How Apple Inc. saves $44-billion in taxes

32 posts / 0 new
Last post
Catchfire Catchfire's picture
How Apple Inc. saves $44-billion in taxes

Apple’s Web of Tax Shelters Saved It Billions

Congressional investigators found that some of Apple’s subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif. 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.

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” said Senator Carl Levin, a Michigan Democrat who is chairman of the Senate Permanent Subcommittee on Investigations that is holding the public hearing Tuesday into Apple’s use of tax havens. “Apple successfully sought the holy grail of tax avoidance. It has created offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.”

Thanks to what lawmakers called “gimmicks” and “schemes,” Apple was able to largely sidestep taxes on tens of billions of dollars it earned outside the United States in recent years. Last year, international operations accounted for 61 percent of Apple’s total revenue.

Investigators have not accused Apple of breaking any laws and the company is hardly the only American multinational to face scrutiny for using complex corporate structures and tax havens to sidestep taxes. In recent months, revelations from European authorities about the tax avoidance strategies used by Google, Starbucks and Amazon have all stirred public anger and spurred several European governments, as well as the Organization for Economic Cooperation and Development, a Paris-based research organization for the world’s richest countries, to discuss measures to close the loopholes.

 

Issues Pages: 
jjuares

I am reading a good book on the hijinks of the financial world. It is called "Thieves of Bay Street" by Bruce Livesey, a former CBC journalist. Once you have read this book and if you have any money in a bank or anywhere else you will want to run down take it out and stuff it in your mattress.

Francesca Allan

This is obscene.

josh

$74 billion was lost to the US treasury from 2009 to 2012.  Now breakfasts for poor children through Head Start are being cut.  

Catchfire Catchfire's picture

Seriously though, $44-billion!

Kaitlin McNabb Kaitlin McNabb's picture

josh wrote:

$74 billion was lost to the US treasury from 2009 to 2012.  Now breakfasts for poor children through Head Start are being cut.  

brb dying inside Cry

Francesca Allan

josh wrote:

Now breakfasts for poor children through Head Start are being cut.  

Now that's an intelligent place to save money. Not.

ygtbk

Nothing like politicians grandstanding, is there? If Apple complied with U.S. law, and the law was passed by the legislators, and now they don't like the result, is it remotely possible that they should have passed a better law?

Catchfire Catchfire's picture

I agree, ygtbk -- I think there is a fair amount of hypocrisy here on the parts of the legislature (hrm hrm hrm hrm how dare these rich friends of ours who donate to our campaigns exploit the laws we made for them). But I also wonder about the conversations Apple's accountants and executives, while working out their tax strategies: is there a point where they all kind of stop and look at each other and say, "Ok, maybe now we're just taking the piss"?

The answer, of course, is: "no."

ygtbk

I partially agree with you, Catchfire. Lawyers and accountants have a duty to provide their clients with the best possible advice, not the best possible advice for an alternate world in which U.S. tax policy makes more sense.

But I do think that Levin is either ignorant of the U.S. tax system or, as you say, hypocritical. For instance, assuming that all of Apple's international profits would have been subject to the U.S. domestic rate of 35% is not how the U.S. tax system works, and conveniently ignores the fact that other countries in which Apple does business might like to tax it (the recent U.K. Starbucks kafuffle is a similar case in point for another multinational).

The underlying situation is that:

1) The U.S. has a relatively high corporate tax rate by OECD standards;

2) Profits made by international subsidiaries of U.S. companies are not taxed until remitted to the U.S.; and

3) The U.S. has tax treaties with a number of countries, who in turn have treaties with other countries, and the interactions can be surprising.

Given this situation, Apple's management is behaving rationally. To get them to behave differently would require a change in incentives.

Suppose the U.S. changed the Internal Revenue Code and renegotiated their tax treaties as follows:

1) Drop corporate tax rate to OECD average.

2) Tax profits of international subs regardless of whether they've been remitted to the U.S., with a credit for local taxes already paid.

3) Look through intermediate corporate layers (i.e. if there's a U.S.- Bermuda-Netherlands-Ireland-U.K. structure in place to get tax treaty benefits, allow tax authorities to collapse it down to U.S.-U.K.).

If that were the system, different behaviour would likely result.

BTW, there's an updated NYT story here:

http://www.nytimes.com/2013/05/22/technology/ceo-denies-that-apple-is-avoiding-taxes.html?_r=0

 

abnormal

ygtbk wrote:

Nothing like politicians grandstanding, is there? If Apple complied with U.S. law, and the law was passed by the legislators, and now they don't like the result, is it remotely possible that they should have passed a better law?

