Good Apple? Bad Apple? Very Profitable Apple! And Great at Minimizing Taxes.

Apple CEO Tim  Cook has been in the press a lot lately about the organization’s aggressive stance on taxes.  In front of a somewhat hostile Senate panel in Washington, he said, “We pay all the taxes we owe, every single dollar,” Cook told the Senate Permanent Subcommittee on Investigations, noting that Apple may now be the largest U.S. corporate taxpayer.  “We not only comply with the laws, but we comply with the spirit of the laws.  We don’t depend on tax gimmicks.  We don’t move intellectual property offshore and use it to sell our products back to the United States to avoid taxes.  We don’t stash money on some Caribbean island.  We don’t move our money from our foreign subsidiaries to fund our U.S. business in order to skirt the repatriation tax.”  In all discussions, you have to enjoy how Apple has focused on taxes paid while the other side has focused on potential other taxes owed.

One claim made in numerous papers is that Apple negotiated a special 2% tax rate from Ireland.  Both Apple and Ireland dispute these claims.

With respect to the above, the operative part of  Tim Cook’s quote is, “We pay all the taxes, and we owe, every single dollar.”  His general tenet is that Apple isn’t breaking any tax laws.  They are being aggressive in minimizing, legally, the amount of taxes they pay.

In a May Mercury News  editorial,   “Apple showing a blatant lack of respect for the law”, Santa Clara University professor of law had a   different interpretation.  In the article he states, “While the tax law permits businesses and individuals to arrange their actual affairs to minimize tax, it does not respect agreements that have no independent economic significance apart from purported tax reduction."  The article states that in 2011 Apple did pay $10 million total tax on $22 billion of income of one of its subsidiaries.  This equates to a tax rate of .05%.  Not 5%.  .05%.

The above about Apple minimizing US taxes  is not news!  The New York Times wrote an article “Double Irish with a Dutch Sandwich” about tax avoidance strategies and Apple (other companies as well) in April 2012.

Domestically, Apple manages much of its investments to minimize state taxes by doing these  through its Apple's Braeburn Capital subsidiary  in Reno, Nevada. This way, they  avoid California 9% state income tax.

Apple’s   2012 “Project Jonathan”,  will enable Apple to save millions in Nevada taxes.  They are  building a data center outside of Reno and putting in almost $1 billion in servers.  The state will waive all but 2 percent of the sales tax rate for the server equipment Apple purchases for the data center.  “But by opening a second location in a special tourism improvement district in downtown Reno — an office meant simply to receive shipment of those servers — Apple is eligible to be reimbursed 75 percent of the 2 percent sales tax it still owes.”  This means that the overall sales tax Apple pays will be 0.5% rather than 7.5%.  Quite impressive and good negotiating on Apple’s part.  That part about the second office that will do little more than receive the servers?  A bit dicey.

Once again, minimizing taxes isn’t illegal.   

Perhaps there should be an  INC test (a new acronym!) that the IRS looks at for companies.  Dealings with Ireland, the Netherlands, and the Cayman Islands.

http://kensek.blogspot.com/2012/06/reno-agrees-to-tax-breaks-to-attract.html

 

http://www.forbes.com/sites/connieguglielmo/2013/05/21/apple-called-a-tax-dodger-by-senate-committee-apple-says-system-needs-to-be-dramatically-simplified

 

http://www.mercurynews.com/opinion/ci_23310792/david-hasen-apple-demonstrating-blatant-lack-respect-tax

 

http://kensek.blogspot.com/2012/04/double-irish-with-dutch-sandwich-yummy.html

Double Irish with a Dutch Sandwich – Yummy Way For Corporations to Reduce Federal Taxes

The “Double Irish with a Dutch Sandwich” has been getting a lot more press lately just because of that darned deficit and that Apple uses this technique to help reduce their Federal taxes.  A hundred million here.  A hundred million there.  Soon, it adds up to billions.  Cupertino, California based Apple also routes some  revenue through Nevada, which ultimately saves state income tax they would have pay in California on investment income.  

The link below leads to a graphic showing  how this works using a pair of Ireland subsidiaries. In Apple's case, the subsidiaries are   named Apple Operations International and Apple Sales International. You then route profits  through the Netherlands.  Store the profits in the Cayman Islands/Caribbean or other  friendly tax havens and voila!  It is legal.  

A number  of US firms do this.  Look at a company's  annual report or their web site.  If they have offices/sites in these countries (Luxembourg as well), there’s a good chance that....  It’s great for software firms. It's worth clicking on the link below just to see the graphic explaining everything.

http://www.nytimes.com/interactive/2012/04/28/business/Double-Irish-With-A-Dutch-Sandwich.html   

By managing its investments through a subsidiary in Reno, Nevada,  Apple avoids California’s 8.84% tax rate.  In Nevada, there is neither state corporate income tax nor capital gains tax. Apple did prepare a response for the NY Times, defending their practices and talking about their job creation in the US. 

http://www.nytimes.com/2012/04/29/business/apples-response-on-its-tax-practices.html?_r=1    

All of the above is legal.  Apple and other companies are just aggressively making best use of applicable tax laws to help minimize the taxes they pay.  In fact, if you are a proponent of discounted cash flow models to help determine a firm’s valuation, minimizing taxes  helps increase  cash flow, which leads to a higher stock price or a higher valuation for an IPO (Initial Public Offering). .  

“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.”

According to the article, “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."   Apple has not released estimates that are more recent.   Lots of iPods on a per capita basis!

One downside for companies using the above is that when money is sent overseas, it cannot be returned to the United States without incurring a new tax bill.  That’s why firms have been urging Congress to have a “repatriation holiday” that would permit US companies to bring some of their profits offshore back without owing large taxes.

Below is a link to the complete NY Times article.  It’s a great read.  You don’t need to be an accountant to understand it.  The link below will probably even work on an iPad!  Read while drinking an Irish coffee and having a Dutch pastry.   

http://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations.html?ref=business