Plan B Forum

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Apple’s Tax Avoidance Strategies: The Times’s Charles Duhigg on the financial practices of Apple and a corporate culture that pushed for great innovation, in both products and tax strategies.

By NELSON D. SCHWARTZ and CHARLES DUHIGG

WASHINGTON — Even as Apple became the nation’s most profitable technology company, it avoided billions in taxes in the United States and around the world through a web of subsidiaries so complex it spanned continents and went beyond anything most experts had ever seen, Congressional investigators disclosed on Monday.


“Apple sought the holy grail of tax avoidance," said Senator Carl Levin, left, a Michigan Democrat.


The investigation is expected to set up a potentially explosive confrontation between a bipartisan group of lawmakers and Timothy D. Cook, Apple’s chief executive, at a public hearing on Tuesday.

Congressional investigators found that some of Apple’s subsidiaries had no employees and were largely run by top officials from the company’s headquarters in Cupertino, Calif. But by officially locating them in places like Ireland, Apple was able to, in effect, make them stateless — exempt from taxes, record-keeping laws and the need for the subsidiaries to even file tax returns anywhere in the world.

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” said Senator Carl Levin, a Michigan Democrat who is chairman of the Senate Permanent Subcommittee on Investigations that is holding the public hearing Tuesday into Apple’s use of tax havens. “Apple successfully sought the holy grail of tax avoidance. It has created offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere.”

Thanks to what lawmakers called “gimmicks” and “schemes,” Apple was able to largely sidestep taxes on tens of billions of dollars it earned outside the United States in recent years. Last year, international operations accounted for 61 percent of Apple’s total revenue.

Investigators have not accused Apple of breaking any laws and the company is hardly the only American multinational to face scrutiny for using complex corporate structures and tax havens to sidestep taxes. In recent months, revelations from European authorities about the tax avoidance strategies used by Google, Starbucks and Amazon have all stirred public anger and spurred several European governments, as well as the Organization for Economic Cooperation and Development, a Paris-based research organization for the world’s richest countries, to discuss measures to close the loopholes.

Still, the findings about Apple were remarkable both for the enormous amount of money involved and the audaciousness of the company’s assertion that its subsidiaries are beyond the reach of any taxing authority.

“There is a technical term economists like to use for behavior like this,” said Edward Kleinbard, a law professor at the University of Southern California in Los Angeles and a former staff director at the Congressional Joint Committee on Taxation. “Unbelievable chutzpah.”

While Apple’s strategy is unusual in its scope and effectiveness, it underscores how riddled with loopholes the American corporate tax code has become, critics say. At the same time, it shows how difficult it will be for Washington to overhaul the tax system.

Over all, Apple’s tax avoidance efforts shifted at least $74 billion from the reach of the Internal Revenue Service between 2009 and 2012, the investigators said. That cash remains offshore, but Apple, which paid more than $6 billion in taxes in the United States last year on its American operations, could still have to pay federal taxes on it if the company were to return the money to its coffers in the United States.

John McCain of Arizona, who is the panel’s senior Republican, said: “Apple claims to be the largest U.S. corporate taxpayer, but by sheer size and scale, it is also among America’s largest tax avoiders.”

In prepared testimony expected to be delivered to the Senate committee by Mr. Cook and other Apple executives on Tuesday, the company said it “welcomes an objective examination of the U.S. corporate tax system, which has not kept pace with the advent of the digital age and the rapidly changing global economy.”

The executives plan to tell the lawmakers that Apple does not use tax gimmicks, according to the prepared testimony.

Mr. Cook is also expected to argue that some of Apple’s largest subsidiaries do not reduce Apple’s tax liability, and to press for a sweeping overhaul of the United States corporate tax code — in particular, by lowering rates on companies moving foreign overseas earnings back to the United States. Apple currently assigns more than $100 billion to offshore subsidiaries.

