outcome than that already generated by the poor social responsibility behavior!

The current transfer-pricing regime is not fitted for today’s global commerce. What Congress should consider doing is (1) eliminate offshore deferral altogether, and (2) apply a substance-over-form analysis to all transfers of intellectual property to offshore affiliates that would in most cases treat them as not occurring for tax purposes. It could phase in the end of deferral by permitting companies to treat their current stash of offshore profits as being repatriated on a straight-line basis over five years, so they avoid a humongous one-time tax hit. The legislation should also restrict the use of loss carryovers against such repatriated cash in much the way that loss carryovers are restricted after major acquisitions.

(And, by the way, that idea I had that I might make the iPhone my next smartphone? I’ve just thrown that in the waste basket. Rather not support a company that is so disloyal to the country that fostered the possibility of its existence and high profits.)

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