Quantcast
  

Thursday, April 24, 2014         

NEW YORK TIMES


 Print   Email   Comment | View 11 Comments   Most Popular   Save   Post   Retweet

How Apple Sidesteps Billions in Taxes

By CHARLES DUHIGG and DAVID KOCIENIEWSKI

POSTED:



RENO, Nev. >> Apple, the world’s most profitable technology company, doesn’t design iPhones here. It doesn’t run AppleCare customer service from this city. And it doesn’t manufacture MacBooks or iPads anywhere nearby.

Yet, with a handful of employees in a small office here in Reno in a company subsidiary named Braeburn Capital, Apple has done something central to its corporate strategy: It has avoided millions of dollars in taxes in California and 20 other states.

Apple’s headquarters are in Cupertino, Calif. By putting an office to collect and invest the company’s profits out of Reno, just 200 miles away, Apple sidesteps state income taxes on some of those gains.

California’s corporate tax rate is 8.84 percent. Nevada’s? Zero.

Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year.

As it has in Nevada, Apple has created subsidiaries in low-tax countries like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox in Luxembourg or an anonymous office here — that help cut the taxes it pays around the world.

Almost every major corporation tries to minimize its taxes, of course. For Apple, the savings are especially alluring because the company’s profits are so high. Wall Street analysts predict Apple could earn up to $45.6 billion in its current fiscal year — which would be a record for any U.S. business.

Braeburn is a variety of apple that is simultaneously sweet and tart. When someone in the United States buys an iPhone, iPad or other Apple product, a portion of the profits from that sale is often deposited into accounts controlled by Braeburn, and then invested in stocks, bonds or other financial instruments, say company executives. Some profits from those investments are shielded from California tax authorities by virtue of Braeburn’s Nevada address.

Since founding Braeburn in 2006, Apple has earned more than $2.5 billion in interest and dividend income on its cash reserves and investments around the globe. What’s more, Braeburn allows Apple to lower its taxes in other states because many of those jurisdictions use formulas that reduce what is owed when a company’s financial management occurs elsewhere.

While Apple’s Reno office helps the company avoid state taxes, its international subsidiaries — particularly the company’s assignment of sales and patent royalties to other nations — help reduce taxes owed to the U.S. and other governments.

The Luxembourg subsidiary, named iTunes S.ar.l., has just a few dozen employees, according to corporate documents filed in that nation and a current executive. But when customers across Europe, Africa or the Middle East — and potentially elsewhere — download a song, television show or app, the sale is recorded in this small country, according to current and former executives.

The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through Luxembourg. Taxes that would have otherwise gone to the governments of Britain, France, the United States and dozens of other nations go to Luxembourg instead, at discounted rates.

In 2011, iTunes S.ar.l.’s revenue exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of iTunes’ worldwide sales.

Apple serves as a window on how technology giants have taken advantage of tax codes written for an industrial age and ill-suited to today’s digital economy. Some profits at companies like Apple, Google, Amazon, Hewlett-Packard and Microsoft derive not from physical goods but royalties on intellectual property, like the patents on software that makes devices work.

Other times, the products themselves are digital, like downloaded songs. It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers. A downloaded application, unlike a car, can be sold from anywhere.

The growing digital economy presents a conundrum for lawmakers overseeing corporate taxation: Though technology is now one of the nation’s largest and most valued industries, many tech companies are among the least taxed, according to government and corporate data.

Even among tech companies, Apple’s rates are low. And while the company has remade industries, ignited economic growth and delighted customers, it has also devised corporate strategies that take advantage of gaps in the tax code, according to former executives who helped create them.

Apple, say former executives, has been particularly talented at identifying legal tax loopholes and hiring accountants who are known for their innovation. In the 1980s, for instance, Apple was among the first major corporations to designate overseas distributors as “commissionaires,” rather than retailers, said Michael Rashkin, Apple’s first director of tax policy, who helped set up the system before leaving in 1999. Because commissionaires never technically take possession of inventory — which would require them to recognize taxes — the structure allowed a salesman in high-tax Germany, for example, to sell computers on behalf of a subsidiary in low-tax Singapore.