In other words it seems the guys that wrote the laws are now upset that people are actually obeying them?

But based on the committee's questions they appear very conflicted on how to deal with the issues, especially when questions concerning international competition (Samsung) were raised and the comparative effective tax rates on worldwide income were addressed.

josh

Behaving rationally and doing what's right are not the same.  This tax shelter required some creativity.  It wasn't like a deduction in the normal course of things.

As reforming the corporate tax, do you really things multi-national corporations would be in favor of anything that will cost them more money?  The history of these things is that the rates are lowered, and soon after the loopholes return.    As for Apple this pretty much sums it up:

Quote:
Apple didn't dispute that entities it set up didn't pay corporate taxes but denied they were designed to avoid taxes.
http://online.wsj.com/article/SB1000142412788732364830457849696346816882...

Even more nauseating is Cook claiming how patriotic Apple is at the same time they are screwing the US out of billions in tax revenue.

josh

Quote:
Apple is one of about 20 major corporations that have been pushing for a fresh tax break, known as a “repatriation holiday,” which would allow them to bring the money to the United States at a drastically reduced rate. John T. Chambers, chief executive of Cisco, has led a sustained lobbying effort for such a policy, promising that it would act as a stimulus to encourage investment and increase jobs in the United States. A similar policy was enacted in 2004, which prompted American companies to return more than $300 billion in foreign earnings at the reduced rate of 5.25 percent. But it led to no discernible increase in American investment or hiring. On the contrary, some of the companies that brought back the most money laid off thousands of workers, and a study by the National Bureau of Economic Research later concluded that 92 cents on every dollar was used for dividends, stock buybacks or executive bonuses.
http://www.nytimes.com/2013/05/22/business/for-us-companies-money-offsho...

ygtbk

@ Josh:

If the IRC were changed as I outlined in post #9, then the concept of "repatriation holiday" would be meaningless - the money would have already been taxed by the U.S. (with credit for any local taxes). The current structure just begs for "repatriation holiday" lobbying.

abnormal

ygtbk wrote:
2) Tax profits of international subs regardless of whether they've been remitted to the U.S., with a credit for local taxes already paid.

How do you address the issue of international competition?  That is, how is the US company supposed to compete with non-US companies that only pay tax on their international earnings when they're repatriated?

As I mentioned earlier the Committee's questions pretty much danced around the issue of international competition (Samsung in the case of Apple). 

Quote:
3) Look through intermediate corporate layers (i.e. if there's a U.S.- Bermuda-Netherlands-Ireland-U.K. structure in place to get tax treaty benefits, allow tax authorities to collapse it down to U.S.-U.K.).

That's probably doable - after all, there are a variety of look thru rules in place already - two questions come to mind though. 

The first relates to the intermediate treaties, what they say and what treaties the US may have with those countries, and in the example you give, what the US/UK treaty itself says - those documents may have to be renegotiated. 

The second is how this is supposed to work if somewhere in that chain third party ownership is injected.  That is, what happens if somewhere in that chain one or more third parties decide to take an equity participation (for simplicity's sake say the participations are such that even if the ownership had been direct without the intermediate jurisdictions the ultimate company would be an NCFC)?

BTW, I do agree with you that you'd see a change in behaviour but that change would probably be companies rushing to redomicile outside the US.

 

ygtbk

@ abnormal:

You raise some good points.

- I agree that treaty renegotiation would likely be required to make the look-through effective. 

- I agree that where subsidiaries are not wholly-owned some kind of allocation of income tax paid by the subsidiary might be required, and I'm sure that people would try to work out ways to game it.

- I'm not sure that companies would rush to redomicile outside the U.S. if the U.S. corporate tax rate ended up close to the OECD average, and the look-through was in place. Congress could likely work up a response if that did happen.

You may find the following paper interesting in this context:

http://corit-academic.org/wp-content/uploads/2011/12/Escaping-the-U.S.-Tax-System-Webber.pdf

abnormal

ygtbk wrote:
- I agree that where subsidiaries are not wholly-owned some kind of allocation of income tax paid by the subsidiary might be required

That's a lot easier said than done - at a minimum you'd have to completely rewrite Subpart F to eliminate the concept of an NCFC.   

Quote:
... and I'm sure that people would try to work out ways to game it.

I can tell you from personal experience that when Subpart F was rewritten as part of TR86 a number of non-US companies either restructured to satisfy the revised definition of an NCFC or simply closed their doors [of course those that closed their doors were immediately replaced with "new" entities that were NCFC's under the new law].  And all you have to do is read the PPM's for a lot of startups based outside the US and you'll find things like voting cutbacks buried in the bylaws so that the company can't accidently become a CFC.

