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Old Apr 29, 2012, 09:09 AM   #1
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How Apple Minimizes its Corporate Tax Burden




In the latest installment of its "iEconomy" series, The New York Times takes a look at how Apple minimizes its corporate tax burden, taking advantage of a number of legal maneuvers and loopholes around the world. Apple's strategies are of course fully legal and used by many other corporations, but with a spotlight on Apple as it has rapidly risen to become the world's most valuable publicly-traded company with record-setting profits, it has obviously attracted much attention about how it handles its money.
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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.
Among the tactics used by Apple:

- Setting up subsidiaries in low-tax locations such as Nevada, Ireland, Netherlands, Luxembourg, and the British Virgin Islands, routing as much revenue as possible through these locations. By routing much of its U.S. revenue through its Braeburn Capital subsidiary in tax-free Reno, Nevada, Apple is able to avoid California's corporate tax rate of 8.84%, while also reducing its tax burden on money earned in other states.

- Apple's iTunes S. r.l. subsidiary in Luxembourg consists mainly of a mailbox and a few dozen employees, but records $1 billion per year in revenue as the entity responsible for all iTunes Store transactions throughout Europe, Africa, and the Middle East. With the iTunes Store offering strictly downloadable goods, Apple is able to take advantage of favorable tax treatment available in Luxembourg as part of the country's efforts to attract businesses.

- Apple has substantial operations in Ireland, but the report notes that one of the main benefits of locating there is that Apple is able to internally transfer its patent royalty earnings to a subsidiary there, with the money being subjected to a 12.5% tax rate rather than the 35% tax rate found in the United States. More than one-third of Apple's worldwide revenue is booked through its Irish subsidiaries.

- Apple records 70% of its revenue overseas, even though much of the product value would normally be considered to derive from their design, which occurs in the United States.




Overall, Apple paid $3.3 billion in corporate taxes in 2011 on earnings of $34.2 billion in profits, an effective tax rate of 9.8%, which is considered low by corporate standards. But with the company's tactics relying on a complex and disjointed system of tax laws throughout the world, it is difficult for the United States to single-handedly require Apple to book more of its revenue in its home country, which currently has the highest corporate tax rates in the world when federal and average state rates are included.

Apple has provided an official response to The New York Times, highlighting its role in job creation in the United States, the tax payments it does make, and its charitable giving. The company also notes that its business practices are in full compliance with all laws and accounting rules.

Update: As noted by Forbes, The New York Times is reporting an incorrect calculation of Apple's effective tax rate for 2011 of 9.8%, simply reusing numbers released several weeks earlier by the Greenlining Institute. Forbes points out that Apple's $3.3 billion in taxes paid during 2011 come from its quarterly estimated tax payments made during the year, but that federal tax guidelines instruct taxpayers to base their calculations on the previous year's earnings.

Consequently, Apple's 2011 quarterly tax payments are actually based on 2010's earnings, with the correct amount of tax for 2011 not being settled until Apple files its final taxes in 2012. And given Apple's strong growth rate, the incorrect assumption that Apple's 2011 tax payments were based on 2011's earnings grossly understates Apple's tax rate.

As outlined in his previous piece debunking the Greenlining Institute's claim, Tim Worstall notes that Apple reports its effective tax rate in its annual 10-K filings with the Securities and Exchange Commission, and that rate came in at 24.2% for 2011, much more in line with industry norms.

Article Link: How Apple Minimizes its Corporate Tax Burden
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Old Apr 29, 2012, 09:11 AM   #2
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rich get richer...
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Old Apr 29, 2012, 09:12 AM   #3
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Perfectly legal, but this is the kind of behaviour that should get alot of attention in order to bring badwill to the companies doing it.
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Old Apr 29, 2012, 09:16 AM   #4
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Originally Posted by Lennholm View Post
Perfectly legal, but this is the kind of behaviour that should get alot of attention in order to bring badwill to the companies doing it.
Couldn't agree more.

Taxes are created and collected for good reason, and companies/people who dodge them are cheating that system. This puts pressure on those who do pay taxes, and/or causes governments to have less funds to achieve their goals.