In addition, Apple was a pioneer of an accounting technique known as the “Double Irish with a Dutch Sandwich,” which reduced taxes by routing profits through two Irish subsidiaries — today named Apple Operations International and Apple Sales International — and the Netherlands and then to the Caribbean. In 2004, Ireland, a nation of less than 5 million, was home to more than one-third of Apple’s worldwide revenues, according to company filings.

Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan. As it stands, the company paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent. (Apple does not disclose what portion of those payments were in the United States, or what portion are assigned to previous or future years.)

By comparison, Wal-Mart last year paid worldwide cash taxes of $5.9 billion on its booked profits of $24.4 billion, a tax rate of 24 percent, which is about average for non-tech companies.

Apple’s domestic tax bill has piqued particular curiosity among corporate tax experts because though the company is based in the United States, its profits — on paper, at least — are largely foreign. While Apple contracts out much of the manufacturing and assembly of its products to other companies overseas, the majority of Apple’s executives, product designers, marketers, employees, research and development and retail stores are in the United States. Tax experts say it is therefore reasonable to expect that most of Apple’s profits would be American as well. The nation’s tax code is based on the concept that a company “earns” income where value is created, rather than where products are sold.

However, Apple’s accountants have found legal ways to allocate about 70 percent of its profits overseas, where tax rates are often much lower, according to corporate filings.

Neither the government nor corporations make tax returns public, and a company’s taxable income often differs from the profits disclosed in annual reports. Companies report their cash outlays for income taxes in their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments. In Apple’s last annual disclosure, the company listed its worldwide taxes — which includes cash taxes paid as well as deferred taxes and other charges — at $8.3 billion, an effective tax rate of almost a quarter of profits.

However, tax analysts and scholars said that figure most likely overstated how much the company would hand to governments because it included sums that might never be paid. “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.”

Apple, in a statement, said it “has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules. We are incredibly proud of all of Apple’s contributions.”

The statement also said that Apple “pays an enormous amount of taxes which help our local, state and federal governments. In the first half of fiscal year 2012, our U.S. operations have generated almost $5 billion in federal and state income taxes, including income taxes withheld on employee stock gains, making us among the top payers of U.S. income tax.”

The statement did not specify how it arrived at $5 billion, nor did it address the issue of deferred taxes, which the company may pay in future years or decide to defer indefinitely. But the $5 billion figure appears to include taxes ultimately owed by Apple employees.

The sums paid by Apple and other tech corporations is a point of contention in the company’s backyard.

A mile and a half from Apple’s Cupertino headquarters is De Anza College, a community college that Steve Wozniak, one of Apple’s founders, attended from 1969 to 1974. Because of California’s state budget crisis, De Anza has cut more than a thousand courses and 8 percent of its faculty since 2008.

Now, De Anza faces a budget gap so large that it is confronting a “death spiral,” the school’s president, Brian Murphy, wrote to the faculty in January. Apple, of course, is not responsible for the state’s financial shortfall, which has numerous causes. But the company’s tax policies are seen by officials like Murphy as symptomatic of why the crisis exists.

“I just don’t understand it,” he said in an interview. “I’ll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete’s sake.

“But then they do everything they can to pay as few taxes as possible.”






 Print   Email   Comment | View 11 Comments   Most Popular   Save   Post   Retweet

COMMENTS
(11)
You must be subscribed to participate in discussions
By participating in online discussions you acknowledge that you have agreed to the TERMS OF SERVICE. An insightful discussion of ideas and viewpoints is encouraged, but comments must be civil and in good taste, with no personal attacks. Because only subscribers are allowed to comment, we have your personal information and are able to contact you. If your comments are inappropriate, you may receive a warning, and if you persist with such comments you may be banned from posting. To report comments that you believe do not follow our guidelines, email commentfeedback@staradvertiser.com.
Leave a comment

