Monday, April 30, 2012

Apple's tax avoidance schemes save the firm billions annually

The New York Times has taken on Apple, once again, with an investigative report detailing how the world's most valuable company by market capitalization avoids not millions, but billions in taxes annually.

Many on the right like to say that America has high corporate tax rates. What they often miss, or perhaps omit, is that those are the "advertised rates." Once all the loopholes are exercised, the U.S. has among the lowest corporate taxes in the world. And that is what Apple does, by, as the NYT says, taking "advantage of tax codes written for an industrial age and ill suited to today’s digital economy."

In this, Apple is not the exception, but rather the rule, as least for technology giants. Others, such as Google,, Hewlett-Packard and Microsoft, among others, exploit the same loopholes.

Of course, there's nothing criminally wrong with any of this, as corporations by law must attempt to maximize profits for their shareholders. It is, of course, another example of how corporations can take advantage of loopholes that do not exist for the common man.

Examples of Apple's tax dodging include an office with just a handful of employees in Reno, NV, 200 miles away from its corporate headquarters in Cupertino, CA. The office collects and invests the company’s profits, allowing Apple to vaoid state income taxes on at laest some of its gains. California's corporate tax: 8.84 percent. Nevada's: none.

Apple has also created subsidiaries in low-tax locales such as Ireland, the Netherlands, Luxembourg and the British Virgin Islands. Some of these "subsidiaries" are little more than a letterbox or an anonymous office.

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One example of a letterbox-based anonymous office is an Apple "subsidiary" in Luxembourg. This office leverages the sales of digital goods through iTunes. Since Apple has that Luxembourg presence (iTunes SARL), it can record iTunes sales to people across EMEA as having been sold in Luxembourg.

Taxes that might otherwise have gone to the governments of the U.S., U.K., France, and elsewhere go to Luxembourg instead, which has promised low, low tax rates to corporations to do this sort of routing.

Robert Hatta, who helped oversee Apple's iTunes retail marketing and sales for European markets until 2007 said, "We set up in Luxembourg because of the favorable taxes. Downloads are different from tractors or steel because there's nothing you can touch, so it doesn't matter if your computer is in France or England. If you're buying from Luxembourg, it's a relationship with Luxembourg."

In this way, not only has Apple led the way with technological advances, it's led the way with tax-dodging strategies, as well. It was the first to take advantage of the complex scheme now called the "Double Irish With a Dutch Sandwich."

That technique, now practiced by hundreds of other corporations, reduces taxes by routing profits first through Irish subsidiaries and the Netherlands and then the Caribbean. Some of the other companies that use this technique admit that they have directly imitated Apple's methods.

The majority of Apple's executives, product designers, marketing team, research and development, and retail stores are in the U.S. Despite this, these schemes mean that Apple can to "allocate about 70 percent of its profits overseas." These are the schemes that progressives and liberals say are "robbing" the U.S. of valuable tax income. These are also the schemes that conservatives want to stay in place, or even increase.

Despite facts like the above, they trumpet falsehoods about the U.S. tax system, and many uninformed Americans believe them. And it's not just the U.S. that is "robbed," but other countries, as well. To put things in concrete terms, Apple paid taxes of $3.3 billion globally on its reported profits of $34.2 billion in 2011, a tax rate of 9.8 percent. Compare that to Walmart, which in 2011 paid global taxes of $5.9 billion on its booked profits of $24.4 billion, or a tax rate of 24 percent (about average for non-tech companies).  Compare that to your own income tax rate, as well.

There is a downside to all these schemes: when money is sent overseas, it cannot be returned to the U.S. without incurring a new tax bill. That, of course, is why Apple and other companies are urging Congress to pass a “repatriation holiday” that would permit U.S. businesses to bring money home without incurring large taxes. It's also one of the reasons Apple gave for its first-ever dividend, coming later this year: money that cannot be repatriated, at least not yet.

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