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.

Update:

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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  • Your daddy

    They earned it They’d just charge more for their products if the taxes go up

  • Ryan

    Its not just system, its they Multimillion Dollar companies that hired lobbyists to change the system in their favor.

    • Grime

      I know its just semantics, but the corporations are part of the “system”. They’re definitely in bed with the government, but that’s the way of the world I guess.

    • Louis

      It’s not Apple, It’s not the system. To use the word blame is to say something is wrong. There is nothing wrong with Apple using all the rules to keep the Federal government from stealing all their money. YES, TAXES ARE STOLEN MONEY!!!

  • Fonzie

    Wow, I realize this is an iPhone website and everything Apple does is the bestest ever! But this is taking fanboyism to a whole new level. I’m sure Apple is the sweetest company run by the most ethical executives in the world. They would never spend millions on lawyers, accountants and lobbyists to save billions. While it appears they are not breaking any rules, you can’t possibly be defending one of the world’s largest companies for tax evasion practices. And to be fair, I’m not singling out Apple. This is a major problem in our country. And I’m not saying they don’t deserve to make money, but paying a fair share to the USA instead of backdoor moves via other countries is exactly why we’re in the shape we’re in. While it sounds like a lot of money, a few extra billion in taxes to these companies is not going to change the lives of the people reaping the savings.

    • Hmmm?

      Thank you for your comment. I can appreciate Apple products and what the company has done but in no way are they saints. Don’t understand why customers jump to their defense like it was a family member under attack. They scrutinize Apple because of their popularity and they are clearly in a position to make a difference. And just because other companies do it doesn’t mean it’s correct/right. And by not participating in “tax evasion” they would be at a disadvantage? That is nonsense especially with Apple’s profit margins from the get go. Even if you are a huge fan of any Company why do people put them on a pedestal? They are just like any other company.

  • Chris

    If Apple pays more taxes, prices go up, so we end up paying for it anyway. Come on, let’s think, we would actually be better off with a simple flat sales tax on everything and abandon the idea of income tax completely.

    • Ryan

      Flat tax means the rich get rich at the expense of the middle class

      • Meee

        Problem is… most rich pay a lower net tax bracket then the middle class right now. The rich have the money to pay someone to invest it, move it, hide it, transfer it, so that they pay less tax on it. Most of us in the middle class can’t do that, and/or don’t have the resources to invest and move money around. The majority of the rest of the world lives paycheck to paycheck. Just saying, a flat tax could stop them from scamming the system.

        • ijohn

          Makes you want to earn more money so you fit in that lower tax bracket doesn’t it? See how lower tax rates on higher income encourages capitalism?

      • Chris

        Umm, no, it means those that work hard get to keep the money that they earned. If everyone is paying the same percentage of their income on tax, then everyone is simply being treated equally. I fail to see how this is unfair to anyone…$5 of $100 is the same percentage as $50 of $1000.

        Why should the person who made a $100 only pay $1 or 1% and the person who made $1000 pay $500 or 50%?

        Doesn’t make any sense to punish people for being successful. Yes, there will be some people that make more than others, but that is the natural course of life and if you don’t like what you are making, get out there, get more education, work harder, etc. and make more money. That is the way things are supposed to work, you should be rewarded for doing well.

  • Brett

    Lower prices from Apple to the customer. They should pass on the savings.

    • kmanvan

      lol *YEAH RIGHT*!

      we ARE talking about Apple here.

  • PicturePete

    Amazon do the same in the UK they paid no UK corporation tax on 3.3bn turnover!! The UK operation avoids tax as the ownership of the main Amazon.co.uk business was transferred to a Luxembourg company in 2006