Unless you are getting a tax return, odds are that April is your least favorite month in terms of preparing taxes and filing them. Apple makes billions of dollars every quarter and they like to reinvest it into their own company. Just like any business, access to capital is important. Fortunately for companies like Apple, Google, Dell, Yahoo! and others, they pay about a third less than many companies on the S&P index according to an article from the New York Times.
Some of the tricks Apple specifically uses is allocating 70% of their profits outside of the U.S. The cash that is generated by Apple’s U.S. operations is not collected by the headquarters in California, but it managed through a subsidiary in Reno, Nevada called Braeburn Capital. California has a corporate tax rate of 8.84% while Nevada does not have a corporate tax rate.
While Apple avoids paying California by managing cash in Nevada, they have reaped tax credit benefits in California for conducting R&D there. Apple has benefitted from over $400 million in R&D since 1996.
Apple also invented a tax-avoiding scheme called the “Double Irish With A Dutch Sandwich.” This is when royalties and profits are routed through subsidiaries in Ireland and the Netherlands. Then it is routed through the Caribbean. Based on their accounting, Ireland “generated” one-third of their revenue last year. Apple assigned some of the ownership in Ireland to a subsidiary with no employees in the Caribbean. Other Ireland profits are routed through the Netherlands, which is nearly tax-free.
Another scheme Apple uses to avoid paying high taxes is making sure that salespeople that are located in high-tax countries are employed by Apple subsidiaries in low tax countries.
Apple also records that many global iTunes sales legally happen in Luxembourg because that country offers tax incentives to companies for processing transactions there. This way they are able to sidestep taxes in the U.S. and France which would charge much higher rates.
Even after all of these tricks, Apple still pays $3.3 billion on profits of $34 billion.
While some people believe that Apple’s practices are unfair, many people argue that Apple does enough for the community. Apple workers eat in local restaurants, service on local boards, and donates to local causes. The millionaires in Silicon Valley pay personal state income taxes. Apple has given Stanford University over $50 million in the last 2 years and donated $50 million to an African aid organization.
Apple responded to the New York Times by saying:
“Apple also pays an enormous amount of taxes which help our local, state and federal governments. 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.”