Atop Apple’s offshore network is a subsidiary named Apple Operations International, which is incorporated in Ireland — where Apple had negotiated a special corporate tax rate of 2 percent or less in recent years — but keeps its bank accounts and records in the United States and holds board meetings in California.

Because the United States bases residency on where companies are incorporated, while Ireland focuses on where they are managed and controlled, Apple Operations International was able to fall neatly between the cracks of the two countries’ jurisdictions.

Apple Operations International has not filed a tax return in Ireland, the United States or any other country over the last five years. It had income of $30 billion between 2009 and 2012. By shuttling revenue between international subsidiaries, Apple was able largely to sidestep paying taxes, Congressional investigators said.

In the prepared testimony, Apple executives disputed the characterization of Apple Operations International. “A.O.I. performs important business functions that facilitate and enhance Apple’s success in international markets,” the testimony states. “It is not a shell company.”

The Senate investigators also found evidence that the company turned over substantially less money to the government than its public filings indicated.

While the company cited an effective rate of 24 to 32 percent in its disclosures, its effective tax rate was 20.1 percent, based on the committee’s findings. And for a company of Apple’s size, the resulting difference was substantial — more than $8 billion in 2009, 2010 and 2011.

Because of these strategies, tax experts say, Washington is forced to rely more and heavily on payroll taxes and individual income taxes to finance the government’s operations. For example, in 2011, individual income taxes contributed $1.1 trillion to federal coffers, while corporate taxes added up to $181 billion.

As companies’ earnings have accumulated offshore, many executives have been pushing more aggressively for a tax holiday that would allow them to bring back funds at lower tax rates. Apple has recently announced that it will return $100 billion to shareholders over three years through a combination of dividends and purchases of its own shares. Though Apple has enough cash on hand to pay for those initiatives, the company recently announced it would take on $17 billion in debt, rather than bring overseas money back to the United States to avoid paying repatriation taxes on those returning funds.

“If Apple had used its overseas cash to fund this return of capital, the funds would have been diminished by the very high corporate U.S. tax rate of 35 percent,” Mr. Cook is planning to testify, according to the prepared text. Apple “believes the current system, which applies industrial era concepts to a digital economy, actually undermines U.S. competitiveness.”

Critics, however, say these so-called repatriation holidays, which bring back funds at lower tax rates, do virtually nothing to stimulate the economy and benefit only corporations, their executives and shareholders. Congress enacted a repatriation holiday in 2004, allowing corporations to bring back about $300 billion from overseas and pay just 5.25 percent rather than the regular 35 percent corporate rate.

But a study by the National Bureau of Economic Research found that 92 percent of the repatriated cash was used to pay for dividends, share buybacks or executive bonuses.

“Repatriations did not lead to an increase in domestic investment, employment or R.&D., even for the firms that lobbied for the tax holiday stating these intentions,” concluded the study, which was conducted by a team of three economists that included a former Bush administration official. Tuesday’s hearing on Capitol Hill, along with the disclosures about Apple’s tax policies, are likely to make lowering repatriation taxes a more difficult proposition for lawmakers to stomach, Congressional staff members said.

On Capitol Hill Monday, legislators made plain their fury over what they called Apple’s “egregious” and “outrageous” conduct.

While other companies have taken advantage of loopholes, Mr. Levin said, “I’ve never seen anything like this and we don’t know anybody who’s seen anything like this.”




Nelson D. Schwartz reported from Washington and Charles Duhigg from New York. David Kocieniewski contributed reporting from New York.

MajGenl.Meade wrote:I think it's high time that corporations should be allowed to marry each other. Then their tax rate would be reduced. Equality for fictitious people is essential and virtually natural.

Meade Inc.

Apple has again been rated as the world's top brand this week, but a leading social researcher warns the omnipresent technology giant is losing touch with its Generation Y heartland.

Michael McQueen tracks the changing tastes of Gen-Y and believes the inventor of genre-defining devices such as the iPhone, iPad and iPod could be largely irrelevant to people under 30 within five years.