Bad Apple, bad.
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Old Apr 29, 2012, 09:16 AM   #5
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Don't blame Apple. It's the current tax code that leaves the burden on the individual's. Look it up!
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Old Apr 29, 2012, 09:16 AM   #6
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Originally Posted by Lennholm View Post
Perfectly legal, but this is the kind of behaviour that should get alot of attention in order to bring badwill to the companies using it.
Why?

If store A sells you a product for $20 and store B sells you the same product for $5, you would buy it from store B, right? You don't feel bad about taking business away from store A, you don't feel like you're doing wrong, you just evaluate the options and take the cheapest route. Perhaps to get the cheaper price from store B you need to set up a membership account or jump through a few hoops, but you'd do it if it saved you enough money.
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Old Apr 29, 2012, 09:16 AM   #7
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Originally Posted by Lennholm View Post
Perfectly legal, but this is the kind of behaviour that should get alot of attention in order to bring badwill to the companies doing it.

It's the fault of our corrupt Congress who write a corrupt tax code.
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Old Apr 29, 2012, 09:17 AM   #8
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Businesses do not pay taxes, ever.

The costs are merely added to the prices of goods and services.

Instead, we should be looking at Apple's payroll. How many hundreds of millions of dollars do their employees get paid?

THEY pay taxes.
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Old Apr 29, 2012, 09:21 AM   #9
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The company also notes that its business practices are in full compliance with all laws and accounting rules.

There is legality and then there are ethics...
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Old Apr 29, 2012, 09:22 AM   #10
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Paying taxes is part of being green and good for the environment.
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Old Apr 29, 2012, 09:22 AM   #11
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Good for Apple. Businesses help society by providing great products and giving jobs to members of that society so that they in turn may buy from other businesses.

If Apple saves money from not paying a lot of taxes, then Apple has more incentives to offer top engineering/management/marketing talent to make their products even better and to make their employees/customers even happier.

Apple pays its "fair share" to society simply by existing.
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Old Apr 29, 2012, 09:22 AM   #12
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It's the fault of our corrupt Congress who write a corrupt tax code.
Not just Congress and the federal tax code are to blame. Apple seems to negotiate deals on local taxes almost everywhere in the US when they build a new facility. They simply pack up and move to another location if the local government holds its ground. Personally I'd like to see Apple engage in a little less tax avoidance, for whether it is legal or not is irrelevant. It is immoral.

As for the rich getting richer, I'd love to see a scatterplot showing net worth of individuals and corporations in the US on the x-axis and taxes paid on the y-axis.... I'd like to see the same in the UK, where I reside.
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Old Apr 29, 2012, 09:23 AM   #13
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Originally Posted by notjustjay View Post
Why?

If store A sells you a product for $20 and store B sells you the same product for $5, you would buy it from store B, right? You don't feel bad about taking business away from store A, you don't feel like you're doing wrong, you just evaluate the options and take the cheapest route. Perhaps to get the cheaper price from store B you need to set up a membership account or jump through a few hoops, but you'd do it if it saved you enough money.
Because even if it's legal it's still unethical. If store A has a higher price because they take their moral responsibility while store B does not, allowing them to reduce the price, I would feel bad for buying from store B instead of store A, and that's why consumers should be made aware.
I don't see how your example is even relevant.
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Old Apr 29, 2012, 09:25 AM   #14
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I don't blame any corporation for using all legal, available means to reduce their tax burden. It's just good business. Perhaps we should be looking at why corporate tax rates in the U.S. are so high that the other, more convoluted options are economically feasible.

The one thing I will say about this article is that you just know there will be many Apple bashers out there that will grab on to this and continue to single out Apple and paint it in a bad light as a result even though they are not the only ones doing this. Like the whole Foxconn labor issue, where a cursory look at what the media reported made it sound like Apple was the only beneficiary of whatever Foxconn does with regard to labor.
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Old Apr 29, 2012, 09:25 AM   #15
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Originally Posted by Lennholm View Post
Because even if it's legal it's still unethical. If store A has a higher price because they take their moral responsibility while store B does not, allowing them to reduce the price, I would feel bad for buying from store B instead of store A, and that's why consumers should be made aware.
I don't see how your example is even relevant.
Do you have that much money to buy a product that is four times more expensive?

