Plutocratic Insurgency Note No. 8: Rotten at the Core - Apple Incorporated’s Stateless Tax Avoidance Strategies & Subsequent Cash Hoard

Plutocratic Insurgency Note No. 8: Rotten at the Core - Apple Incorporated’s Stateless Tax Avoidance Strategies & Subsequent Cash Hoard   

Pamela Ligouri Bunker and Robert J. Bunker

Apple Inc. is an American multinational technology company headquartered in Cupertino, California that designs, develops, and sells consumer electronics, computer software, and online services.

                                                                                          —Wikipedia [1]                                 

Much like the fictional account of the Strange Case of Dr. Jekyll and Mr. Hyde, Apple Incorporated is a beloved ‘American’ company by day when it sells its innovative and sleek technology products such as iMacs and iPhones to our people and those of other nations and a ‘stateless’ revenue-maximizing multinational behemoth after hours when it comes time to pay the tax bill. Humble garage start-up origins and intense brand loyalty aside, this free multinational corporation’s darker underbelly focuses on profit maximization for its shareholders and executive officers at the expense of sovereign state revenues contributing to the public good of the American citizenry. 

Key Information: United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, Committee on Homeland Security and Governmental Affairs, “EXHIBITS Hearing On Offshore Profit Shifting and the U.S. Tax Code Part 2 (Apple Inc.) May 21, 2013.” https://www.hsgac.senate.gov/download/?id=B2F27D33-856B-4B2A-8B55-D045DC285978:

I. EXECUTIVE SUMMARY

On May 21, 2013, the Permanent Subcommittee on Investigations (PSI) of the U.S. Senate Homeland Security and Government Affairs Committee will hold a hearing that is a continuation of a series of reviews conducted by the Subcommittee on how individual and corporate taxpayers are shifting billions of dollars offshore to avoid U.S. taxes. The hearing will examine how Apple Inc., a U.S. multinational corporation, has used a variety of offshore structures, arrangements, and transactions to shift billions of dollars in profits away from the United States and into Ireland, where Apple has negotiated a special corporate tax rate of less than two percent. One of Apple’s more unusual tactics has been to establish and direct substantial funds to offshore entities in Ireland, while claiming they are not tax residents of any jurisdiction. For example, Apple Inc. established an offshore subsidiary, Apple Operations International, which from 2009 to 2012 reported net income of $30 billion, but declined to declare any tax residence, filed no corporate income tax return, and paid no corporate income taxes to any national government for five years. A second Irish affiliate, Apple Sales International, received $74 billion in sales income over four years, but due in part to its alleged status as a non-tax resident, paid taxes on only a tiny fraction of that income.

In addition, the hearing will examine how Apple Inc. transferred the economic rights to its intellectual property through a cost sharing agreement with its own offshore affiliates, and was thereby able to shift tens of billions of dollars offshore to a low tax jurisdiction and avoid U.S. tax. Apple Inc. then utilized U.S. tax loopholes, including the so-called “check-the-box” rules, to avoid U.S. taxes on $44 billion in taxable offshore income over the past four years, or about $10 billion in tax avoidance per year. The hearing will also examine some of the weaknesses and loopholes in certain U.S. tax code provisions, including transfer pricing, Subpart F, and related regulations, that enable multinational corporations to avoid U.S. taxes…

Key Information: Lee Sheppard, “How Does Apple Avoid Taxes?” Forbes. 28 May 2013, https://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoid-taxes/#12c343d720a7:

Apple’s brand halo is slipping. Silicon Valley’s well-known vanity and contempt for government are amply displayed in Apple’s tax figures. Apple, a consumer products company that sells beautifully designed gadgets, pays very little tax anywhere in the world, including the United States.

Apple AAPL +0.01% is playing fast and loose with consumers’ affection for its highly discretionary products, especially in Europe. It is ill-advised for any consumer products company not to pay tax where it sells products. Equally important, Apple’s tax avoidance is also testing the patience of strapped European governments that are looking for ways to get American multinationals to pay tax.

The Senate Homeland Security Permanent Subcommittee on Investigations laid out Apple’s tax planning in a May 20 report. The report concluded that Apple’s tax arrangements have nothing to do with its business. Even for a jaded tax lawyer used to hokey schemes to avoid taxation, Apple’s arrangements were surprising…

Key Information:  Nellie Bowles, “Cupertino’s mayor urges Apple to pay more tax: ‘Where’s the fairness?’” The Guardian. 5 May 2016, https://www.theguardian.com/technology/2016/may/05/apple-taxes-cupertino-mayor-infrastructure-plan:

Barry Chang is stuck between Apple on one side not paying for his infrastructure proposal and frustrated citizens on the other who see their roads too crowded

The last time the mayor of Cupertino walked into Apple—the largest company in his small Californian town and, it so happens, the most valuable company in the world—he hoped to have a meeting to talk about traffic congestion.