The Sydney-based researcher has written four books on social trends with the most recent, Winning The Battle For Relevance, based on a survey of more than 500 companies.

He created a "relevance curve" for the book to describe a company's importance to its core market and believes Apple is "past the turning point".

"They're not as hot as they were two years ago. The next 12 months will be absolutely critical for them, whether they can release another game-changing product like they did with the iPhone and the iPad. It's been a long time between drinks for them," McQueen says.

The BrandZ ranking of global brands released this week ranked Apple at number one ahead of Google, IBM, McDonald's and Coca-Cola, a result that BrandZ says is based partly on global value but also on consumer sentiment.

However, McQueen points to Forbes magazine's annual ranking of innovative companies, which last year relegated Apple from 5th to 26th. He says the rising profile of portable device competitors such as Samsung is creating "a subtle shift in what's now cool".

"The iPhone is not the badge of cool that it was even 12 months ago," McQueen says.

"The key would be to recalibrate - who they are, why they exist, what business are they in."

McQueen's first book, The New Rules of Engagement, was based on interviews with 80,000 high school students conducted over three years. He has since worked with corporate clients, teachers and parents in an effort to "decode the younger generation" as well as gaining an understanding of how companies work.

He says any company - even one as large as Apple - can lose touch with its customers in the space of just five years, pointing to the likes of Blackberry and Sony as multi-nationals that squandered market-leading positions.

Blackberry held a massive 42.6 per cent of its target market in the US in January 2010, which has slumped this month to just 5.2 per cent.

"Their two big failures were that they failed to connect to the lifestyle market, so they were so corporate and so business, that they got stuck in that mode," McQueen says.

"They'd got so big, it was like 'we could never fall'. One of the key principles is this thing called the intoxication of success. They're so big for so long, they become close-minded, arrogant, complacent, even a sense of invincibility creeps in. Kodak is another in the same boat.

"You look at brands like Lego, they're the poster children for re-inventing themselves constantly. They almost went broke in the early 90s, they were in serious trouble, now they're in everything. It's a brilliant company.

"The minute you look around at your team and everyone is of similar age, of similar background, you're in trouble. At Daewoo, up until they collapsed, up to 70 per cent of their management team went to the same high school.

"So you've got this culture that forms that attracts people who are like what the culture already is. Anyone who comes in with a different mindset is ejected, like a white blood cell.

"Organisations often can't see themselves and you look from the outside and say 'you guys are so stuck in the way you do things, nothing has changed in the last three years, and you all look the same', which is a big telltale sign."

McQueen says there is no way to accurately predict how many companies may unknowingly have passed their peak and be heading into a period of decline, although it is often staff rather than management who see the first signs.

"Often the managers only look at the skin-layer indicators, like how are we tracking against the budget, what are our KPIs. But on the floor often it's those staff who know because they talk to customers, and customers are saying 'you're overpriced' or 'your systems are outdated', but it's not filtering to to the top," he says.

Companies often measure themselves against key indicators - sales, market share or balance sheets - that McQueen describes as their "audible pulse", but which typically reflect decisions made up to two years prior.

"You can have a really good audible pulse and all your outside indicators look good but your 'silent pulse', which measures how relevant you are and what your momentum is, can be way off. That might not show up for another two or three years," he says.

"Kodak was still a darling of Wall Street for years, almost a decade after they'd lost the battle to digital. People still loved their stock, they were still a wealthy company. So you can be a long way down the track towards being irrelevant and if you're only measuring your audible pulse, which is all the tangible things, you could have no clue."

There's some good news for companies that can identify their impending decline and act to arrest the slide. McQueen says IBM dragged itself back from the brink in the late 1980s and early 1990s with an exhaustive company-wide review, and that Sony is currently doing something similar. "It's not too late, but it will be hard for them," he says.



