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How to make $30 billion and pay no corporate income tax, the Apple way

Apple went to Ireland, and it found a pot of gold. Or more precisely, it managed to bring in $30 billion in overseas profits over a four-year period without paying a dime of corporate income tax to the Irish, American or any other national government.

That is one key conclusion in a new report from the Senate Permanent Subcommittee on Investigations on the computer giant’s strategies for avoiding  U.S. corporate income tax.  It is a rare and detailed window into how multinationals juggle their international operations to avoid having to pay the taxman. This report may be about Apple, but the information it contains will sound familiar to anyone who has talked to tax lawyers or studied the 10-Ks of other major companies that do business around the world.

appleicon (Russel A. Daniels/Associated Press)

“Apple complies fully with both the laws and spirit of the laws,” the company said in prepared testimony on the matter it posted to its Web site (CEO Tim Cook is scheduled to testify Tuesday). “And Apple pays all its required taxes, both in this country and abroad.” Nothing in the report contradicts that assertion, and that is why what it reveals is all the more startling. This isn’t some rogue company playing fast and loose with the tax code. This is one of America’s most successful companies finding ways to shift things around, legally and in plain sight.

Here’s how it works:

Apple Operations International is registered in Cork, Ireland, but has “no physical presence at that or any other address,” according to the report. Indeed, the corporate entity has existed for 30 years and apparently never had a single employee. Of the three people on its board, all Apple employees, two live in California; 32 of its last 33 board meetings took place in Cupertino, and the Irish director participated in seven of them. Its assets are managed by a Nevada company, and held in bank accounts in New York.

It falls in a strange loophole: Because it is not managed and controlled in Ireland, that nation does not tax its earnings, even at the low Irish corporate income tax rate. And because it is not registered in the United States, it has owed no American taxes. It would be a little like an individual living in America and earning a living from investments in Ireland and thus being able to avoid paying taxes to either government—a strategy that decidedly would not work, by the way.

From 2009 to 2012, the Irish affiliate received $29.9 billion in dividend income. The upshot, according to the report: "According to Apple, AOI’s net income made up 30% of Apple’s total worldwide net profits from 2009-2011, yet Apple also disclosed to the Subcommittee that AOI did not pay any corporate income tax to any national government during that period."

There is another clever strategy that Apple uses that the new report documents — holding a large chunk of its intellectual property in low-tax Irish affiliates as well. Think of it this way: If you live in, say, Germany and buy an IPhone, you are buying a physical object that was assembled in China from parts that come from all over. But you are also buying a piece of the intellectual property of Apple — a benefit from the labor of thousands of designers and programmers and marketers who are in California.

Apple's international affiliates. Source: Prepared by Apple for the Senate Permanent Subcommittee on Investigations.

But Apple has no desire to pay high California and U.S. income tax on all its intellectual property. So instead, Apple Inc. shares that cost with its Irish affiliates in proportion to their sales. As the report puts it:  “By structuring its intellectual property rights and distribution operations in the manner it did, Apple Inc. was able to avoid having worldwide Apple sales revenue related to its intellectual property attributed to itself in the United States where it would be subject to taxation in the year received. Instead, Apple Inc. arranged for a large portion of its worldwide sales revenue to be attributed to [Apple Service International] in Ireland. As explained earlier, according to Apple, Ireland has provided Apple affiliates with an income tax rate of less than 2% and as low as 0.05%."

In its prepared testimony, Apple makes a point of emphasizing all the even more aggressive tax avoidance strategies it doesn't pursue. "Apple does not use tax gimmicks. Apple does not move its intellectual property into offshore tax havens and use it to sell products back into the U.S. in order to avoid U.S. tax; it does not use revolving loans from foreign subsidiaries to fund its domestic operations;  it does not hold money on a Caribbean island; and it does not have a bank account in the  Cayman Islands."

The subcommittee is investigating Apple's tax strategies as part of a broader campaign for corporate income tax reform in the United States. The strategies it has pursued are not unique, not at the outer limits of the law, and involve one of America's most prominent and successful companies. As such, it shows just how much work on the corporate tax code there is to do.



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Dylan Matthews · May 20, 2013

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