Barry Chang barely made it into the lobby when Apple’s security team asked him to leave, he said.

“They said ‘you cannot come in, you’re not invited’. After that I left and have not gone back,” said an exasperated Chang, who’s been mayor since December 2015 and had approached the computing firm when he was serving on the city council three years ago.

Many people in Cupertino, a 60,000-person town in the heart of Silicon Valley, are beginning to organize around their overburdened city. They claim the region is struggling with aging infrastructure and booming companies whose effective tax rate is often quite low. Frustrated by traffic and noise, some in Cupertino are trying to put a stop to more development, which they argue brings more congestion on the roads, parking and train system. But Chang says limiting new development would damage the regional economy and that the real solution should be higher taxes on the wealthy and companies such as Apple…

Apple is building a new headquarters in Cupertino that some have called the Death Star. Photograph: Handout

Key Information: Tripp Mickle, “Apple’s Mountain of Cash Is Set to Top $250 Billion.” The Wall Street Journal. 1 May 2017, A1, A6, https://www.wsj.com/articles/apples-250-billion-cash-pile-enlivens-hopes-fuels-expectations-1493566748 (Original). Via Dow Jones Newswires: http://www.foxbusiness.com/features/2017/05/01/apples-mountain-cash-is-set-to-top-250-billion-wsj.html:

Apple Inc. is expected to report Tuesday that its stockpile of cash has topped a quarter of a trillion dollars, an unrivaled corporate hoard that is greater than the market value of both Wal-Mart Stores Inc. and Procter & Gamble Co. and exceeds the combined foreign-currency reserves held by the U.K. and Canada combined.

The money, more than 90% of which is stockpiled outside of the U.S., has drawn fresh attention as President Donald Trump has proposed slashing business taxes and a one-time tax holiday on corporate cash brought home. That could ratchet up pressure on the tech giant to make splashy acquisitions or dole out more money to shareholders.

Apple’s quarterly results will show the company has doubled its cash pile in just over 4 1/2 years. In the last three months of 2016, it racked up new cash at a rate of about $3.6 million an hour.

As of December, the company had $246.09 billion total cash, cash equivalents, and securities. Apple, like many big American companies, parks most of that cash offshore rather than paying U.S. taxes on its overseas profits…

Key Information: Rita Barrera and Jessica Bustamante, “The Rotten Apple: Tax Avoidance in Ireland.” The International Trade Journal. 2 August 2017, http://www.tandfonline.com/doi/full/10.1080/08853908.2017.1356250?scroll=top&needAccess=true:

ABSTRACT

The European Commission found that Ireland gave Apple preferential tax treatment which amounted to $14.5 billion in unpaid taxes between 2003 and 2014. Due to Apple’s tax havens in Ireland, they have taken advantage of U.S. and Irish tax regulations. However, the issue in controversy is whether there was, in fact, a special deal between Apple and Ireland, and whether the European Commission has the authority to make such claims. To answer this question, we explore the legal and ethical issues of using tax havens and how Apple’s stakeholders are affected by Apple’s complex organizational structure…

Tax avoidance has become a major concern for the U.S. Congress due to multinational companies such as Apple, Starbucks, Amazon, and several other firms shifting their profits to offshore subsidiaries, which allows them to violate and abuse U.S. tax laws. The drastic downturn in U.S. tax revenue and an increase in the practice of U.S. corporations investing significant amounts of their earnings in their foreign subsidiaries was a result of tax havens and tax shelters. Numerous studies indicate that global companies are moving their income to tax havens such as Ireland, Bermuda, and the Cayman Islands to pay little or no taxes…

Key Information:  “Apple and Google U.S. Treasury Holdings Soar in 2017.” Smaulgld. 8 August 2017, https://smaulgld.com/apple-google-u-s-treasury-holdings-soar-2017/:

Apple and Alphabet (Google) Boost U.S. Treasury Security Holdings to Nearly $100 billion at June 30, 2017.

Combined Apple and Google US Treasury Security holdings top holdings of Canada, France and Germany.

At the end of the second quarter large U.S. Corporations held growing and substantial amounts of U.S. Treasury Securities…

According to recent SEC filings at the end of the second quarter:

Apple owned $52.6 billion in US Treasuries up 28.3% from $41 billion in the third quarter of 2016.

Apple’s holdings were about $20.1 short term U.S. Treasury Notes (2, 3, 5, 7, or ten year maturities) and $31.4 in long term U.S. Treasury Bonds (30 year maturity) with the remainder in Treasury bills.

