[Vision2020] How Apple Sidesteps Billions in Taxes

[lfalen]

You should not fault anyone for taking advantage of the tax codes. Work to revise tax codes. On a federal level try to get rid of tax exemptions and subsidies. Steve Jobs by the way was a democrat. I do like the fact that he worked with Parents Television Council to try and reduce the amount of porn on television and the internet.
-----Original message-----
From: Art Deco art.deco.studios at gmail.com
Date: Sun, 29 Apr 2012 13:07:55 -0700
To: vision2020 at moscow.com
Subject: [Vision2020] How Apple Sidesteps Billions in Taxes

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> ------------------------------
> April 28, 2012
> How Apple Sidesteps Billions in Taxes By CHARLES
> DUHIGG<http://topics.nytimes.com/top/reference/timestopics/people/d/charles_duhigg/index.html?inline=nyt-per>and
> DAVID
> KOCIENIEWSKI<http://topics.nytimes.com/top/reference/timestopics/people/k/david_kocieniewski/index.html?inline=nyt-per>
> 
> RENO, Nev. — Apple<http://topics.nytimes.com/top/news/business/companies/apple_computer_inc/index.html?inline=nyt-org>,
> the world’s most profitable technology company, doesn’t design iPhones
> here. It doesn’t run AppleCare customer service from this city. And it
> doesn’t manufacture MacBooks or iPads anywhere nearby.
> 
> Yet, with a handful of employees in a small office here in Reno, Apple has
> done something central to its corporate strategy: it has avoided millions
> of dollars in taxes in California and 20 other states.
> 
> Apple’s headquarters are in Cupertino, Calif. By putting an office in Reno,
> just 200 miles away, to collect and invest the company’s profits, Apple
> sidesteps state income taxes on some of those gains.
> 
> California’s corporate tax rate is 8.84 percent. Nevada’s? Zero.
> 
> Setting up an office in Reno is just one of many legal methods Apple uses
> to reduce its worldwide tax bill by billions of dollars each year. As it
> has in Nevada, Apple has created subsidiaries in low-tax places like
> Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some
> little more than a letterbox or an anonymous office — that help cut the
> taxes it pays around the world.
> 
> Almost every major corporation tries to minimize its taxes, of course. For
> Apple, the savings are especially alluring because the company’s profits
> are so high. Wall Street analysts predict Apple could earn up to $45.6
> billion in its current fiscal year — which would be a record for any
> American business.
> 
> Apple serves as a window on how technology giants have taken advantage of
> tax codes written for an industrial age and ill suited to today’s digital
> economy. Some profits at companies like Apple, Google, Amazon,
> Hewlett-Packard and Microsoft derive not from physical goods but from
> royalties on intellectual property, like the patents on software that makes
> devices work. Other times, the products themselves are digital, like
> downloaded songs. It is much easier for businesses with royalties and
> digital products to move profits to low-tax countries than it is, say, for
> grocery stores or automakers. A downloaded application, unlike a car, can
> be sold from anywhere.
> 
> The growing digital economy presents a conundrum for lawmakers overseeing
> corporate taxation: although technology is now one of the nation’s largest
> and most valued industries, many tech companies are among the least taxed,
> according to government and corporate data. Over the last two years, the 71
> technology companies in the Standard & Poor’s 500-stock index — including
> Apple, Google, Yahoo and Dell — reported paying worldwide cash taxes at a
> rate that, on average, was a third less than other S.& P. companies’. (Cash
> taxes may include payments for multiple years.)
> 
> Even among tech companies, Apple’s rates are low. And while the company has
> remade industries, ignited economic growth and delighted customers, it has
> also devised corporate strategies that take advantage of gaps in the tax
> code, according to former executives who helped create those strategies.
> 
> 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.
> 
> Without such tactics, Apple’s federal tax bill in the United States most
> likely would have been $2.4 billion higher last year, according to a recent
> study <http://taxprof.typepad.com/files/134tn0777.pdf> by a former Treasury
> Department economist, Martin A. Sullivan. As it stands, the company paid
> cash taxes of $3.3 billion around the world on its reported profits of
> $34.2 billion last year, a tax rate of 9.8 percent. (Apple does not
> disclose what portion of those payments was in the United States, or what
> portion is assigned to previous or future years.)
> 
> By comparison, Wal-Mart<http://investors.walmartstores.com/phoenix.zhtml?c=112761&p=irol-sec>last
> year paid worldwide cash taxes of $5.9 billion on its booked profits
> of $24.4 billion, a tax rate of 24 percent, which is about average for
> non-tech companies.
