Charles Duhigg of the New York Times has written another extraordinary article about Apple, this time focused on the heroic lengths Apple has gone to to avoid paying taxes to governments around the world.
All companies try to minimize taxes, obviously. And tech companies, it turns out, are ideally suited to skirting tax laws–because tech products can be “sold” from anywhere, regardless of where they’re designed or made.
But Apple appears to have been as spectacularly creative and successful in tax-avoidance as it has been in gadgets.
Last year, for example, Apple’s global cash tax rate was only 9.8%. It paid $3.3 billion of cash taxes on profits of $34 billion. (Cash taxes are the taxes Apple actually paid, as opposed to the “tax” line that appears on the income statement.) This compares to a tax rate of 24% for Walmart, which, according to Duhigg, is about average for a major global corporation.
In the U.S. last year, Apple’s tax-avoidance schemes allowed it to save $2.4 billion in federal taxes alone, according to one study. The company likely saved millions more by avoiding state and local taxes.
Per Duhigg, here are some of Apple’s tax-avoidance tricks:
- Apple’s first major move has been to find ways to allocate 70% of its profits outside the U.S., despite the fact that most of its executives and product designers are located here. The U.S. tax code was supposedly designed to tax companies on where most of their value is created, rather than where the products are made or sold, but Apple has found ways around that.
- The cash generated by Apple’s U.S. business is not collected or managed by the company’s headquarters in California. It’s collected and managed by a subsidiary called Braeburn Capital located in Nevada. Why? Because California has a corporate tax rate of 8.84%, while Nevada has no corporate tax rate. Thus, Apple pays no taxes on profits generated by its cash. Braeburn also helps Apple reduce taxes in other states, which have lower rates for companies that manage their finances elsewhere.
- At the same time that Apple is avoiding California taxes by managing its cash in Nevada, it is getting tax credits from California for conducting “research and development” in California. Apple has benefitted from more than $400 million of R&D credits since 1996, Duhigg says.
- Internationally, Apple invented a tax-avoidance scheme known as the “Double Irish With A Dutch Sandwich,” which is now used by hundreds of other companies. This scheme routes royalties and profits generated on U.S. inventions through subsidiaries in Ireland and the Netherlands and then to the Caribbean. On an accounting basis, Ireland “generated” one-third of Apple’s revenue last year. Apple has also assigned some of the ownership of its Ireland operation to a subsidiary with no employees in the Caribbean, and routes other Irish profits through the Netherlands, which is also basically tax-free.
- Apple makes sure that salespeople located in high-tax countries are actually employed by Apple subsidiaries in low-tax countries. For example, a salesperson located in high-tax Germany might sell Apple products on behalf of an Apple subsidiary located in low-tax Singapore–and the sales in Germany are then taxed at low Singaporean rates.
- Apple has decreed that many global “iTunes” sales legally happen in Luxembourg, because Luxembourg offers tax incentives for companies that process transactions there. This dodges taxes in the U.S., France, Britain, and other countries that would charge much higher rates.
- And so on…
Now, all this, of course, is perfectly legal. And hundreds of other companies take advantage of many of the same sorts of tricks that Apple uses.
And Apple does still pay billions in taxes ($3.3 billion, on profit of $34 billion).
But while Apple is going to heroic lengths to set up subsidiaries in Nevada and the Caribbean, of course, California is going broke.
And so is Cupertino, where Apple is building its amazing new spaceship headquarters.
So, not surprisingly, many in California are angry about how much tax Apple avoids paying in the state. And so, presumably, are some folks in the federal government, Britain, France, Germany, and other countries in which Apple is following the letter of the law, but not the spirit.
The answer is certainly not for the U.S. or California to suddenly “crack down” on Apple–if that happened, the company would immediately leave the United States altogether, taking the taxes it does pay with it.
The answer–if the goal is to force Apple and other companies to pay higher taxes–is probably for world trade organizations to come together and establish consistent policies across the world. But that’s easier said that done.
So, in the meantime, the usual adage applies: Paying taxes is for the little people.