As for your comment re "trying to work out ways" - don't forget that companies pay a lot of very bright people very large amounts of money to work with the rules, whatever they may be, in order to obtain the results they want.  On that front the markets are generally years ahead of the regulators, legislator and even the audit profession. 

Quote:
- I'm not sure that companies would rush to redomicile outside the U.S. if the U.S. corporate tax rate ended up close to the OECD average, and the look-through was in place. Congress could likely work up a response if that did happen.

You're making the assumption that companies would look to redomesticate to OECD countries or at least countries with tax rates near the OECD average.  There are lots of options I'd recommend over that.

As a complete aside, if I were advising a startup as to where to domicile their holding company it would not be the US.  Even if, at inception, it had no foreign operations I'd still recommend establishing HoldCo outside the US.

Quote:
You may find the following paper interesting in this context:

http://corit-academic.org/wp-content/uploads/2011/12/Escaping-the-U.S.-Tax-System-Webber.pdf

Thanks - I'll add it to my reading list.

abnormal

BTW, just printed the article off and read the first few lines.  No offense but the author is a complete lightweight.

ygtbk

abnormal wrote:

BTW, just printed the article off and read the first few lines.  No offense but the author is a complete lightweight.

None taken - I am not a tax expert, although I know some basics. If there's a better survey article available online on inversions and redomicile of U.S. companies, please feel free to post a link.

ETA: OK, I'll bite - where would you incorporate a start-up? Ireland? Malta?

Fidel

Getting to the Heart of America's Economic Crisis (2008)

Michael Hudson wrote:

As matters stand today, you could raise the income tax to 100% and still not capture the actual cash-flow revenue of real estate, monopolies, and multinationals who use transfer pricing to manipulate their income and expense statements to show no reportable taxable income at all. So the first concern should be what kind of revenue to tax. Owning a real estate rental property is like owning an oil well in the days of the depletion allowance. In addition to charging off interest as a tax-deductible expense (rather than a financing choice), owners pretend that their buildings are depreciating, despite the fact that property prices have risen almost steadily.

So in most years no taxable income is reported at all. Real estate owners don’t even have to pay a tax on capital gains what Mill called the unearned increment if they plow back their sales proceeds into buying even more assets. And this is just what the great majority of wealth-holders do. They keep on trading and accumulating, tax-free. The situation is much the same with companies taken over by corporate raiders. Paying interest to junk bond holders absorbs what formerly were taxable earnings paid out as dividends. This is what really is crippling the U.S. tax system and de-industrializing the economy.

Hudson says to start with, governments should tax transfer pricing and savings of offshore banking centers at the rate that normal earnings would be taxed.

radiorahim radiorahim's picture

Yeah but when Apple avoids paying billions in taxes it does it in such a hipster and cool way...not like those other uncool tax avoiders.

This is iTax Avoidance.

Fidel

Hudson says, and I agree but hopelessly so, that things won't really be fixed until they cleanup corruption within the justice department and Washington. No nation or vicious empire can survive corruption from within. Like Rome faded away, this one will not fall so much as it will fall away while emerging economies begin to shine.

abnormal

Fidel wrote:
Paying interest to junk bond holders absorbs what formerly were taxable earnings paid out as dividends. This is what really is crippling the U.S. tax system and de-industrializing the economy.

Glad to hear that those bond holders don't pay any tax on the interest they earn.  Or doesn't that count because it doesn't support the thesis the author of the article is (desperately) trying to support.

Quote:
Hudson says to start with, governments should tax transfer pricing and savings of offshore banking centers at the rate that normal earnings would be taxed.

Unfortunately he has no idea what transfer pricing is.  But the second half of that sentence makes even less sense - no matter how I try to interpret it I can't make heads or tails out of it.

abnormal

ygtbk wrote:
ETA: OK, I'll bite - where would you incorporate a start-up? Ireland? Malta?

First, I'm not aware of any detailed discussions of inversions that are available on line.

As for where to incorporate that startup, the answer depends on what the company in question was - a manufacturing concern, an insurance company, a hedge fund, and so forth.  Part of the answer depends on local regulation, part depends on proximity/access to markets, part depends on the local availability of the necessary expertise, part depends on the cost of operating whereever the company is established, ...

If the company wants to be passported into the EU Ireland is near the top of the list.  Believe it or not, Gibraltar actually topped the list in one case because it happened to have the necessary enabling legislation.

