The US Senate lead by Senator Carl Levin, released a memorandum that alleges Apple’s (AAPL) deliberate tax avoidance. Apple has constantly pulled in billions of sales in the recent years with cash reserves of over $100 billion. Recently, Apple issued bonds to finance dividends to its investors. Many analysts were perplexed why Apple needed to borrow in order to pay dividends to its investors. Turns out, Apple’s cash is mostly overseas and the company won’t bring the money home because of taxes. Apple CEO Time Cook is summoned to testify to the court on May 21 to explain their tax dodging strategies.
Almost all of Apple’s foreign operations are run through an Irish company with no employees. This Irish company originally set up in 1980 is known as Apple Operations International. Apple’s global sales go through Apple Operations International.
Apple pays 2%—or less—in corporate income tax in Ireland. This is a negotiated tax rate with the Irish government. Between 2009 and 2011, one Irish subsidiary, Apple Sales International, earned $38 billion and paid $21 million in taxes, for an effective rate of .06%.
Apple Operations International provided 30% of Apple’s worldwide net profits from 2009 to 2011. It doesn’t pay taxes anywhere.
The US decides if it can tax you based on where you incorporate your company. On the other hand, Ireland decides if it can tax you based on the location of the people managing the company. So if you incorporate a subsidiary in Ireland, and manage it from the US, you are qualified to not pay taxes in either countries. Isn’t that brilliant? Nothing less from Apple. Apple has not been filing a tax return for AOI anywhere in the world in the last five years.
Because of this brilliant diversion, Apple’s US profits keep ending up in Ireland. The report also argues that Apple is effectively sending US profits to its Irish subsidiaries, too. How? Transfer pricing. Apple forged a cost-sharing agreement with its Irish subsidiaries that gives them a disproportionate share of the profit from research and development that occurs in the United States. From 2009 to 2012, Apple allocated $4 billion in R&D costs to its US unit, which had $38.7 billion in profits, while its Irish subsidiary had $4.9 billion in R&D costs—and $74 billion in profits.
One of the most popular tax loop-holes for multinational companies is known as “check-the-box.” It allows companies to instruct the government to completely disregard certain foreign subsidiaries for tax purposes. Apple’s main Irish subsidiary, AOI, checks the box for its entire global distribution network. This allowed the company to avoid paying $12.5 billion in taxes that would have been assessed for foreign sales by its network of global distributors.
Tim Cook will testify in the Senate on May 21 to defend their tax strategy and promote a tax reform. In annual reports between 2009 and 2011, the company told investors it was setting aside $13.7 billion to pay federal taxes—but it has actually paid only $5.3 billion. It’s pretty strange that each year they’re off by many billions of dollars. As a result, Apple’s actual US tax rate is only 20.1%, much lower than the 24% to 32% it said it was paying. Without this senate probe, we would not know the difference.
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