Alphabet (Google) held $44.8 billion in US Treasury Notes (with maturities of 2, 3, 5, 7, or ten years) up 19.1% from $37.6 billion at the end of 2016…

Key Information:  “Paradise Papers: Apple’s secret tax bolthole revealed.” BBC News. 6 November 2017, http://www.bbc.com/news/world-us-canada-41889787:

The world’s most profitable firm has a secretive new structure that would enable it to continue avoiding billions in taxes, the Paradise Papers show.

They reveal how Apple sidestepped a 2013 crackdown on its controversial Irish tax practices by actively shopping around for a tax haven.

It then moved the firm holding most of its untaxed offshore cash, now $252bn, to the Channel Island of Jersey…

Up until 2014, the tech company had been exploiting a loophole in tax laws in the US and the Republic of Ireland known as the “double Irish”.

This allowed Apple to funnel all its sales outside of the Americas— currently about 55% of its revenue—through Irish subsidiaries that were effectively stateless for taxation purposes, and so incurred hardly any tax…

Who: Apple Incorporated (Nasdaq, AAPL; Website; https://www.apple.com), a multinational technology company founded in 1976 with  +117,500 employees and   headquartered in Cupertino, CA.

What: Complicated corporate tax avoidance strategies devised by top international law firms that focus on exploiting loopholes in national tax codes. By utilizing these tax avoidance strategies, Apple Incorporated has become a ‘free corporation,’ essentially an extra-sovereign entity nearly immune to U.S. taxes, resulting in its being able to create an ever-growing cash hoard.

Apple’s Offshore Cash Hoard 2004-2017

 https://www.icij.org/investigations/paradise-papers/apples-secret-offshore-island-hop-revealed-by-paradise-papers-leak-icij/

When: These corporate tax avoidance strategies have existed since at least 2003 per the European Commission findings and have been in the public spotlight beginning in the mid-2012 to early-2013 time period.   

Where: This is taking place at a global level for Apple Incorporated sales of goods and services and specifically in the United States, the European Union, Ireland, Holland, and Jersey related to taxation and tax avoidance measures.   

Why: To maximize profit for Apple shareholders and executive officers—a rational and legal multinational corporate approach just not an ethical one, given the blatant nature of twisting the ‘tax rules’ and playing sovereign states against each other for profit seeking purposes.

Analysis: In what should be a public relations disaster for Apple, Inc.—engaging in tax avoidance activities at the tens-of-billions of dollars level and then being caught red handed by U.S. and EU investigators and subsequently written up by liberal democratic press—their corporate image remains relatively untarnished. This is partially due to “Silicon Valley’s well-known vanity and contempt for government…amply displayed in Apple’s tax figures”[2] as well as the fact that other U.S. headquartered multinational corporations—and the elite who are their major shareholders—are engaging in similar tax avoidance schemes as evidenced in the millions of documents leaked in The Panama Papers in 2015[3] and The Paradise Papers in November 2017.[4]

Apple’s tax avoidance strategies, which in the past have centered on creating Irish and Dutch shell companies to exploit U.S. tax regulations[5] and now due to EU pressure have migrated to Jersey (a crown dependency of the United Kingdom and a well-known tax haven with no corporate taxes[6]) for similar purposes, have resulted in its building up an unprecedented amount of cash on hand which includes over $50 billion in U.S Treasuries.  The overall amount, as of May 2017, “… has swelled to over $250bn (£194bn), a sum greater than the combined foreign reserves of the British government and Bank of England.”[7] This sum is also larger than the cash reserves of the United Kingdom and Canada combined.[8]

A bullet listing of Apple’s offshore profits and tax dodging strategy highlighted in a November 2017 Institute on Taxation and Economic Policy (ITEP) fact sheet is as follows:

• Apple has booked $252.3 billion[iv] in profits offshore on which it has not paid a dime in U.S. taxes. It’s offshore sum is greater than any other company.[v] This is nearly 10 percent of the total $2.6 trillion in profits that U.S. Fortune 500 companies disclose holding offshore.

• By keeping these profits offshore, Apple is avoiding $78.5 billion in U.S. taxes.[vi]

• A repatriation rate of 12 percent, as proposed by the GOP, would generate at least $51.6 billion in tax savings for Apple.

• Between 2008 and 2015, Apple earned $305 billion before taxes, and paid a foreign tax rate of only 5.8% during this time.[vii]

• Apple was able to achieve this low foreign rate by shifting a large portion of its profits into its three Irish subsidiaries.[viii]

• A Senate investigation in 2013 found that two of Apple’s Irish subsidiaries were structured so that, for tax purposes, they weren’t “residents” of either Ireland or the U.S., allowing them to pay almost nothing to either country.[ix]

• Last year, European authorities charged Ireland with illegally cutting a special tax deal with Apple that gave the company a tax rate as low as 0.005%, lowering its Irish tax bill by over $14 billion.[x]

• Much of the profits that Apple has assigned to its Irish subsidiaries is actually held in U.S. bank accounts and government bonds, but it can avoid S. taxes on these amounts because for tax purposes, the profits are under “foreign control.”[xi][9]

The preceding statistics are rather sobering and show that tens-of-millions dollars invested in assembling a world class team of tax lawyers and accountants, political consultants and lobbyists, and more than a few shady overseas officials for ‘strategic tax mitigation purposes’ can reap massive benefits for multinational corporations, their executive officers, and well heeled shareholders.