Due to some peculiarities of Swiss law, Canton Zug comes to mind as well (among other things, it's currently the home of the largest privately held company in the world).

If the company were an insurance entity I'd opt for Bermuda or Cayman (Bermuda is the third largest insurance centre in the world - Cayman is one of the largest banking centres in the world).  Barbados has its pluses in this direction as well.

 

ygtbk

Thanks, abnormal. I was thinking more narrowly about tax issues but what you say (consider regulation, access, workforce, etc.) makes sense in the broader context. Operations can also sometimes benefit from being distributed - one IT shop that I know has programmers in Ireland and the U.S., so Ireland's already started the day (and with luck made some progress) when the Americans come in, and work can be handed off mid-day.

abnormal

ygtbk wrote:
Operations can also sometimes benefit from being distributed - one IT shop that I know has programmers in Ireland and the U.S., so Ireland's already started the day (and with luck made some progress) when the Americans come in, and work can be handed off mid-day.

Way back when (pre-email days) I remember working on a massive Australian account - we'd arrive in the office to find a hundred page fax from the Melbourne office waiting.  We'd work on it all day long and send a massive fax back at the end of the day - any telephone conversations tended to happen at about 8:00 in the evening (at our end).  Result was that we were pretty much working round the clock.

With email and remote access that would be so much easier nowadays.

 

radiorahim radiorahim's picture

The U.S. Department of Justice is going after Apple for e-book price fixing

More here.

abnormal

Quote:
Truck and tractor maker Fiat Industrial intends to move its tax residence to the United Kingdom from Italy after its upcoming merger with its CNH unit, according to a U.S. stock market listing filings.

The move out of high-tax Italy is likely to result in a lower tax burden for the new group.

Fiat Industrial plans to merge with CNH and then fold both companies into a new group provisinally called FI CBM Holdings N.V. with a primary listing on the New York Stock Exchange. The group filed a preliminary prospectus on May 14, and expects the merger and listing to be completed in the third quarter of 2013.

After the merger, FI CBM "intends to operate in a manner to be treated as resident in the United Kingdom for tax purposes," the prospectus said.

http://www.reuters.com/article/2013/05/21/fiatindustrial-tax-idUSL6N0E21G220130521

 

abnormal

Quote:
The Trouble With Taxing Corporations

It hardly qualifies as a defense. But that is perhaps the most accurate statement that Apple’s chief executive, Timothy D. Cook, could have made to lawmakers inquiring last week about how its creative financial techniques contributed to its low business tax payments.       

You may have heard of Google’s “Double Irish With a Dutch Sandwich” — an increasingly popular route through Ireland and the Netherlands that cleanses corporate cash of most of its tax liability.       

Amazon and Facebook like the sandwich, too.       

Don’t forget the fabled tax wizards in General Electric’s accounting department. Or what about Starbucks, which paid a grand total of $13 million in British corporate taxes over 15 years on revenue of more than $5 billion?       

Starbucks is not a complex technology firm with a subsidiary in a low-tax Caribbean island charging its headquarters through the nose to license some cutting-edge software patent. It’s a chain of coffee shops, part of the predigital economy.

etc ...[/i]

http://www.nytimes.com/2013/05/29/business/the-trouble-with-taxing-corporations.html?pagewanted=2&_r=0&smid=tw-nytimes&partner=rss&emc=rss

 

 

 

abnormal

And if you've got a few minutes this is worth watching.

http://www.guardian.co.uk/technology/video/2013/may/29/apples-dirty-little-tax-secret-video

Personally I wouldn't call it a "dirty little tax secret".  I'd call it sheer genius on behalf of whoever figured this one out.

But it just proves my earlier comment that the market is years ahead of the regulators, legislators, and accounting profession. 

 

ygtbk

abnormal wrote:

And if you've got a few minutes this is worth watching.

http://www.guardian.co.uk/technology/video/2013/may/29/apples-dirty-little-tax-secret-video

Personally I wouldn't call it a "dirty little tax secret".  I'd call it sheer genius on behalf of whoever figured this one out.

But it just proves my earlier comment that the market is years ahead of the regulators, legislators, and accounting profession. 

Very interesting. The "Apple tells the Americans where it's incorporated / Apple tells the Irish where its managed" part made it sound a bit dodgy, but there's nothing to stop both statements from being true. Whoever set up the structure was pretty smart.

On a related note, there's a trend to stricter limitation-of-benefits articles in U.S. tax treaties:

http://www.robertsandholland.com/siteFiles/News/478article.pdf

The article's six years old so there may be more recent developments.

abnormal

Short answer - avoid the US like the plague.