Read more: http://www.smh.com.au/executive-style/c ... z2TzTOrs44

dgs49 wrote:Anyone...ANYONE... who speaks of a corporation paying its "fair share" of income taxes is manifestly an economic moron.

Some Big Corporations Don’t Pay Taxes, Either

By BRUCE BARTLETT

Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take.”

On Sept. 13, Harold Hamm, chairman and chief executive of Continental Resources, testified before the House Committee on Energy and Commerce about achieving energy independence. He said his company, an oil producer, could produce much more if federal policies didn’t hold it back. Among them is the tax system. Mr. Hamm said his company paid an effective tax rate of 38 percent.

One often hears corporate executives make such assertions. Republicans always accept them at face value, because to them there is no public policy problem that isn’t caused by high taxes. Tax cuts are their solution to just about every problem. Cutting the corporate tax rate is among the key measures that all Republicans favor to stimulate growth.

One problem with the Republican theory is that many big corporations actually pay little, if any, federal income tax. For example, The New York Times has reported that General Electric, the sixth-largest corporation in the United States, earned $14.2 billion in 2010, but disclosed in federal filings that it had no federal tax liability.

This disparity between the high taxes that many people say they believe American corporations pay and the low rate they actually pay applies to Mr. Hamm’s business as well. Citizens for Tax Justice, a labor-backed group, looked at Continental Resources’ financial reports, where it must disclose tax payments, and found that in 2011 it paid a federal tax rate of 1.9 percent on profits of close to $700 million. Its average federal tax rate over the last five years was 2.2 percent.

According to Citizens for Tax Justice, G.E. paid a federal tax rate about the same as Continental Resources’ over the last 10 years – an average of 2.3 percent, including four years in which it received a net tax refund.

When poor people pay no federal income taxes and get a government refund because of such programs as the earned-income tax credit, Republicans are incensed, implying that if only the poor paid their fair share that the deficit would disappear. They never suggest that corporations like G.E. pay their fair share, even though the G.E. example is far from unique, according to Citizens for Tax Justice.

The complexity of the corporate income tax makes it easy to evade and avoid American taxes. Edward D. Kleinbard, a professor of tax law at the University of Southern California, points to the easy availability of tax havens, where corporations artificially book their profits and avoid taxation on them.

I had a personal experience with such tax havens recently. I needed a copy of Microsoft Word for a new computer and went to Microsoft.com to buy and download it. But my credit card company refused the charge. When I checked to see what the problem was, I was told that the credit card company was suspicious because the charge went to a company based in Luxembourg.

Luxembourg is, of course, a notorious tax haven. Arranging to realize its profits in such places has long been a tax-avoidance policy practiced by Microsoft and other big corporations. According to a July 22 report by the London-based Tax Justice Network, as much as $32 trillion of global financial wealth may be parked in the world’s tax havens.

Even without taking account of offshore tax havens and other aggressive tax avoidance activities, corporate taxes are grossly overrated as a cost of doing business in the United States. According to the Office of Management and Budget, the corporate income tax raised just 1.2 percent of the gross domestic product last year. Even in 2007, before the economic crisis, it raised only 2.7 percent of G.D.P. This is well down from the 1950s, when the corporate tax raised twice as much revenue as a share of G.D.P.

Republicans often point to the statutory corporate tax rate in the United States as evidence that American companies are overtaxed. Indeed, it is true that the United States has the highest statutory central government tax rate among members of the Organization for Economic Cooperation and Development. The combined statutory rate in the United States is 39.2 percent, including state taxes, compared with an average of 29.6 percent in the O.E.C.D.

However, as a Sept. 13 report from the Congressional Research Service explains, looking only at the statutory rate is highly misleading as an indication of the burden of the corporate tax. That is because it does not take account of the many tax expenditures that reduce the effective tax rate paid by American corporations. In 2011, they reduced corporate tax revenues by $159 billion.

