An Apple a Day

6/3/2013

Back when you were a kid, your mom probably told you "an apple a day keeps the doctor away." Well here's something Mom didn't know – apparently, an apple a day keeps the tax man away, too. At least, that's the conclusion we might draw from recent Congressional hearings focused on Apple Inc. and its strategies for avoiding taxes!
 

Last month, the Senate Permanent Committee on Investigations conducted a hearing compellingly titled "Offshore Profit Shifting and the U.S. Tax Code – Part 2 (Apple Inc.)." The Committee graciously invited Apple's CEO, Tim Cook, to share how Apple avoids U.S. tax.
 

Here's the issue in a nutshell: Apple earns tens of billions of dollars per year from their innovative desktop and laptop computers, iPods, iPads, and ubiquitous iPhones, and Apple pays billions in tax on its U.S. profits. In 2012 alone, the company paid $6 billion in federal income tax, $327 million in payroll tax, and $830 million in state income tax. But international operations account for about 61% of the company's gross revenue. So Apple's accountants and attorneys, who sound as clever as the engineers who design the company's products, find ways to leave that revenue outside the U.S., where it sidesteps our 35% corporate income tax. From 2009-2012, Apple shifted at least $74 billion away from the IRS's reach.
 

How do they do it? Mainly through the use of subsidiaries in places as diverse as Ireland, Luxembourg, the British Virgin Islands, and Reno (yes, the one in Nevada). For example, Apple owns a holding company organized in Ireland called Apple Operations International. Because the company is domiciled in Ireland, the IRS doesn't consider it to be a U.S. corporation subject to the 35% U.S. tax. But because Apple manages and controls the company from the U.S., Irish law doesn't consider it to be subject to the 12.5% Irish tax, either. That’s right - Apple Operations International lives on both a literal island and a figurative tax-free one. It earned $30 billion from 2009-2012 and didn't even file tax returns for those years. Edward Kleinbard, a law professor at the University of Southern California and former staff director at the Congressional Joint Committee on Taxation says "There is a technical term economists like to use for behavior like this. Unbelievable chutzpah."
 

Apple's defenders point out that Apple doesn't make the rules – they're just doing their best on behalf of their shareholders with a tax code that "has not kept up with the digital age." CEO Cook points out that Apple has created or supported 600,000 U.S. jobs (including 50,000 for Apple's own employees and 550,000 at other companies) involved in engineering, manufacturing, logistics, and software development, including third-party app development. They claim that Apple is probably the biggest corporate income taxpayer in the country, accounting for $1 of every $40 in corporate tax the IRS collected last year. And they argue that they don't use tax gimmicks like moving intellectual property offshore to sell products back into the U.S., using revolving loans from foreign subsidiaries to fund U.S. operations, or holding money in Caribbean islands or Cayman Islands bank accounts.
 

However you feel about Apple’s clever approach, you can bet Congress will be keeping a close eye on Apple and other giant American companies. And while we’re sure Apple’s accountants can stand the heat, we here at TaxAudit.com are here to defend the little guy. Individuals and small businesses get audited every day and, regardless of how simple your tax life might be, it’s always good to have an expert on your side!