Apple’s Tax Avoidance: Evil Scheming, Good Business, or Both?

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Apple CEO Tim Cook

The New York Times is out with the latest installment of its iEconomy series, which focuses on Apple, the world’s most profitable company. The article details the elaborate — and legal — ways that Apple, and other tech companies, minimize their tax bills. The piece raises several questions: Is Apple to be condemned for its tax-avoidance strategies, or praised for maximizing profits for shareholders? (Is it even possible for a corporate giant to be both “evil” and “good” at the same time?) Is the real culprit the complex U.S. corporate tax code? Or is this just an example of one of the world’s best-performing companies taking advantage of a globalized, increasingly digital economy to push the limits of U.S. tax law?

At a time when the cash-strapped federal and state governments are looking for ways to boost revenue, corporate tax avoidance strategies have taken on urgent importance. There’s no doubt that Apple, which is poised to set a record this year for profits by an American company, pays less in taxes than other firms. Last year, The Times says Apple paid a global cash tax rate of only 9.8% — $3.3 billion on profits of $34 billion — compared to a tax rate of 24% for Walmart, which the paper says is about average. Apple avoided paying $2.4 billion in federal taxes last year, the paper said, citing research by former Treasury Department economist Martin A. Sullivan. (There’s some dispute about the way The Times analyzed the tax numbers, but the paper stands by its reporting, a spokesperson told me Monday.)

What’s not in doubt is that Apple is off to a staggering year, and it’s looking for every available way to hold on to its ballooning profits. Last week, the company reported quarterly earnings of $11.6 billion, compared to $6 billion one year ago, on revenue of $39.2 billion, a 59% increase over last year. Wall Street analysts predict that Apple could earn as much as $47 billion in profits during its current fiscal year.

(More: Apple Profit Soars 94%, Stock Up 7%)

Among the major findings from The Times story:

  • Apple has subsidiaries in low-tax U.S. states like Nevada — where the corporate tax rate is zero — and foreign countries like Ireland, the Netherlands, Luxembourg and the British Virgin Islands, to help reduce its tax bill.
  • Profit from iPhone and iPad sales is often routed to Apple’s Nevada subsidiary, called Braeburn Capital (after a type of “simultaneously sweet and tart” Apple), which then invests the money in stocks, bonds and other investments. Some of the proceeds from these investments is shielded from California, where Apple is based, because Braeburn is located in Nevada, where there is no state capital gains tax.
  • Tech companies like Apple, Google, Amazon, Hewlett-Packard and Microsoft — which derive substantial revenue from intellectual property royalties and digital products — have an easier time than wholly brick-and-mortar companies moving profits to low-tax locations. Apple books about 70% of its profits overseas, where corporate tax rates are often much lower than in the United States.
  • When customers in Europe, Africa or the Middle East download songs or apps from the Apple online store, the sale is booked at Apple’s subsidiary in Luxembourg, named iTunes S.à r.l., which has just a few dozen employees.”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,” the paper reported.
  • Apple pioneered an accounting trick known as the “Double Irish With a Dutch Sandwich,” which cuts its tax bill by “routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean.” Hundreds of other companies have since copied Apple’s method.

All in all, pretty sophisticated stuff. Apple responded to The Times piece with a lengthy statement, which touts the companies contributions to the U.S. economy.

“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,” Apple’s statement read, in part. “Apple has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules.”

(More: Why Apple is Winning: Innovation, Opportunity and Execution)

So do Apple’s tax avoidance practices, which have no doubt been intensely scrutinized by the companies lawyers to make sure they’re legal, constitute evil corporate conduct? Or should the company be commended for pushing the limits to maximizer shareholder value? Apple is an astonishingly successful company filled with brilliant people. It should really be no surprise that it’s running circles around the tax man. This is clearly a bad outcome for state and federal budgets, which desperately need the revenue. But as The Atlantic‘s Derek Thompson points out, it’s not clear there’s much we can do to stop it.

One thing’s for sure: As the two major drivers of the world economy continue apace — globalization and technology — it’s clear that financial innovation, especially with respect to tax avoidance, has dramatically outpaced domestic and international taxation oversight structures.

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1 comments
rvauthor
rvauthor

It is a strange situation where one percent of Americans volunteer to serve in harm's way in the U.S. Armed Forces knowing they could lose their lives in defense of Liberty while the one percent at the top of the income and earnings bracket work diligently to help U.S. and multinational corporations avoid paying taxes, much of which is spent to defend our Liberty. We appear to have replaced draft dodgers with tax dodgers.