It is no secret that our public sector is in trouble. Our roads and bridges desperately need upgrading. Our schools and libraries are being forced to slash staff and activities. Our social services and program are being cut. And the reason: not enough money.
Yet at the same time, it is also no secret that our most powerful and profitable corporations are merrily finding countless ways to avoid paying taxes. It might seem like this situation would produce a serious discussion about societal aims and values—but it hasn’t. Our political and business leaders appear quite content that business as usual should not be inconvenienced for the sake of the economy.
The New York Times recently provided an excellent study of, in its words, “How Apple Sidesteps Billions in Taxes.” How does the company do it? The answer is tax loopholes and a number of subsidiaries in low tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands. Why does it do it? We are talking real money here. According to the New York Times, Apple “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.” By comparison, Wal-Mart was downright patriotic—paying a tax rate of 24 percent.
Get your passports ready. If a U.S. consumer buys an Apple product like a song from iTunes or an iPhone the royalties earned are routed to an Irish subsidiary. That is because Apple assigned the rights to royalties on patents developed in its California operations to the subsidiary. The royalities gathered in Ireland are then transferred, with few tax obligations thanks to Irish law, to another Apple subsidiary in the British Virgin Islands, where tax rates are extremely low. Thus, not only does the U.S. lose out on tax revenue, so does Ireland. And in case you have forgotten, Ireland is suffering massive cuts in public spending because of a lack of revenue.
If a product is purchased by someone residing outside the U.S., the patent royalties are routed to a different Irish subsidiary. Apple then transfers those royalties through the Netherlands, tax free thanks to European laws, back to its primary Irish subsidiary and then on to its Caribbean subsidiary.
If this is confusing check out this graphic. How important is Ireland to Apple? In 2004, the country received more than one-third of Apple’s world wide revenue. The U.S. corporate tax rate is 35 percent. The Irish corporate tax rate is 12.5 percent. And the British Virgin Island tax rate is even lower.
Of course Apple’s profits are not limited to patent royalties. That is where its Luxembourg subsidiary comes into play. As the New York Times explains:
when customers across Europe, Africa or the Middle East — and potentially elsewhere — download a song, television show or app, the sale is recorded in this small country . . . In 2011 [the revenue of this Luxembourg subsidiary] exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of iTunes’s worldwide sales.
The advantages of Luxembourg are simple, say Apple executives. The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through Luxembourg. Taxes that would have otherwise gone to the governments of Britain, France, the United States and dozens of other nations go to Luxembourg instead, at discounted rates.
“We set up in Luxembourg because of the favorable taxes,” said Robert Hatta, who helped oversee Apple’s iTunes retail marketing and sales for European markets until 2007. “Downloads are different from tractors or steel because there’s nothing you can touch, so it doesn’t matter if your computer is in France or England. If you’re buying from Luxembourg, it’s a relationship with Luxembourg.”
Back Home In The U.S.
Of course Apple also makes money from sales in the United States. But it has a way of handling that “problem” as well. The company’s headquarters is in Cupertino, California but it has a Reno subsidiary, Braeburn Capital, collect and manage its profits. According to the New York Times:
When someone in the United States buys an iPhone, iPad or other Apple product, a portion of the profits from that sale is often deposited into accounts controlled by Braeburn, and then invested in stocks, bonds or other financial instruments, say company executives. Then, when those investments turn a profit, some of it is shielded from tax authorities in California by virtue of Braeburn’s Nevada address.
Since founding Braeburn, Apple has earned more than $2.5 billion in interest and dividend income on its cash reserves and investments around the globe. If Braeburn were located in Cupertino, where Apple’s top executives work, a portion of the domestic income would be taxed at California’s 8.84 percent corporate income tax rate.
But in Nevada there is no state corporate income tax and no capital gains tax. What’s more, Braeburn allows Apple to lower its taxes in other states — including Florida, New Jersey and New Mexico — because many of those jurisdictions use formulas that reduce what is owed when a company’s financial management occurs elsewhere.
California has lost billions of dollars in tax revenue—oh yes and is deep in a budget crisis.
In fairness to Apple it is far from alone in using these tricks of the trade. Almost all technology companies do it. So, here is the thing—if we really care about our public infrastructure and programs we have to start getting tough on these companies. Their success was aided by past public investment–there should be payback. But then again perhaps there is no such thing as society–only the corporation counts.