Apple Saves Billions in Taxes Playing by The Rules – Should We Blame Apple or The System?

Over the weekend, The New York Times published a lengthy, but fascinating article as part of its “iEconomy” series, about how Apple saved billions of dollars in taxes in the US.

New York Times’ Charles Duhigg and David Kocieniewski point out though the methods used by Apple are legal to reduce its worldwide tax bill by billions of dollars each year.

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. 

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.  

The article goes on to highlight that states like California are facing a budget crisis due to such tax avoidance methods employed by corporations like Apple.

Apple, in a statement to New York Times, 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.”

However, there are two issues with New York Times article. It seems unfair to pick on Apple for using legal methods for tax avoidance. If they didn’t do it, they would be at a disadvantage with their competitors who are also using similar methods. Also as Tim Worstall of Forbes points out, the New York Times is wrong in assuming that Apple’s effective tax rate for 2011 will be 9.8%. He notes that any company that grows its profits quickly will have an apparently low tax rate with the method used by New York Times as taxes paid actually in this year are always calculated from profits made last year.

It is only after the trading year has finished, after the actual profits have been calculated, that Apple then pays the balancing sum to the IRS for the actual profits made in 2011.

Worstall reports that Apple’s own 10K filing shows that their effective tax rates were 24.2%, 24.4% and 31.8% for 2011, 2010 and 2009, respectively, which is higher than industry average.

It’s a pity that New York Times is trying to tell the world that the problem is Apple rather than the system that needs to be fixed, where companies like Apple are simply playing by the rules. Guess, it is the downside of being the most valuable company in the world.

What do you think? Is it wrong that Apple is saving billions in taxes taxes playing by the rules? Sound off in the comments.


Joy of Tech’s humorous take on the Apple saving tax story sums it up very well.

[via New York Times, Forbes]

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