Apple avoids paying billions of dollars in taxes to the US and other countries thanks to a number of legal strategies that include setting up subsidiaries far from its headquarters in Cupertino, California. According to the New York Times, Apple has set up offices in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands to reduce the amount of taxes it pays. While such practices are not uncommon among companies, Apple’s methods are drawing notice as, even though the company is raking in titanic profits (up to $45.6 billion this fiscal year, a record for American business), its tax rate has remained low.
Last year, Apple made a reported profit of $34.2 billion and paid cash taxes of $3.3 billion around the world, a tax rate of 9.8 percent. In contrast, Wal-Mart’s tax rate on a booked profit of $24.4 billion was 24 percent, resulting in taxes of $5.9 billion.
Apple has extended the innovation that has created its consumer-delighting products to its accounting methods, the New York Times suggests:
Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies.
On the one hand, it is hardly news to hear that a global company with profits and a profile like that of Apple’s has created such overseas subsidiaries in order to take advantage of generous tax breaks offered by governments (such as Ireland’s) eager to have Apple’s business and, too, its jobs.
The crucial differences lies in how Apple is making its profit. While some of this is, of course, from sales of iPhones, iPads, computers and the like, Apple (as well as Google, Amazon, Hewlett-Packard and Microsoft, to name a few companies) also derives its profits from royalties on patents and intellectual property and from digital products, such as songs that are downloaded.
The result is that, even while the technology industry is increasingly the largest and most valued in the U.S., government and corporate data reveal that such companies are the least taxed. A review of the tax records of the the 71 technology companies in the Standard & Poor’s 500-stock index (including Apple, Google and Dell) shows that they all paid worldwide cash taxes at a rate that is a third less than that of other S. & P. companies, says the New York Times. Powerful tech companies functioning in global markets are able to do this by taking advantage of “tax codes written for an industrial age and ill suited to today’s digital economy.”
The mega-profits Apple is posting are in stark contrast to the severe budget crisis — a $9.2 billion budget shortfall — that California faces. The state is cutting health care programs, has raised tuition at state universities and increased out-of-state enrollment, drastically cut services for individuals with disabilities and proposed reducing the education budget by $4.8 billion. The cuts to California’s education system are all the more glaring as Apple has aggressively portrayed itself as pro-education and marketed its products to schools.
Apple has given $50 million to Stanford University in the past two years and the same amount to an African aid organization. Of course Apple can do as it will with its money but it is noticeable that those massive amounts have been given to a wealthy private university and to an organization that is, like the company’s subsidiaries around the world, distant from the U.S.’s shores.
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