Sunday 25 August 2013

US investigation of Apple’s tax avoidance practices

The seven craziest findings in the US investigation of Apple’s tax avoidance practices
615_Apple_iPhone_Flag_Apple_ReutersThe big reveal here is two-fold: The U.S. corporate tax code is an impossible dream (we knew that, already); and Apple is acting like a sensible corporation (we knew that, too).
There are a few ways to respond to the congressional report that Apple has discovered ingenious ways to avoid paying taxes on income earned overseas. Leading up to Apple CEO Tim Cook’s testimony on his company’s dubious-if-legal tax strategies, few things you need to know is that;
1. Almost all of Apple’s foreign operations are run through an Irish company with no employees.

The company told investigators that it lost all records concerning why Apple Operations International was originally set up in 1980, and why all of Apple global sales go through it. You might have a few ideas why if you keep reading.

2. Apple pays 2%—or less—in corporate income tax in Ireland.

The already low-tax country gives Apple special treatment with a negotiated 2% income tax rate. But that’s just the top-line number: 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%.

3. Apple Operations International, which provided 30% of Apple’s worldwide net profits from 2009 to 2011, doesn’t pay taxes anywhere.

This move is devilishly brilliant: The US decides if it can tax you based on where you incorporate your company. 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 don’t (so far) have to pay taxes in either country. And that’s exactly what Apple has done, not filing a tax return for AOI anywhere in the world in the last five years.

4. Apple’s US profits keep ending up in Ireland, too.

The report alleges more than just the avoidance of US taxes on foreign sales of Apple’s products. It also argues that Apple is effectively sending US profits to its Irish subsidiaries, too. How? Transfer pricing. Apple has set up 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.

5. Most of the $102 billion Apple is keeping “overseas” is in US banks.

Just as its Irish companies are managed by US employees, Apple’s Irish cash is mostly kept in US financial institutions, largely managed by Braeburn Capital, Apple’s financial engineering nexus in Nevada.
6. The magic of “check-the-box” makes whole companies disappear

One of the most favored tax loop-holes for multinationals 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.

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7. Apple is seemingly terrible at estimating its own taxes

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. Those set-asides are only advance estimates, but 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. Absent this congressional investigation, we wouldn’t know the difference.
As Apple CEO Tim Cook awakens last Tuesday morning to prep for a hearing on Capitol Hill about corporate taxes, the lawmakers set to question him are armed with a report saying his company kept billions in profits in Irish subsidiaries to pay little to no taxes to any government.
In a 40-page memorandum released Monday, the Senate's Permanent Subcommittee on Investigations identified three subsidiaries that have no "tax residency" in Ireland, where they are incorporated, or in the United States, where company executives manage those companies.
The main subsidiary, a holding company that includes Apple's retail stores throughout Europe, has not paid any corporate income tax in the last five years.
The subsidiary, which has a Cork, Ireland, mailing address, received $29.9 billion in dividends from lower-tiered offshore Apple affiliates from 2009 to 2012, comprising 30 percent of Apple's total worldwide net profits, the report said.
"Apple has exploited a difference between Irish and U.S. tax residency rules," the report said.
Apple said in a comment posted online on late Monday it does not use "tax gimmicks." It said the existence of its subsidiary "Apple Operations International" in Ireland does not reduce Apple's U.S. tax liability and the company will pay more than $7 billion in U.S. taxes in fiscal 2013.
Subcommittee staffers said on Monday that Apple was not breaking any laws and had cooperated fully with the investigation.

Code overhaul sought

Tuesday's hearing is the second to be held by Senator Carl Levin, a Michigan Democrat and chairman of the subcommittee, to shed light on the weaknesses of the U.S. corporate tax code. Levin has sought to overhaul the code in Congress.
Lawmakers globally are closely scrutinizing the taxes paid by multinational companies. In Britain, Google faces regulatory inquiries over its own tax policies, while Hewlett-Packard Co and Microsoft Corp have been called to Capitol Hill to answer questions about their own practices.
Corporations must pay the top U.S. percent corporate tax on foreign profits, but not until those profits are brought into the United States from abroad. This exception is known as corporate offshore income deferral.
In submitted testimony ahead of last Tuesday's hearing, Apple said any tax reform should favor lower corporate income tax rates regardless of revenue, eliminate tax expenditures and implement a "reasonable tax on foreign earnings that allows free movement of capital back to the US."
"Apple recognizes these and other improvements in the U.S. corporate tax system may increase the company's taxes," it said.
Large U.S. companies boosted their offshore earnings by 15 percent last year to a record $1.9 trillion, avoiding hefty tax bills by keeping the profits abroad, according to research firm Audit Analytics.

Tax scrutiny

Apple also uses two conventional offshore tax practices typical of multinational companies' tax-avoidance strategies, the report said.
Multinational corporations value goods and services moving across international borders from one corporate unit to another. Known as "transfer pricing," these moves are frequently managed to reduce corporations' global tax costs.
Apple's tax structure highlights flaws in the U.S. corporate tax code so that Congress "can effectively close the loopholes used by many U.S. multinational companies," Arizona Senator John McCain, the subcommittee's top Republican, said in a statement on Monday.
Levin, who announced he will retire at the end of 2014, introduced legislation in February to close tax loopholes. At a news conference on Monday, Levin said his bill should pass independent of any broader tax reform push in Congress.
McCain, the top Republican on the subcommittee, told the joint news conference he would co-sponsor Levin's bill, the first Republican to support the bill. He called Apple's tax practices "egregious, and (a) really outrageous scheme."

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