Apple’s tax rate: 9.8 percent?

A weekend story from the New York Times shared a surprising statistic: Apple paid just $3.3 billion on $34.2 billion of profits last year — giving it a tax rate of just 9.8 percent.

The report, which points out that nearly every major technology firm has its share of tax tricks up its sleeve, says Apple accomplishes this feat with a two-pronged tax strategy. For domestic sales, the company pays profits as a royalty on a subsidy it owns in Ireland, which are then routed to a tax haven. For overseas sales, the company uses a second Irish subsidy, routes the profits through The Netherlands to avoid European taxes, and then sends its profits to its tax haven via the first Irish subsidy. (This strategy is called the “Double Irish with a Dutch Sandwich,” the report says.)

Tech firms, the report says, pay about one-third less in taxes than do other companies on the Standard & Poor’s 500.

Apple issued a statement in response to the article, saying that it “pays an enormous amount of taxes which help our local, state and federal governments. 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.”

Forbes contributor Tim Worstall, however, has challenged the Times’s accounting. Worstall said that the 9.8 percent figure, which reported earlier by the Greenlining Institute, uses the wrong calculations for Apple’s tax share. According to Worstall, Geenling counts the cash paid in taxes in 2011 based on Apple’s profits for that year, ending up with 9.8 percent. But annual tax bills come due after the previous year’s full profits are counted, Worstall says, meaning that Apple’s 2011 tax payment should be based on its 2010 earnings.

Worstall uses a summary of federal tax law from an About.com article to explain requirements for paying estimated quarterly taxes for corporations. He then calculates Apple’s 2011 tax bill based on its 2010 profits. His result: In 2011, Apple paid $3.3 billion on 2010 profits of about $18 billion, at a tax rate of 18 percent.

In its own tax filings, Apple reported these tax rate figures paid in the last three years: “approximately 24.2%, 24.4% and 31.8% for 2011, 2010 and 2009, respectively.”

Samuel Kang, a co-author of the Greenlining Institute report, said that the nonprofit organization believed its calculation method was the “best indicator, given all the conflicting tax deadlines.”

Regardless of the method used, he said, both Worstall’s and Greenlining’s numbers are lower than the rate Apple reported.

“Somehow Apple’s still over 24 percent,” he said, adding that there needs to be more transparency in the way taxes are reported. “That’s still a huge discrepancy. It appears to me that nobody knows or has an accurate read on what the company has actually paid.”

Even Apple’s reported rate is significantly less than the 35 percent federal income tax rate. The company attributes its smaller tax burden to the tactics described in the Times report -- “primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S.”

Related stories:

Report: Apple strategy helps to legally cut its global tax bill by billions every year

Samsung, Apple top Nokia in smartphone shipments

Is Apple like Sony?

Hayley Tsukayama covers consumer technology for The Washington Post.

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