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

Google Agrees to Pay $22.5M for Apple Browser Breach

To paraphrase  a song from several years ago,  “Oops, you did it again.”  Google will pay   $22.5 million to settle allegations by the U.S. Federal Trade Commission that it breached Apple’s   Safari Internet browser to track individuals browsing behavior.    To put the size of the penalty into perspective, at the end of the last fiscal year, Google had total cash of $41.7 billion.  The penalty won’t  put too large a dent in their cash.  

According to the FTC, Google deceived consumers and violated terms of a consent decree signed with the commission in 2011 when it planted   cookies on Safari, bypassing Apple software’s privacy settings.  This allowed Google track users’ Internet browsing behavior.  The FTC charged that Google's actions violated the  decree that was to prevent Google from misrepresenting the extent of control that customers have over the collection of their information.   

The FTC is empowered to levy penalties as large as $16,000 a day.  Perhaps a larger and more appropriate penalty, $4.99 per user.  In addition, force the little Android person to wear a cone of shame from Pixar’s “Up” and “Monster’s Inc.”  for a year on the Google search site.  Create a little cartoon app that causes the Android  to jerk its  head around when you type in either “cookie” or “squirrel”. 

This is the largest fine the FTC has ever levied against a company. The FTC  also ordered Google to disable all the tracking cookies.   The FTC is giving a fair amount of time for Google to come into complete compliance  Google has  until February 2014 to do so.  

  

 “No matter how big or small, all companies must abide by FTC orders against them and keep their privacy promises to consumers, or they will end up paying many times what it would have cost to comply in the first place,” stated FTC Chairman Jon Leibowitz. Other companies the FTC has entered into settlements on privacy allegations in the past  include Facebook,   Twitter Inc. and MySpace Inc.

“Trust no one” seems to be the operative phrase when it comes to protecting your personal privacy.  Individuals should read up on how to turn off tracking in their web browser,  both in Apple’s and other browsers. 

 http://www.businessweek.com/news/2012-08-09/google-said-to-face-fine-by-u-dot-s-dot-over-apple-safari-breach

Reno Agrees to Tax Breaks to Attract Apple Project

Sometimes you just have to give a company a tax break.  Regardless of size.  On Wednesday, the Reno City Council approved major tax breaks to coax Apple to open two facilities in northern Nevada as part of a $1 billion investment over 10 years.  In exchange for this, Apple will be building a 350-acre data center just east of Sparks for its cloud computing service.  The negotiations were done under the name “Project Jonathan” for the apple. 

Reno officials agreed to the city's portion of a deal that includes $89 million in county, city and state tax abatements.  Analysts say that's a 79 percent reduction in Apple's tax burden.  They predict the project will create about 500 temporary construction jobs and, once completed, generate $343 million in economic activity over the next decade.

The data center will eventually employ up to 41 full-time employees and 200 long-term contract employees.  Construction will create 580 temporary jobs, according to the Reno Gazette-Journal.

According to the Las Vegas Sun, of the $105 million in tax revenue the project is expected to produce during a ten-year period, state, and local governments will see just $16 million.  First, the state can waive all but 2 percent of the sales tax rate for the server equipment Apple purchases for the data center.   

Then,by opening a second location in a special tourism improvement district in downtown Reno (Primarily to receive the servers. These  will then get trucked out to the actual data center) Apple will be eligible to be reimbursed 75 percent of the 2 percent sales tax it still owes.  The overall sales tax for the expected $1 billion in servers Apples buys will be   0.5% rather  than 7.5%.

This isn’t Apple’s only foray into Nevada.  By managing its investments through a subsidiary in Reno, Apple avoids California’s 8.84% tax rate.  In Nevada, there is neither state corporate income tax nor capital gains tax.  Major tax savings versus having this done in California. 

   

Sometimes you have to wonder who does the numbers on these deals.  Probably the same people who do justifications for cities and states to pay much of the cost of new sports  facilities.  The county commission’s endorsement in a hearing in a hearing that lasted   20 minutes, with no one testifying in opposition.  Overall, a sweet iDeal for Apple. 

