Apple uses subsidiaries in Ireland, the Netherlands and other low-tax nations in a strategy that enables the technology giant to cut its global tax bill by billions every year, a report says.
The New York Times outlined legal methods used by Cupertino, California-based Apple to avoid paying billions of dollars in government and state taxes.
One approach highlighted in the report is even though the company is based in California, Apple has set up a small office in Reno, Nevada, to collect and invest its profits. The corporate tax rate in Nevada is zero, but in California, it is 8.84%.
While many major corporations try to reduce their tax bills, technology companies such as Apple, Google, Microsoft and others have more options to do so. That is because some of their revenue comes from digital products or royalties on patents, which makes it easier for them to move profits to tax-friendly states or countries, the Times said.
In contrast, it is tougher to shift the collection of profits from the sale of a physical product - like groceries or a car - to a tax-friendly haven.
The 71 technology companies in the Standard & Poor's 500, including Apple, Google, Yahoo and Dell, reported paying global cash taxes over the past two years at a rate that is, on average, one-third less than other S&P 500 companies, the Times said.
Apple has legally allocated about 70% of its profits overseas, where tax rates are often much lower than in the US, according to company filings.
However, Apple’s accountants have found legal ways to allocate about 70 percent of its profits overseas, where tax rates are often much lower, according to corporate filings.
Neither the government nor corporations make tax returns public, and a company’s taxable income often differs from the profits disclosed in annual reports. Companies report their cash outlays for income taxes in their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments. In Apple’s last annual disclosure, the company listed its worldwide taxes — which includes cash taxes paid as well as deferred taxes and other charges — at $8.3 billion, an effective tax rate of almost a quarter of profits.
However, tax analysts and scholars said that figure most likely overstated how much the company would hand to governments because it included sums that might never be paid. “The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an economist at Reed College who specializes in multinational taxation. “But for tech companies it goes from fiction to farcical.”
Apple, in a statement, said it “has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules.” It added, “We are incredibly proud of all of Apple’s contributions.”
Apple “pays an enormous amount of taxes, which help our local, state and federal governments,” the statement also said. “In the first half of fiscal year 2012, our U.S. operations have generated almost $5 billion in federal and state income taxes, including income taxes withheld on employee stock gains, making us among the top payers of U.S. income tax.”
The statement did not specify how it arrived at $5 billion, nor did it address the issue of deferred taxes, which the company may pay in future years or decide to defer indefinitely. The $5 billion figure appears to include taxes ultimately owed by Apple employees.
The sums paid by Apple and other tech corporations is a point of contention in the company’s backyard.
A mile and a half from Apple’s Cupertino headquarters is De Anza College, a community college that Steve Wozniak, one of Apple’s founders, attended from 1969 to 1974. Because of California’s state budget crisis, De Anza has cut more than a thousand courses and 8 percent of its faculty since 2008.
Now, De Anza faces a budget gap so large that it is confronting a “death spiral,” the school’s president, Brian Murphy, wrote to the faculty in January. Apple, of course, is not responsible for the state’s financial shortfall, which has numerous causes. But the company’s tax policies are seen by officials like Mr. Murphy as symptomatic of why the crisis exists.