As a consequence, the weighted effective tax rate – taxes as a share of profits – is 27.1 percent in the United States, which is below the 27.7 percent average rate of O.E.C.D. nations. The weighted average marginal tax rate on corporations – the tax on each additional dollar earned – is 20.2 percent in the United States, compared with 18.3 percent in the O.E.C.D.

For these reasons, the investor Warren Buffett says it’s “a myth that American corporations are paying 35 percent or anything like it.”

The Congressional Research Service report also notes that in the United States corporate taxes as a share of G.D.P. were the third lowest among all O.E.C.D. countries in 2009 – 1.7 percent of G.D.P. (including state taxes), compared with an O.E.C.D. average of 2.8 percent of G.D.P. Even Ireland, which conservatives often point to has having an exemplary corporate tax system, raised corporate taxes equal to 2.4 percent of G.D.P.

One continuing confusion in the corporate tax debate is who, exactly, pays it. Corporations, after all, are not entities separate from their owners (shareholders), employees and customers. They are the ones who pay the tax, but economists have been debating about who and to what degree for a century.

A Treasury Department report in May concluded that 82 percent of the corporate tax is borne by capital, with 18 percent borne by labor. Contrary to popular belief, none of the tax is shifted to consumers, which stands to reason because prices are set by producers that pay different tax rates or may even be tax-exempt.

The private Tax Policy Center published a study on Sept. 13 with similar conclusions. It estimates that 20 percent of the corporate tax is paid by labor, 20 percent is borne by the “normal” return to capital – roughly, the risk-free interest rate – and 60 percent by the “supernormal” return to capital. The latter is the extent to which the return to corporate stock has historically exceeded the risk-free interest rate.

One driving force for tax reform is a widespread belief, on both sides of the aisle, that the statutory corporate tax rate should be reduced. That is fine as long as the tax base is broadened by eliminating loopholes. But the idea that cutting the tax rate is a magic bullet to jump-start growth is nonsense, because corporate taxes are, in fact, quite low.

A Challenging Time for
International Tax Policy

By Kimberly A. Clausing

Kimberly A. Clausing is the Thormund A. Miller and
Walter Mintz Professor of Economics at Reed College
in Portland, Ore. She can be reached at clausing@reed.
edu.
This article discusses options facing policymakers in
the taxation of multinational firms. Clausing expresses
concerns about adopting a territorial tax system
without due consideration of the effects on U.S.
economic activity and the corporate tax base.

By any measure, the U.S. system of taxing multinational corporations is broken. Because corporations can postpone paying U.S. taxes on foreign profits indefinitely as long as they keep those profits abroad, the current system encourages firms to move factories and jobs to low-tax destinations and to keep their profits reinvested abroad. Because the corporate tax code is full of loopholes that allow firms to book income from U.S. operations as if it came from operations in low-tax countries, corporate tax revenues are significantly reduced. I recently
estimated that income shifting by multinational firms costs the treasury about $90 billion a year.1 That shifting of economic activity
abroad has real costs for American workers.

Because nearly everyone agrees that the system is broken, debates over reform are intensifying. Two main approaches have emerged. The first seeks to reduce the incentive to locate economic activity and income abroad. For example, the Obama administration is proposing a minimum tax on foreign income earned in tax havens and a crackdown on corporate practices in which income from an economic activity is booked in low-tax countries while the deductions and credits associated with the same activity are booked in the United States. The bipartisan tax reform proposal by Sens. Ron Wyden, D-Ore., and Daniel Coats, R-Ind., takes a similar approach and would reduce the incentive to locate jobs and income abroad. Both of the proposals couple tighter international tax rules with a lower corporate tax rate to encourage economic investment and jobs in the United States.

Others are pushing a different approach. They would move the United States to a territorial system in which the foreign income of U.S. multinational corporations is completely exempt from U.S. taxation. That approach would significantly increase incentives for U.S. firms to move economic activity abroad. U.S. tax payments for the income from foreign operations of U.S. multinational corporations would not simply be deferred; they would be completely erased. That would eliminate constraints on shifting income abroad.