> 
> Apple’s domestic tax bill has piqued particular curiosity among corporate
> tax experts because although the company is based in the United States, its
> profits — on paper, at least — are largely foreign. While Apple contracts
> out much of the manufacturing and assembly of its products to other
> companies overseas, the majority of Apple’s executives, product designers,
> marketers, employees, research and development, and retail stores are in
> the United States. Tax experts say it is therefore reasonable to expect
> that most of Apple’s profits would be American as well. The nation’s tax
> code is based on the concept that a company “earns” income where value is
> created, rather than where products are sold.
> 
> However, Apple’s accountants have found legal ways to allocate about 70
> percent of its profits overseas, where tax rates are often much lower,
> according to corporate
> filings<http://files.shareholder.com/downloads/AAPL/1826229879x0xS1193125-11-282113/320193/filing.pdf>.
> 
> 
> Neither the government nor corporations make tax returns public, and a
> company’s taxable income often differs from the profits disclosed in annual
> reports. Companies report their cash outlays for income taxes in their
> annual Form 10-K, but it is impossible from those numbers to determine
> precisely how much, in total, corporations pay to governments. In Apple’s
> last annual disclosure, the company listed its worldwide taxes — which
> includes cash taxes paid as well as deferred taxes and other charges — at
> $8.3 billion, an effective tax rate of almost a quarter of profits.
> 
> However, tax analysts and scholars said that figure most likely overstated
> how much the company would hand to governments because it included sums
> that might never be paid. “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.”
> 
> Apple, in a statement, said it “has conducted all of its business with the
> highest of ethical standards, complying with applicable laws and accounting
> rules.” It added, “We are incredibly proud of all of Apple’s
> contributions.”
> 
> Apple “pays an enormous amount of taxes, which help our local, state and
> federal governments,” the statement also said. “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.”
> 
> The statement did not specify how it arrived at $5 billion, nor did it
> address the issue of deferred taxes, which the company may pay in future
> years or decide to defer indefinitely. The $5 billion figure appears to
> include taxes ultimately owed by Apple employees.
> 
> The sums paid by Apple and other tech corporations is a point of contention
> in the company’s backyard.
> 
> A mile and a half from Apple’s Cupertino headquarters is De Anza College, a
> community college that Steve
> Wozniak<http://topics.nytimes.com/top/reference/timestopics/people/w/stephen_wozniak/index.html?inline=nyt-per>,
> one of Apple’s founders, attended from 1969 to 1974. Because of
> California’s state budget crisis, De Anza has cut more than a thousand
> courses and 8 percent of its faculty since 2008.
> 
> Now, De Anza faces a budget gap so large that it is confronting a “death
> spiral,” the school’s president, Brian Murphy, wrote to the
> faculty<http://www.deanza.edu/budgetinfo/announcements/News01_23_12.html>in
> January. Apple, of course, is not responsible for the state’s
> financial
> shortfall, which has numerous causes. But the company’s tax policies are
> seen by officials like Mr. Murphy as symptomatic of why the crisis exists.
> 
> “I just don’t understand it,” he said in an interview. “I’ll bet every
> person at Apple has a connection to De Anza. Their kids swim in our pool.
> Their cousins take classes here. They drive past it every day, for Pete’s
> sake.
> 
> “But then they do everything they can to pay as few taxes as possible.”
> 
> *Escaping State Taxes*
> 
> In 2006, as Apple’s bank accounts and stock price were rising, company
> executives came here to Reno and established a subsidiary named Braeburn
> Capital to manage and invest the company’s cash. Braeburn is a variety of
> apple that is simultaneously sweet and tart.
> 
> Today, Braeburn’s offices are down a narrow hallway inside a bland building
> that sits across from an abandoned restaurant. Inside, there are posters of
> candy-colored iPods and a large Apple insignia, as well as a handful of
> desks and computer terminals.
> 
> When someone in the United States buys an
> iPhone<http://topics.nytimes.com/top/reference/timestopics/subjects/i/iphone/index.html?inline=nyt-classifier>,
> iPad<http://topics.nytimes.com/top/reference/timestopics/subjects/i/ipad/index.html?inline=nyt-classifier>or
> other Apple product, a portion of the profits from that sale is often
> deposited into accounts controlled by Braeburn, and then invested in
> stocks, bonds or other financial instruments, say company executives. Then,
> when those investments turn a profit, some of it is shielded from tax
> authorities in California by virtue of Braeburn’s Nevada address.