Average daily high during the summer around Sparks.  90 degrees F. Average daily low during the winter. About 20 degrees F. There will  be some major power used for  at this facility, just for  heating and cooling.

http://www.siliconvalley.com/latest-headlines/ci_20956109/tech-ticker-reno-tax-breaks-lure-apple-dish

Inside Apple, How the Company Really Works

Fortune Magazine Senior Editor at Large   Adam Lashinksy spoke to students  at Stanford University Wednesday   as part of the DFJ Entrepreneurial Thought Leaders lecture series.  The topic - Inside Apple.  Lashinsky is  the author of   “Inside Apple: How America’s Most Admired – and Secretive – Company Really Works”.   The lecture took place at NVIDIA Auditorium in the Huang Engineering Center, close to   the Packard Electrical Engineering Building and Gates Computer Science Building.

“Apple doesn’t want us to know what goes on inside of Apple,” stated Lashinsky.  At the store on the main Apple campus, individuals can buy a shirt that has on it,   “I visited the Apple campus.  But that’s all I’m allowed to say.”

He felt that Apple’s way of doing business violates “Everything you learned in business school.”  Lashinsky emphasized that businesses should learn from Apple, but not try to copy them.  “Competitors can better understand how to go against Apple by understanding how Apple does it”.

“Today, the company is not led by entrepreneurs.”  Nonetheless, Lashinsky  felt that the company is entrepreneurial and that people under Jobs were challenged (even rudely) to do their best work. 

“Jobs ran Apple as a productive narcissist," Lashinsky said.  He explained that , the company had become a number of fiefdoms by the time Jobs returned   in the 90's. .  They had become a fractionalized company.  Jobs wanted one fiefdom, run by him.  

As examples of  centralizing his fiefdom and focusing  Apple, Jobs slashed the number of products the company offered when he returned to four. Multiple advertising budgets under multiple people were combined into one.  All execs reported to Jobs.    Steve Jobs hated organizational charts,.Something about not making it easy to not poach members of the executive team. Jobs’ right hand person when he returned to Apple was Tim Cook, who is now CEO of the company.  

Apple’s campus, culture, and work are compartmentalized, according to Lashinsky.  Everything is a secret.  If employees aren’t working on a specific project, their card keys won’t give them access to areas dedicated to that project.  Individual’s not working on a product’s UI, for example, may not even know what the UI looks like until the product introduction is held.

  

Apple managers  micromanage, operating on a milestone basis.  Each action item is assigned to one person, the DRI, for "directly responsible individual".

There aren’t a lot of politics at Apple, Lashinksy stated.  “You don’t have a lot of information to play politics.  So you go to work.”

 “Apple has a culture of fear”, according to Lashinsky.  They have the “ultimate need to know culture.".     Part of the culture is that Apple keeps secrets from itself.  “You don’t talk about what you’re working on.  You charge forward with 100% of your energy” to do great things 

Apple operates on the basis that customers don’t really know what they want/need until it’s provided to them. Then when the product is introduced, the company can “delight its customers with the next new thing.”  He contrasted Apple with companies that do a lot of market research on products.  

As part of its rewards for employees, Apple has an annual Top 100 retreat.    Attendees  are not chosen by rank.  Under Jobs, the meeting room at the retreat was swept for bugs.  Jobs wouldn’t let people take when food servers were in the room.

One Apple's obsessions is their internal focus on integration between marketing,   manufacturing, product management, engineering, and design in a  “Highly  regimented, milestoned way.  Design is paramount at Apple.”

Some other keys to  Apple's  success:

Stay on script.  Determine the message and stay with it.  Keep the press at arm’s length, except important reviewers.  He mentioned the Wall Street Journal’s Walt Mossberg as one of those reviewers.

“Simplify, simplify, simplify”   is on the wall in the marketing building on the main campus,    Lines are drawn through the first two simplifies. 

Sweat the details.  “I would submit that most companies are bad at it.”  If you obsess, it leads to excellence, the company feels.

 Lashinsky felt that Jobs left the company with approximately an 18 month roadmap. It should get interesting after that. 

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