More at Tax Notes, July 17, 2012
________________________
1Kimberly A. Clausing, ‘‘The Revenue Effects of Multinational
Firm Income Shifting,’’ Tax Notes, Mar. 28, 2011, p. 1580,
Doc 2011-4859, 2011 TNT 61-9, updating Clausing, ‘‘Multinational
Firm Tax Avoidance and Tax Policy,’’ 62 Nat’l Tax J. 703
(Dec. 2009).

You are an old man who thinks in terms of nations and peoples. There are no nations; there are no peoples. There are no Russians. There are no Arabs. There are no third worlds. There is no West. There is only one holistic system of systems; one vast, interwoven, interacting, multivaried, multinational dominion of dollars.

-- Network (screenplay by Paddy Chayefsky)

Sue U wrote:
And BTW, Republican tax policy advisor Bruce Bartlett has no problem talking about a corporation's fair share of taxes:

Some Big Corporations Don’t Pay Taxes, Either

By BRUCE BARTLETT

One problem with the Republican theory is that many big corporations actually pay little, if any, federal income tax. For example, The New York Times has reported that General Electric, the sixth-largest corporation in the United States, earned $14.2 billion in 2010, but disclosed in federal filings that it had no federal tax liability. [One company cited, but where is the total data to support this assertion?]

When poor people pay no federal income taxes and get a government refund because of such programs as the earned-income tax credit, Republicans are incensed, implying that if only the poor paid their fair share that the deficit would disappear. [Which conservatives? Milton Friedman was a big proponent of the EITC. No one with an ounce of sense thinks that there is much tax revenue to be gained on the low-end of the scale, but it is a good idea that everyone pays at least a little tax so they have some stake in the system.]

* * *According to a July 22 report by the London-based Tax Justice Network, as much as $32 trillion of global financial wealth may be parked in the world’s tax havens. [Which might be all the proof we need that corporate tax rates are high, despite his argument to the contrary.


** *
Republicans often point to the statutory corporate tax rate in the United States as evidence that American companies are overtaxed. Indeed, it is true that the United States has the highest statutory central government tax rate among members of the Organization for Economic Cooperation and Development,[ and as we know it is marginal rates that impact behavior, not overall rates, so this shows that we have a tax structure that is anti-competitive. ]The combined statutory rate in the United States is 39.2 percent, including state taxes, compared with an average of 29.6 percent in the O.E.C.D. [10% disadvantage, without resorting to tax gimmicks, is a problem.]

However, as a Sept. 13 report from the Congressional Research Service explains, looking only at the statutory rate is highly misleading as an indication of the burden of the corporate tax. That is because it does not take account of the many tax expenditures that reduce the effective tax rate paid by American corporations. In 2011, they reduced corporate tax revenues by $159 billion.

As a consequence, the weighted effective tax rate – taxes as a share of profits – is 27.1 percent in the United States, which is below the 27.7 percent average rate of O.E.C.D. nations. The weighted average marginal tax rate on corporations – the tax on each additional dollar earned – is 20.2 percent in the United States, compared with 18.3 percent in the O.E.C.D. [Again showing that U.S. corporations are at a disadvantage of nearly 2%.]

***

One continuing confusion in the corporate tax debate is who, exactly, pays it. Corporations, after all, are not entities separate from their owners (shareholders), employees and customers. [And this is DGs point and the economic reality, and now Bartlett actually adds something to the discussion:]

A Treasury Department report in May concluded that 82 percent of the corporate tax is borne by capital, with 18 percent borne by labor. Which is exactly why conservatives don't like the corporate tax -- it is a form of double taxation. This report finds that the owners pay 82% of the corporate tax and then pay tax again when the profit are distributed to them in the form of dividends or capital gains. Not sure why he is ignoring this inequity. * * *

dgs49 wrote:Anyone...ANYONE... who speaks of a corporation paying its "fair share" of income taxes is manifestly an economic moron.