The New York Times, reviewing leaked documents from the law firm Appleby, described how Apple reroutes profits to avoid taxes. Apple’s denial is full of facts but lacks clarity.
In Monday’s New York Times article “After a Tax Crackdown, Apple Found a New Shelter for Its Profits,” here’s what we learned:
Five months after [Apple CEO Tim] Cook’s testimony [to Congress in 2013], Irish officials began to crack down on the tax structure Apple had exploited. So the iPhone maker went hunting for another place to park its profits, newly leaked records show. With help from law firms that specialize in offshore tax shelters, the company canvassed multiple jurisdictions before settling on the small island of Jersey, which typically does not tax corporate income.
Apple has accumulated more than $128 billion in profits offshore, and probably much more, that is untaxed by the United States and hardly touched by any other country. Nearly all of that was made over the past decade.
The details of the story are hellishly complicated, since they depend on details of tax rulings in multiple countries. But it’s clear that Apple has set up its management structure in such a way as to minimize its taxes. This is not a crime. But as America’s most highly valued and most profitable company, Apple certainly doesn’t like the way it looks.
Apple defends itself
Just as when Apple made the controversial decision not to break the encryption on a terrorist’s iPhone, Apple issued a statement about its tax policies. Both were not press releases, but were instead open letters to the public. But Tim Cook himself signed the clear and powerful statement about the complex issue of encryption. The 1100-word statement about taxes has no signature.
Let’s take a look at some highlights of the statement, “The facts about Apple’s tax payments.” Like the best of Apple’s communication, it’s direct and clear. In what follows, it helps to know that the “International Consortium of Investigative Journalists” is the organization that obtained and distributed the leaked Appleby documents to news organizations.
Here’s the most of the statement, along with my translation. I’ve omitted some of the less interesting details to keep the length manageable.
Apple believes every company has a responsibility to pay its taxes, and as the largest taxpayer in the world, Apple pays every dollar it owes in every country around the world. We’re proud of the economic contributions we make to the countries and communities where we do business.
Translation: We don’t break the law. We make more profit than anyone else, so we pay more tax than anyone else.
We’re presenting the facts on this page in response to reporting by the International Consortium of Investigative Journalists.
Translation: We won’t dignify reports by naming and linking to them.
Among the inaccuracies in these reports:
- The changes Apple made to its corporate structure in 2015 were specially designed to preserve its tax payments to the United States, not to reduce its taxes anywhere else. No operations or investments were moved from Ireland.
Translation: While it is impossible to verify statements about motives, we want you to believe the strange notion that we want to pay higher U.S. taxes. We can clearly state that we didn’t move our workers or money — because we only made changes in our financial structure, not changes in the work we do or where we do it.
- Far from being “untouched by the United States,” Apple pays billions of dollars in taxes to the US at the statutory 35 percent rate on investment income from its overseas cash.
Translation: We have so much money stashed overseas that it generates investment income. That’s what we pay tax on, not the actual profits we make overseas.
- Apple’s effective tax rate on foreign earnings is 21 percent — a figure easily calculated from public filings. This rate has been consistent for many years.
Translation: We’re preserving our overseas tax dodges, not improving them.
Last month, in response to questions from the ICIJ, the New York Times and others, Apple provided the following statement:
“The debate over Apple’s taxes is not about how much we owe but where we owe it. As the largest taxpayer in the world we’ve paid over $35 billion in corporate income taxes over the past three years, plus billions of dollars more in property tax, payroll tax, sales tax and VAT. We believe every company has a responsibility to pay the taxes they owe and we’re proud of the economic contributions we make to the countries and communities where we do business.
Translation: We don’t break the law. We exploit it.
Under the current international tax system, profits are taxed based on where the value is created. The taxes Apple pays to countries around the world are based on that principle. The vast majority of the value in our products is indisputably created in the United States — where we do our design, development, engineering work and much more — so the majority of our taxes are owed to the US.
Translation: Since the argument is only about overseas profits, we’ll misdirect you by talking about U.S. profits instead, where we play plenty of tax.
When Ireland changed its tax laws in 2015, we complied by changing the residency of our Irish subsidiaries and we informed Ireland, the European Commission and the United States. The changes we made did not reduce our tax payments in any country. In fact, our payments to Ireland increased significantly and over the last three years we’ve paid $1.5 billion in tax there — 7 percent of all corporate income taxes paid in that country. Our changes also ensured that our tax obligation to the United States was not reduced.
Translation: Our net income grew 5.8% this year. And our margin is 21%. So we’re doing pretty well by just making sure that our tax payments don’t go up.