Not everyone is rich enough to be that 'ethical'
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Old Apr 29, 2012, 09:26 AM   #16
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Originally Posted by charlieegan3 View Post
rich get richer...
The clever getting richer. If US taxes weren't total garbage, this wouldn't be a problem.

----------

Quote:
Originally Posted by Lennholm View Post
Because even if it's legal it's still unethical. If store A has a higher price because they take their moral responsibility while store B does not, allowing them to reduce the price, I would feel bad for buying from store B instead of store A, and that's why consumers should be made aware.
I don't see how your example is even relevant.
What does ethics have to do with it? Apple clearly pays everyone it owes money to by operating overseas...
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Old Apr 29, 2012, 09:26 AM   #17
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You can't fault companies and people for taking advantage of legal loopholes but this is a perfect example of why we should eliminate them.
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Old Apr 29, 2012, 09:29 AM   #18
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Good for Apple. The more US companies that expose the idiocracy of our tax code the quicker things might change.

The US government has nobody to blame but themselves.
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Old Apr 29, 2012, 09:33 AM   #19
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Originally Posted by -Ken- View Post
Do you have that much money to buy a product that is four times more expensive?

Not everyone is rich enough to be that 'ethical'
The point is consumers should be made aware so that they can decide for themselves what their priorities are.
We the consumers collectively have the power to control how companies practice their business.

----------

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Originally Posted by AustinIllini View Post
What does ethics have to do with it? Apple clearly pays everyone it owes money to by operating overseas...
Do you even grasp the concept of ethics as opposed to legal obligation?
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Old Apr 29, 2012, 09:33 AM   #20
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Every company that can, does this. These "schemes", offshores and so on are helping to implode the world economy. To fight this, countries either lower their own taxes on businesses which then they have to get from individuals or somekind of global legislation (UN stuff) is put in place to stop this from happening. I believe the second will never happen so...
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Old Apr 29, 2012, 09:33 AM   #21
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Minimizing taxes is the ethical thing to do

A company is ethically obligated to minimize its own tax burden IMO. I would fault a company that does otherwise. The humans involved in the company (employees, investors) already pay taxes, as well they should since they're the ones who directly benefit from most government services.

Blaming a company for taking advantage of legal tax loopholes is like blaming water for finding leaks in a boat.
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Old Apr 29, 2012, 09:33 AM   #22
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Originally Posted by Lennholm View Post
The point is consumers should be made aware so that they can decide for themselves what their priorities are.
We the consumers collectively have the power to control how companies practice their business.
And the intelligent consumer should buy from Apple because the intelligent consumer knows the price of products would increase if subjected to higher taxes.
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Old Apr 29, 2012, 09:34 AM   #23
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3.3b tax paid? Where is that from? Their last full year financial claims 8.3b income tax, which may not be paid, yet. But it would be their expected liability.
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Old Apr 29, 2012, 09:34 AM   #24
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Originally Posted by VulchR View Post
Not just Congress and the federal tax code are to blame. Apple seems to negotiate deals on local taxes almost everywhere in the US when they build a new facility. They simply pack up and move to another location if the local government holds its ground. Personally I'd like to see Apple engage in a little less tax avoidance, for whether it is legal or not is irrelevant. It is immoral.

As for the rich getting richer, I'd love to see a scatterplot showing net worth of individuals and corporations in the US on the x-axis and taxes paid on the y-axis.... I'd like to see the same in the UK, where I reside.

Apple treats opening new offices the same as any other company. Apple didn't invent local tax breaks, they are simply playing the game. And please show me where Apple has up and moved when not getting a local tax break.
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Old Apr 29, 2012, 09:34 AM   #25
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Originally Posted by AustinIllini View Post
The clever getting richer.
Actually, worldwide the richer have been getting richer. In Western countries like the US and the UK, they have been doing this in part through tax avoidance and outright tax evasion.

As for 'the clever getting richer', I have to ask what was so clever about the lemming-like bankers who drove the global economy into a nosedive? In the UK they seemed to have retired early, using their amassed wealth to sit on their fat, parasitic arses while living a comfortable life doing absolutely nothing of value to anybody.

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.... And please show me where Apple has up and moved when not getting a local tax break.
Fair enough. I was sloppy in my language. They threaten to leave (for instance).
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Last edited by VulchR; Apr 29, 2012 at 09:41 AM.
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