THE iECONOMY
Part 3: Protecting Profits
How Apple Sidesteps Billions in Taxes
David Calvert for The New York Times
Braeburn Capital, an Apple
subsidiary in Reno, Nev., manages and invests the company’s cash. Nevada
has a corporate tax rate of zero, as opposed to the 8.84 percent levied
in California, where Apple has its headquarters.
By CHARLES DUHIGG and DAVID KOCIENIEWSKI
Published: April 28, 2012 1370 Comments
RENO, Nev. — Apple,
the world’s most profitable technology company, doesn’t design iPhones
here. It doesn’t run AppleCare customer service from this city. And it
doesn’t manufacture MacBooks or iPads anywhere nearby.
THE iECONOMY
A series examining challenges posed by increasingly globalized high-tech industries.
Reaction
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Apple’s Response on Its Tax Practices (April 29, 2012)
Peter DaSilva for The New York Times
Brian Murphy, center, head of De Anza College in
Cupertino, Calif., says the big tech firms are “philosophically antitax,
and it’s decimating the state.”
Readers’ Comments
What do you think of Apple's tax strategy? Reporters responded to selected comments on the Business Day Live video on Monday at nytimes.com/ieconomy.
Yet, with a handful of employees in a small office here in Reno, Apple
has done something central to its corporate strategy: it has avoided
millions of dollars in taxes in California and 20 other states.
Apple’s headquarters are in Cupertino, Calif. By putting an office in
Reno, just 200 miles away, to collect and invest the company’s profits,
Apple sidesteps state income taxes on some of those gains.
California’s corporate tax rate is 8.84 percent. Nevada’s? Zero.
Setting up an office in Reno is just one of many legal methods Apple
uses to reduce its worldwide tax bill by billions of dollars each year.
As it has in Nevada, Apple has created subsidiaries in low-tax places
like Ireland, the Netherlands, Luxembourg and the British Virgin Islands
— some little more than a letterbox or an anonymous office — that help
cut the taxes it pays around the world.
Almost every major corporation tries to minimize its taxes, of course.
For Apple, the savings are especially alluring because the company’s
profits are so high. Wall Street analysts predict Apple could earn up to
$45.6 billion in its current fiscal year — which would be a record for
any American business.
Apple serves as a window on how technology giants have taken advantage
of tax codes written for an industrial age and ill suited to today’s
digital economy. Some profits at companies like Apple, Google, Amazon,
Hewlett-Packard and Microsoft derive not from physical goods but from
royalties on intellectual property, like the patents on software that
makes devices work. Other times, the products themselves are digital,
like downloaded songs. It is much easier for businesses with royalties
and digital products to move profits to low-tax countries than it is,
say, for grocery stores or automakers. A downloaded application, unlike a
car, can be sold from anywhere.
The growing digital economy presents a conundrum for lawmakers
overseeing corporate taxation: although technology is now one of the
nation’s largest and most valued industries, many tech companies are
among the least taxed, according to government and corporate data. Over
the last two years, the 71 technology companies in the Standard &
Poor’s 500-stock index — including Apple, Google, Yahoo and Dell —
reported paying worldwide cash taxes at a rate that, on average, was a
third less than other S.& P. companies’. (Cash taxes may include
payments for multiple years.)
Even among tech companies, Apple’s rates are low. And while the company
has remade industries, ignited economic growth and delighted customers,
it has also devised corporate strategies that take advantage of gaps in
the tax code, according to former executives who helped create those
strategies.
Apple, for instance, was among the first tech companies to designate
overseas salespeople in high-tax countries in a manner that allowed them
to sell on behalf of low-tax subsidiaries on other continents,
sidestepping income taxes, according to former executives. Apple was a
pioneer of an accounting technique known as the “Double Irish With a
Dutch Sandwich,” which reduces taxes by routing profits through Irish
subsidiaries and the Netherlands and then to the Caribbean. Today, that
tactic is used by hundreds of other corporations — some of which
directly imitated Apple’s methods, say accountants at those companies.
Without such tactics, Apple’s federal tax bill in the United States most
likely would have been $2.4 billion higher last year, according to a recent study
by a former Treasury Department economist, Martin A. Sullivan. As it
stands, the company paid cash taxes of $3.3 billion around the world on
its reported profits of $34.2 billion last year, a tax rate of 9.8
percent. (Apple does not disclose what portion of those payments was in
the United States, or what portion is assigned to previous or future
years.)
By comparison, Wal-Mart
last year paid worldwide cash taxes of $5.9 billion on its booked
profits of $24.4 billion, a tax rate of 24 percent, which is about
average for non-tech companies.
Additional reporting was contributed by Keith Bradsher in Hong Kong,
Siem Eikelenboom in Amsterdam, Dean Greenaway in the British Virgin
Islands, Scott Sayare in Luxembourg and Jason Woodard in Singapore.
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How Apple Sidesteps Billions in Global Taxes
Apple serves as a window on how technology giants have
taken advantage of tax codes written for an industrial age and
ill-suited to today’s digital economy.
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Apple’s Response on Its Tax Practices
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Graphic: Shrinking Corporate Tax Rates
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Video: Charles Duhigg and David Kocieniewski Respond to Reader Questions and Comments
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