We understand that some would like to change the tax system so multinationals’ taxes are spread differently across the countries where they operate, and we know that reasonable people can have different views about how this should work in the future. At Apple we follow the laws, and if the system changes we will comply. We strongly support efforts from the global community toward comprehensive international tax reform and a far simpler system, and we will continue to advocate for that.”
Translation: We don’t break the law. We exploit it. Since tax methods will always be different in different countries, there will always be a way to exploit it.
More Information About Apple’s Tax Payments
Throughout its history, Apple has designed new products — and established entirely new industries — by focusing on innovation. That hard work and dedication has led to the creation of revolutionary products and services that have profoundly improved people’s lives and created millions of jobs around the world.
Translation: We’re innovative. We make a lot of profit. Let’s talk about that, rather than taxes.
Taxes for multinational companies are complex, yet a fundamental principle is recognized around the world: A company’s profits are taxed based on where value is created. The Organisation for Economic Co-operation and Development, Ireland, the United States and others all agree on this principle.
Translation: International taxes are not simple, no matter how much we try to simplify them.
1. Apple is the largest taxpayer in the world, paying over $35 billion in corporate income taxes in the last three years. Apple pays taxes in every country where we sell our products. . . . Apple’s worldwide effective tax rate is 24.6 percent, higher than average for US multinationals.
Translation: We make the most money, so we pay the most tax. There are companies whose tax dodges are a lot worse than ours.
2. The vast majority of the value in Apple products is created in the United States, where design, development, engineering work and more are accomplished. So under the current international tax system, the majority of Apple taxes are owed to the US.
Translation: We have more workers and do more work in America, so we can only apply tax dodges to overseas sales.
3. Apple has cash overseas because that’s where it sells the majority of its products. Under the current tax system, post-tax earnings from foreign sales are subject to US tax. Apple has earmarked more than $36 billion to cover US deferred taxes. This is in addition to the $35 billion the company paid in corporate income taxes over the past three years.
Translation: We’re keeping over $200 billion from overseas sales outside the U.S. We have so much money we don’t need it here. Make us an offer, U.S. Congress — let’s negotiate about how much tax we’d have to pay if we brought it back.
4. Apple has been operating in Ireland since 1980 when Steve Jobs looked for a base to expand outside the US. The facility in Cork, Ireland started with 60 employees and now has over 6,000. Apple’s innovation and investment supports a further 12,000 jobs across Ireland. And across Europe, Apple supports more than 1.5 million jobs. . . .
As part of these changes, Apple’s subsidiary which holds overseas cash became resident in the UK Crown dependency of Jersey, specifically to ensure that tax obligations and payments to the US were not reduced. Since then Apple has paid billions of dollars in US tax on the investment income of this subsidiary. There was no tax benefit for Apple from this change and, importantly, this did not reduce Apple’s tax payments or tax liability in any country.
Translation: We have had real operations in Ireland for 27 years, because setting up there reduced our taxes and wage costs. As for the Jersey thing . . . we’re making sure our tax payments don’t go up by as much. Otherwise, why would we have set it up?
5. Apple believes comprehensive international tax reform is essential, and for many years has been advocating for simplification of the tax code. Reform that allows a free flow of capital will accelerate economic growth and support job creation. A coordinated legislative effort internationally will remove the current tug of war between countries over tax payments and ensure certainty of law for taxpayers.
Translation: If we could make these tax dodges without paying lawyers so much, that would be easier. It would also be easier from a PR perspective if we didn’t have to explain these complex machinations.
Analyzing Apple’s communications policy
There’s no getting around the fact that this is a complex topic. Apple has addressed it with facts. Its statement is direct, clear, and mostly free of exaggeration and jargon. While there is passive voice, it’s not used to evade responsibility. For a discussion about international taxes, this is amazingly straightforward.
It’s also repetitive and evasive. It’s clear that Apple determined a number of presumably true statements and decided to focus on and repeat them (like “ensure that tax obligations and payments to the US were not reduced” and “paid billions of dollars in US tax on the investment income”). These may be the truth, but they are not the whole truth.
There is no getting around the fact that Apple set up a financial structure on the UK Island of Jersey, where there is no corporate tax. And there is no clear explanation here of why.
I’m pleased that Apple is attempting to clearly explain what it did. But what it did was to create a financial structure that advantages the company. This is what all companies do. It’s just too bad that Apple, since it wants to look like a good guy, can’t admit its obvious financial motives: to keep more of its money.