To add insult to such corporate thievery, Apple has recently built a shiny new 2,800,000 sq ft ‘spaceship-like’ headquarters in Cupertino at an estimated cost of $5 billion[10] which, in essence, has been funded by the American public from lost U.S. Treasury revenues. The square footage of this headquarters is slightly larger than that of the 104-floor One World Trade Center and the 102-floor Empire State Building in New York City, respectively. This monument to plutocratic capitalism, contrasted with Cupertino’s underfunded and aging public infrastructure[11], is illustrative of not only the corporation’s ongoing hubris but the expectation that it will continue to reap the fruits of its tens-of-billions of dollars stateless tax avoidance strategies well into the foreseeable future, even with the occasional governmental fines and sanctions as a minor cost of engaging in this form of business being thrown into the mix.[12]     

End Notes

[1] “Apple Inc.” Wikipedia.  26 November 2017 (Last edited), https://en.wikipedia.org/wiki/Apple_Inc.

[2] Lee Sheppard, “How Does Apple Avoid Taxes?” Forbes. 28 May 2013, https://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoid-taxes/#12c343d720a7.

[3] “The Panama Papers: Politicians, Criminals and the Rogue Industry that Hides Their Cash.” Washington, DC: The International Consortium of Investigative Journalists, 2017, https://panamapapers.icij.org.

[4] “The Paradise Papers: Secrets of the Global Elite.” Washington, DC: The International Consortium of Investigative Journalists, 2017, https://www.icij.org/investigations/paradise-papers/.

[5] See “Double Irish With A Dutch Sandwich.” The New York Times. 28 April 2012, http://www.nytimes.com/interactive/2012/04/28/business/Double-Irish-With-A-Dutch-Sandwich.html. 

[6] Chris Welch, “Apple chose Jersey as new offshore tax haven after Ireland crackdown.” The Verge. 6 November 2017, https://www.theverge.com/2017/11/6/16614158/apple-jersey-offshore-tax-shelter-ireland.

[7] James Titcomb, “Apple’s cash reserves swell to $250bn.” The Telegraph. 1 May 2017, http://www.telegraph.co.uk/technology/2017/05/01/apples-cash-reserves-swell-250bn/.

[8] Joe Mullin, “Apple has a record $250 billion in the bank.” Ars Technica. 1 May 2017, https://arstechnica.com/gadgets/2017/05/apple-has-a-record-250-billion-in-the-bank/.

[9] “Fact Sheet: Apple and Tax Avoidance.” Institute on Taxation and Economic Policy (ITEP). November 2017, https://itep.org/wp-content/uploads/applefactsheet1117.pdf.

[10] Patrick May, “Apple Park: How many cafes, parking spaces, bicycles …” The Mercury News. 21 April 2017, http://www.mercurynews.com/2017/04/21/apple-park-by-the-numbers/.

[11] Nellie Bowles, “Cupertino’s mayor urges Apple to pay more tax: ‘Where’s the fairness?’” The Guardian. 5 May 2016, https://www.theguardian.com/technology/2016/may/05/apple-taxes-cupertino-mayor-infrastructure-plan.

[12] Or, as the Apple CEO has called it, “total political crap.” See, Connor Humphries and Alastair Macdonald, “EU ruling on Apple’s Irish tax is ‘total political crap’: CEO.” Reuters. 31 August 2016, https://www.reuters.com/article/us-eu-apple-cook/eu-ruling-on-apples-irish-tax-is-total-political-crap-ceo-idUSKCN1173Q2.

Further Reading

Simon Bowers, “Leaked Documents Expose Secret Tale Of Apple’s Offshore Island Hop.” The International Consortium of Investigative Journalists. 6 November 2017, https://www.icij.org/investigations/paradise-papers/apples-secret-offshore-island-hop-revealed-by-paradise-papers-leak-icij/.

Sean Farrell and Henry McDonald, “Apple ordered to pay €13bn after EU rules Ireland broke state aid laws.” The Guardian. 30 August 2016, https://www.theguardian.com/business/2016/aug/30/apple-pay-back-taxes-eu-ruling-ireland-state-aid.

Nigar Hashimzade and Yuliya Epifantseva, eds., The Routledge Companion to Tax Avoidance Research. Abingdon: Routledge, 2017.

All opinions are strictly those of the authors and in no way reflect the viewpoints of any U.S. Governmental, academic, or corporate entity.