> 
> Since founding Braeburn, Apple has earned more than $2.5 billion in
> interest and dividend income on its cash reserves and investments around
> the globe. If Braeburn were located in Cupertino, where Apple’s top
> executives work, a portion of the domestic income would be taxed at
> California’s 8.84 percent corporate income tax rate.
> 
> But in Nevada there is no state corporate income tax and no capital gains
> tax.
> 
> What’s more, Braeburn allows Apple to lower its taxes in other states —
> including Florida, New Jersey and New Mexico — because many of those
> jurisdictions use formulas that reduce what is owed when a company’s
> financial management occurs elsewhere. Apple does not disclose what portion
> of cash taxes is paid to states, but the company reported that it owed $762
> million in state income taxes nationwide last year. That effective state
> tax rate is higher than the rate of many other tech companies, but as Ms.
> Clausing and other tax analysts have noted, such figures are often not
> reliable guides to what is actually paid.
> 
> Dozens of other companies, including Cisco, Harley-Davidson and Microsoft,
> have also set up Nevada subsidiaries that bypass taxes in other states.
> Hundreds of other corporations reap similar savings by locating offices in
> Delaware.
> 
> But some in California are unhappy that Apple and other California-based
> companies have moved financial operations to tax-free states — particularly
> since lawmakers have offered them tax breaks to keep them in the state.
> 
> In 1996, 1999 and 2000, for instance, the California Legislature increased
> the state’s research and development tax credit, permitting hundreds of
> companies, including Apple, to avoid billions in state taxes, according to
> legislative analysts<http://www.lao.ca.gov/2003/randd_credit/113003_research_development.html>.
> Apple has reported tax savings of $412 million from research and
> development credits of all sorts since 1996.
> 
> Then, in 2009, after an intense lobbying campaign led by Apple, Cisco,
> Oracle, Intel and other companies, the California Legislature reduced taxes
> for corporations based in California but operating in other states or
> nations. Legislative analysts
> say<http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0001-0050/abx3_15_cfa_20090215_133520_asm_floor.html>the
> change will eventually cost the state government about $1.5 billion a
> year.
> 
> Such lost revenue is one reason California now faces a budget
> crisis<http://www.lao.ca.gov/analysis/2012/update/economic-revenue-update-022712.pdf>,
> with a shortfall of more than $9.2 billion in the coming fiscal year alone.
> The state has cut some health care programs, significantly raised tuition
> at state universities, cut services to the disabled and proposed a $4.8
> billion reduction in spending on kindergarten and other grades.
> 
> Apple declined to comment on its Nevada operations. Privately, some
> executives said it was unfair to criticize the company for reducing its tax
> bill when thousands of other companies acted similarly. If Apple
> volunteered to pay more in taxes, it would put itself at a competitive
> disadvantage, they argued, and do a disservice to its shareholders.
> 
> Indeed, Apple’s decisions have yielded benefits. After
> announcing<http://files.shareholder.com/downloads/AAPL/1826229879x0xS1193125-12-182321/320193/filing.pdf>one
> of the best quarters in its history last week, the company said it had
> net profits of $24.7 billion on revenues of $85.5 billion in the first half
> of the fiscal year, and more than $110 billion in the bank, according to
> company filings.
> 
> *A Global Tax Strategy*
> 
> Every second of every hour, millions of times each day, in living rooms and
> at cash registers, consumers click the “Buy” button on iTunes or hand over
> payment for an Apple product.
> 
> And with that, an international financial engine kicks into gear, moving
> money across continents in the blink of an eye. While Apple’s Reno office
> helps the company avoid state taxes, its international subsidiaries —
> particularly the company’s assignment of sales and patent royalties to
> other nations — help reduce taxes owed to the American and other
> governments.
> 
> For instance, one of Apple’s subsidiaries in Luxembourg, named iTunes S.à
> r.l., has just a few dozen employees, according to corporate documents
> filed in that nation and a current executive. The only indication of the
> subsidiary’s presence outside is a letterbox with a lopsided slip of paper
> reading “ITUNES SARL.”
> 
> Luxembourg has just half a million residents. But when customers across
> Europe, Africa or the Middle East — and potentially elsewhere — download a
> song, television show or app, the sale is recorded in this small country,
> according to current and former executives. In 2011, iTunes S.à r.l.’s
> revenue exceeded $1 billion, according to an Apple executive, representing
> roughly 20 percent of iTunes’s worldwide sales.
> 
> The advantages of Luxembourg are simple, say Apple executives. The country
> has promised to tax the payments collected by Apple and numerous other tech
> corporations at low rates if they route transactions through Luxembourg.
> 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.