Please login to leave a comment.
manakuke wrote:
Offshore tax strategies to maximize profits?
on April 29,2012 | 04:49AM
duna6430 wrote:
"Almost every major corporation tries to minimize its taxes, of course. For Apple, the savings are especially alluring because the company’s profits are so high. Wall Street analysts predict Apple could earn up to $45.6 billion in its current fiscal year — which would be a record for any U.S. business." Of course...and another reason we need tax reforms at every level. Companies are going to do what's most profitable for their bottom line. In the article - Wal-Mart paid a 24% rate... There must be some way we can make it lucrative for companies to pay whatever's deemed to be fair - and keep their money (AND JOBS) in America?
on April 29,2012 | 08:30AM
Manoa2 wrote:
The tax law was written that way for a reason after extensive lobbying as a form of subsidy by other US Taxpayers for companies like Apple to invest overseas and take advantage of cheaper labor costs. This way their shareholders, many of whom are in the USA, like myself then make more money and spend and invest it where we choose.
on April 29,2012 | 05:33PM
nodaddynotthebelt wrote:
Businesses have to do what they have to do in order to minimize costs. But sending our labor to other countries is so Un-American. And we wonder why America has no jobs available for its people. We can thank companies like Apple and the government that encourages it through its laws. We should have laws that are fair not only to the businesses but also fair to the American citizens. The government should give incentives for bringing labor here instead of encouraging labor to go outside of the country. Apple is not the only business sending our potential labor outside. I am sure many like Microsoft is doing the same. It is a loss to our American citizens who are out of a job. Another problem is union. They make labor too expensive for businesses and that leads to companies seeking labor outside of the U.S. With these factors in place we will continue to spiral down that vicious cycle of sending our money to other countries like China. Money that could be used to help our country grow financially instead of lining the pockets of the rich who do not care about his fellow Americans. As long as he maximizes his investment he couldn't care less about his brothers who are without jobs. So, thank you Apple and Microsoft. You help make the world a better place. Except for us Americans.
on April 29,2012 | 08:35AM
Manoa2 wrote:
There is no way that US labor can compete with foreign labor working for far less money in a country with a lower cost of living (and often with subsidized housing and universal health care). In fact those jobs keep going to where the labor is cheapest-- from the USA to Japan and Korea, but now to China and Malaysia, but it will move to even cheaper places as the standard of living in Malaysia keeps improving. It is just pure economics that determines this and i cannot be changed even massive government subsidy whether in money or in tax breaks.
on April 29,2012 | 05:38PM
nodaddynotthebelt wrote:
The same goes to Mitt Romney who invests his money offshore to avoid taxes through tax shields. Thank you, too, Mitt Romney.
on April 29,2012 | 08:37AM
typroctor wrote:
Why would they want to pay higher taxes in the US when everyone knows how the government pisses it away. GSA, etc.
on April 29,2012 | 11:55AM
primowarrior wrote:
At least it sounds like Apple pays some taxes, unlike other companies like GE who at times have not only paid no federal tax, but received our hard earned tax money as credits due to loopholes in the tax code.
on April 29,2012 | 12:33PM
thebostitch wrote:
Good for Apple!!!!!!!! ... and a god lesson for Federal (Obama) and Local/State's Governments that higher taxes don't ever bring more revenue, as companies (and people) find ways to avoid them!!!! The Greed (of the Government) is never profitable.
on April 29,2012 | 04:55PM
Manoa2 wrote:
THis is different. The tax on businesses allow this-- it was written so american businesses could go overseas to invest, compete, and take advantage of cheaper labor and shelter foreign income from taxes (they also cut deals with foreign countries with cheap labor so we will locate our plants overseas). Call it a subsidy by other tax payers. This makes these companies richer and thereby makes us richer since the shareholders of american companies are largely in the US
on April 29,2012 | 06:03PM
thebostitch wrote:
Good point :)
on April 30,2012 | 02:10AM
IN OTHER NEWS
Latest News/Updates
Blogs