Apple, the world?s most profitable technology company, doesn?t design iPhones here. It doesn?t run AppleCare customer service from this city. And it doesn?t manufacture MacBooks or iPads anywhere nearby. Yet, with a handful of employees in a small office here in Reno, Apple has done something central to its corporate strategy: it has avoided millions of dollars in taxes in California and 20 other states.
Apple?s headquarters are in Cupertino, California. By putting an office in Reno, just 200 miles away, to collect and invest the company?s profits, Apple sidesteps state income taxes on some of those gains. California?s corporate tax rate is 8.84%. Nevada?s? Zero.
Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year. As it has in Nevada, Apple has created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands?some little more than a letterbox or an anonymous office?that help cut the taxes it pays around the world.
Almost every major corporation tries to minimise its taxes, of course. For Apple, the savings are especially alluring because the company?s profits are so high. Wall Street analysts predict Apple could earn up to $45.6 billion in its current fiscal year?which would be a record for any American business.
Apple serves as a window on how technology giants have taken advantage of tax codes written for an industrial age and ill suited to today?s digital economy. Some profits at companies like Apple, Google, Amazon, Hewlett-Packard and Microsoft derive not from physical goods but from royalties on intellectual property, like the patents on software that makes devices work. Other times, the products themselves are digital, like downloaded songs. It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers. A downloaded application, unlike a car, can be sold from anywhere.
The growing digital economy presents a conundrum for lawmakers overseeing corporate taxation: although technology is now one of the nation?s largest and most valued industries, many tech companies are among the least taxed, according to government and corporate data. Over the last two years, the 71 technology companies in the Standard & Poor?s 500-stock index?including Apple, Google, Yahoo and Dell?reported paying worldwide cash taxes at a rate that, on average, was a third less than other S&P companies?. (Cash taxes may include payments for multiple years.)
Even among tech companies, Apple?s rates are low. And while the company has remade industries, ignited economic growth and delighted customers, it has also devised corporate strategies that take advantage of gaps in the tax code, according to former executives who helped create those strategies.
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 US 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%. (Apple does not disclose what portion of those payments was in the US, or what portion is assigned to previous or future years.)
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%, which is about average for non-tech companies.
Apple?s domestic tax bill has piqued particular curiosity among corporate tax experts because although the company is based in the US, its profits?on paper, at least?are largely foreign. While Apple contracts out much of the manufacturing and assembly of its products to other companies overseas, the majority of Apple?s executives, product designers, marketers, employees, research and development, and retail stores are in the US. Tax experts say it is therefore reasonable to expect that most of Apple?s profits would be American as well. The nation?s tax code is based on the concept that a company ?earns? income where value is created, rather than where products are sold. However, Apple?s accountants have found legal ways to allocate about 70% of its profits overseas, where tax rates are often much lower, according to?corporate filings.
Neither the government nor corporations make tax returns public, and a company?s taxable income often differs from the profits disclosed in annual reports. Companies report their cash outlays for income taxes in their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments. In Apple?s last annual disclosure, the company listed its worldwide taxes?which includes cash taxes paid as well as deferred taxes and other charges?at $8.3 billion, an effective tax rate of almost a quarter of profits.
However, tax analysts and scholars said that figure most likely overstated how much the company would hand to governments because it included sums that might never be paid. ?The information on 10-Ks is fiction for most companies,? said Kimberly Clausing, an economist at Reed College who specialises in multinational taxation. ?But for tech companies it goes from fiction to farcical.? Apple, in a statement, 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 US 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 US income tax.? The statement did not specify how it arrived at $5 billion, nor did it address the issue of deferred taxes, which the company may pay in future years or decide to defer indefinitely. The $5 billion figure appears to include taxes ultimately owed by Apple employees.
The sums paid by Apple and other tech corporations is a point of contention in the company?s backyard.A mile and a half from Apple?s Cupertino headquarters is De Anza College, a community college that?Steve Wozniak, one of Apple?s founders, attended from 1969 to 1974. Because of California?s state budget crisis, De Anza has cut more than a thousand courses and 8% of its faculty since 2008. Now, De Anza faces a budget gap so large that it is confronting a ?death spiral,? the school?s president, Brian Murphy,?wrote to the faculty?in January. Apple, of course, is not responsible for the state?s financial shortfall, which has numerous causes. But the company?s tax policies are seen by officials like Mr Murphy as symptomatic of why the crisis exists. ?I just don?t understand it,? he said in an interview. ?I?ll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete?s sake. ?But then they do everything they can to pay as few taxes as possible.? In one of his last public appearances before his death,?Steven P Jobs, Apple?s chief executive, addressed Cupertino?s City Council last June, seeking approval to build a new headquarters.
Most of the council was effusive in its praise of the proposal. But one councilwoman, Kris Wang, had questions. How will residents benefit, she asked. Perhaps Apple could provide free wireless internet to Cupertino, she suggested, something Google had done in neighboring Mountain View.
?See, I?m a simpleton; I?ve always had this view that we pay taxes, and the city should do those things,? Mr Jobs replied, according to?a video of the meeting. ?That?s why we pay taxes. Now, if we can get out of paying taxes, I?ll be glad to put up Wi-Fi.? He suggested that, if the City Council were unhappy, perhaps Apple could move. The company is Cupertino?s largest taxpayer, with more than $8 million in property taxes assessed by local officials last year. Ms Wang dropped her suggestion.
Cupertino, Ms Wang said in an interview, has real financial problems. ?We?re proud to have Apple here,? said Ms Wang, who has since left the council. ?But how do you get them to feel more connected?? Other residents argue that Apple does enough as Cupertino?s largest employer and that tech companies, in general, have buoyed California?s economy. Apple?s workers eat in local restaurants, serve on local boards and donate to local causes. Silicon Valley?s many millionaires pay personal state income taxes. In its statement, Apple said its ?international growth is creating jobs domestically, since we oversee most of our operations from California.?
?The vast majority of our global workforce remains in the US,? the statement continued, ?with more than 47,000 full-time employees in all 50 states.? Moreover, Apple has given nearby Stanford University more than $50 million in the last two years. The company has also donated $50 million to an African aid organisation. In its statement, Apple said: ?We have contributed to many charitable causes but have never sought publicity for doing so. Our focus has been on doing the right thing, not getting credit for it. In 2011, we dramatically expanded the number of deserving organisations we support by initiating a matching gift program for our employees.?
Still, some, including De Anza College?s president, Mr Murphy, say the philanthropy and job creation do not offset Apple?s and other companies? decisions to circumvent taxes. Within 20 minutes of the financially ailing school are the global headquarters of Google, Facebook, Intel, Hewlett-Packard and Cisco. ?When it comes time for all these companies?Google and Apple and Facebook and the rest?to pay their fair share, there?s a knee-jerk resistance,? Mr Murphy said. ?They?re philosophically anti-tax, and it?s decimating the state.? ?But I?m not complaining,? he added. ?We can?t afford to upset these guys. We need every dollar we can get.?
Additional reporting was contributed by Keith Bradsher in Hong Kong, Siem Eikelenboom in Amsterdam, Dean Greenaway in the British Virgin Islands, Scott Sayare in Luxembourg and Jason Woodard in Singapore.