> 
> “We set up in Luxembourg because of the favorable taxes,” said Robert
> Hatta, who helped oversee Apple’s iTunes retail marketing and sales for
> European markets until 2007. “Downloads are different from tractors or
> steel because there’s nothing you can touch, so it doesn’t matter if your
> computer is in France or England. If you’re buying from Luxembourg, it’s a
> relationship with Luxembourg.”
> 
> An Apple spokesman declined to comment on the Luxembourg operations.
> 
> Downloadable goods illustrate how modern tax systems have become
> increasingly ill equipped for an economy dominated by electronic commerce.
> Apple, say former executives, has been particularly talented at identifying
> legal tax loopholes and hiring accountants who, as much as iPhone
> designers, are known for their innovation. In the 1980s, for instance,
> Apple was among the first major corporations to designate overseas
> distributors as “commissionaires,” rather than retailers, said Michael
> Rashkin, Apple’s first director of tax policy, who helped set up the system
> before leaving in 1999.
> 
> To customers the designation was virtually unnoticeable. But because
> commissionaires never technically take possession of inventory — which
> would require them to recognize taxes — the structure allowed a salesman in
> high-tax Germany, for example, to sell computers on behalf of a subsidiary
> in low-tax Singapore. Hence, most of those profits would be taxed at
> Singaporean, rather than German, rates.
> 
> *The Double Irish*
> 
> In the late 1980s, Apple was among the pioneers in creating a tax structure
> — known as the Double Irish — that allowed the company to move profits into
> tax havens around the world, said Tim Jenkins, who helped set up the system
> as an Apple European finance manager until 1994.
> 
> Apple created two Irish subsidiaries — today named Apple Operations
> International and Apple Sales International — and built a glass-encased
> factory amid the green fields of Cork. The Irish government offered Apple
> tax breaks in exchange for jobs, according to former executives with
> knowledge of the relationship.
> 
> But the bigger advantage was that the arrangement allowed Apple to send
> royalties on patents developed in California to Ireland. The transfer was
> internal, and simply moved funds from one part of the company to a
> subsidiary overseas. But as a result, some profits were taxed at the Irish
> rate of approximately 12.5 percent, rather than at the American statutory
> rate of 35 percent. 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 more recent estimates.)
> 
> Moreover, the second Irish subsidiary — the “Double” — allowed other
> profits to flow to tax-free companies in the Caribbean. Apple has assigned
> partial ownership of its Irish subsidiaries to Baldwin Holdings Unlimited
> in the British Virgin Islands, a tax haven, according to documents filed
> there and in Ireland. Baldwin Holdings has no listed offices or telephone
> number, and its only listed director is Peter Oppenheimer, Apple’s chief
> financial officer, who lives and works in Cupertino. Baldwin apples are
> known for their hardiness while traveling.
> 
> Finally, because of Ireland’s treaties with European nations, some of
> Apple’s profits could travel virtually tax-free through the Netherlands —
> the Dutch Sandwich — which made them essentially invisible to outside
> observers and tax authorities.
> 
> Robert Promm, Apple’s controller in the mid-1990s, called the strategy “the
> worst-kept secret in Europe.”
> 
> It is unclear precisely how Apple’s overseas finances now function. In
> 2006, the company reorganized its Irish divisions as unlimited
> corporations, which have few requirements to disclose financial
> information.
> 
> However, tax experts say that strategies like the Double Irish help explain
> how Apple has managed to keep its international taxes to 3.2 percent of
> foreign profits last year, to 2.2 percent in 2010, and in the single digits
> for the last half-decade, according to the company’s corporate filings.
> 
> Apple declined to comment on its operations in Ireland, the Netherlands and
> the British Virgin Islands.
> 
> Apple reported in its last annual disclosures that $24 billion — or 70
> percent — of its total $34.2 billion in pretax profits were earned abroad,
> and 30 percent were earned in the United States. But Mr. Sullivan, the
> former Treasury Department economist who today writes for the trade
> publication Tax Analysts, said that “given that all of the marketing and
> products are designed here, and the patents were created in California,
> that number should probably be at least 50 percent.”
> 
> If profits were evenly divided between the United States and foreign
> countries, Apple’s federal tax bill would have increased by about $2.4
> billion last year, he said, because a larger amount of its profits would
> have been subject to the United States’ higher corporate income tax rate.
> 
> “Apple, like many other multinationals, is using perfectly legal methods to
> keep a significant portion of their profits out of the hands of the
> I.R.S.,” Mr. Sullivan said. “And when America’s most profitable companies
> pay less, the general public has to pay more.”
> 
> Other tax experts, like Edward D.
> Kleinbard<http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1791769>,
> former chief of staff of the Congressional Joint Committee on Taxation,
> have reached similar conclusions.
> 
> “This tax avoidance strategy used by Apple and other multinationals doesn’t
> just minimize the companies’ U.S. taxes,” said Mr. Kleinbard, now a
> professor of tax law at the University of Southern California. “It’s German
> tax and French tax and tax in the U.K. and elsewhere.”
> 
> One downside for companies using such strategies is that when money is sent
> overseas, it cannot be returned to the United States without incurring a
> new tax bill.
> 
> However, that might change. Apple, which holds $74 billion offshore, last
> year aligned itself with more than four dozen companies and organizations
> urging Congress for a “repatriation holiday” that would permit American
> businesses to bring money home without owing large taxes. The
> coalition<http://www.winamericacampaign.org/>,
> which includes Google, Microsoft and Pfizer, has hired dozens of lobbyists
> to push for the measure, which has not yet come up for vote. The tax break
> would cost the federal government $79 billion over the next decade,
> according to a Congressional report.
> 
> *Fallout in California*
> 
> In one of his last public appearances before his death, Steven P.
> Jobs<http://topics.nytimes.com/top/reference/timestopics/people/j/steven_p_jobs/index.html?inline=nyt-per>,
> Apple’s chief executive, addressed Cupertino’s City Council last June,
> seeking approval to build a new headquarters.
> 
> Most of the Council was effusive in its praise of the proposal. But one
> councilwoman, Kris Wang, had questions.
> 
> How will residents benefit? she asked. Perhaps Apple could provide free
> wireless Internet to Cupertino, she suggested, something Google had done in
> neighboring Mountain View.
> 
> “See, I’m a simpleton; I’ve always had this view that we pay taxes, and the
> city should do those things,” Mr. Jobs replied, according to a video of the
> meeting <http://www.youtube.com/watch?v=gtuz5OmOh_M>. “That’s why we pay
> taxes. Now, if we can get out of paying taxes, I’ll be glad to put up
> Wi-Fi.”
> 
> He suggested that, if the City Council were unhappy, perhaps Apple could
> move. The company is Cupertino’s largest taxpayer, with more than $8
> million in property taxes assessed by local officials last year.
> 
> Ms. Wang dropped her suggestion.
> 
> Cupertino, Ms. Wang said in an interview, has real financial problems.
> “We’re proud to have Apple here,” said Ms. Wang, who has since left the
> Council. “But how do you get them to feel more connected?”
> 
> Other residents argue that Apple does enough as Cupertino’s largest
> employer and that tech companies, in general, have buoyed California’s
> economy. Apple’s workers eat in local restaurants, serve on local boards
> and donate to local causes. Silicon Valley’s many millionaires pay personal
> state income taxes. In its statement, Apple said its “international growth
> is creating jobs domestically, since we oversee most of our operations from
> California.”
> 
> “The vast majority of our global work force remains in the U.S.,” the
> statement continued, “with more than 47,000 full-time employees in all 50
> states.”
> 
> Moreover, Apple has given nearby Stanford University more than $50 million
> in the last two years. The company has also donated $50 million to an
> African aid organization. In its statement, Apple said: “We have
> contributed to many charitable causes but have never sought publicity for
> doing so. Our focus has been on doing the right thing, not getting credit
> for it. In 2011, we dramatically expanded the number of deserving
> organizations we support by initiating a matching gift program for our
> employees.”
> 
> Still, some, including De Anza College’s president, Mr. Murphy, say the
> philanthropy and job creation do not offset Apple’s and other companies’
> decisions to circumvent taxes. Within 20 minutes of the financially ailing
> school are the global headquarters of Google, Facebook, Intel,
> Hewlett-Packard and Cisco.
> 
> “When it comes time for all these companies — Google and Apple and Facebook
> and the rest — to pay their fair share, there’s a knee-jerk resistance,”
> Mr. Murphy said. “They’re philosophically antitax, and it’s decimating the
> state.”
> 
> “But I’m not complaining,” he added. “We can’t afford to upset these guys.
> We need every dollar we can get.”
> 
> Additional reporting was contributed by Keith Bradsher in Hong Kong, Siem
> Eikelenboom in Amsterdam, Dean Greenaway in the British Virgin Islands,
> Scott Sayare in Luxembourg and Jason Woodard in Singapore.
> 
> 
> -- 
> Art Deco (Wayne A. Fox)
> art.deco.studios at gmail.com
> 
>