How Apple's phantom taxes hide billions in profit

Jul 23, 2012 by PETER SVENSSON
This July 9, 2008 file photo shows buildings reflected in the glass of the Apple Store in New York. On Tuesday, July 24, 2012, Apple is set to report financial results for the second quarter. Analysts are expecting net income of $9.8 billion. (AP Photo/Ed Ou, file)

On Tuesday, Apple is set to report financial results for the second quarter. Analysts are expecting net income of $9.8 billion. But whatever figure Apple reports won't reflect its true profit, because the company hides some of it with an unusual tax maneuver.

Inc., already the world's most valuable company, understates its profits compared with other multinationals. It's building up an overlooked asset in the form of billions of dollars, tucked away for bills it may never pay.

Tax experts say the company could easily eliminate these phantom tax obligations. That would boost Apple's profits for the past three years by as much $10.5 billion, according to calculations by The Associated Press.

While investors might rejoice if Apple suddenly added $10.5 billion to its profits, unilaterally erasing a massive U.S. tax obligation could tarnish its reputation as a relatively responsible payer of U.S. taxes. Instead, the company is lobbying to change U.S. law so that it can erase its liabilities in a less conspicuous fashion. The issue has become part of the .

Like other companies, Apple typically keeps profits on overseas sales in overseas accounts. When someone buys an iPad in Paris or Sydney, for instance, the stays outside the United States.

Apple may pay some corporate income taxes on that profit to the country where it sells the , but it minimizes these by using various accounting moves to shift profits to countries with low tax rates. For example the strategy known as "Double Irish With a Dutch Sandwich," routes profits through Irish and Dutch subsidiaries and then to the Caribbean.

When it comes to using creative tax techniques, Apple is no different from other , says Robert Willens, an independent accounting expert.

And just like other corporations, Apple leaves cash overseas. If it brought it home to the U.S., it would have to pay on the money (though it would get a credit for foreign taxes already paid). In Apple's case, those overseas accounts have grown to a staggering $74 billion — equal to the market value of Citigroup Inc.

The money is accumulating overseas because corporations are counting on lower U.S. tax rates in the future. At 35 percent, the U.S. corporate tax rate is among the highest for developed countries. In 2004, Congress enacted a one-year "tax holiday" for overseas earnings, and multinationals are hoping for a repeat of that. Presidential candidate Mitt Romney wants to permanently eliminate federal taxes on overseas profits. President Barack Obama attacked that idea last week, saying it won't create U.S. jobs, like the Romney campaign contends.

Where Apple does differ from other companies is that it sets aside a portion of these overseas profits, marking them as subject to U.S. taxes sometime in the future. Essentially, it's saying "this is money that we'll likely have to pay U.S. federal income taxes on" because we intend to repatriate it, says Willens.

But because Apple doesn't actually bring the profits into U.S. accounts, it doesn't pay the taxes. Instead, it records a tax liability. When Apple reports quarterly results, it subtracts these liabilities from its profits, even though it hasn't actually paid the taxes.

The liabilities accumulate, and as Apple's profits grow, they're piling up faster and faster.

"When you capitalize that into the future, it might be tens of billions of dollars," said Martin Sullivan, an economist with Tax Analysts, a nonprofit publisher.

The company had a net $6 billion of tax liabilities at the end of September, the last reported figure. It's had two blow-out quarters since then and is expected to report another one Tuesday. Based on reported and expected profits for the last three quarters, the liabilities can be estimated at around $10.5 billion.

Apple declined to comment on the specifics of its tax strategies or why it records tax liabilities that other multinationals avoid.

"Apple has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules," the Cupertino, Calif., company said in a statement.

Yet Apple has made clear that it has no intention of repatriating its profits from overseas at the current U.S. tax rate. When CEO Tim Cook announced that the company would start paying a dividend this summer, he said the board determined the size of the dividend solely by looking at the amount of cash the company has in U.S. accounts.

"We do not want to incur the tax cost to repatriate the foreign cash at this time," Chief Financial Officer Peter Oppenheimer told investors in March.

Apple's net tax liabilities started building three years ago, when its sales started rocketing because of the iPhone. In that time, the company has reported a total of $69 billion in . If it had applied the same accounting practices as other multinational technology companies, and not marked some overseas profits as subject to U.S. taxes, its profits would have been about $78 billion, or 13 percent higher.

The boost to net income could mean a boost to the stock, since companies are usually valued on their earnings. If investors were to value Apple based on the last 12 months of earnings, with the tax liabilities added to earnings, the stock might be 13 percent higher.

Willens and Sullivan say that Apple could erase its liabilities by considering the profits "permanently reinvested" overseas, acknowledging that they will never be brought home. That would erase the tax liability, but it could make Apple look like a less responsible corporate citizen.

"I doubt they're going to do that on their own, because they don't want to be set up for criticism," said Willens.

Groups such as Citizens for Tax Justice compile lists of the corporations report. Apple looks like a relatively good taxpayer on such lists, with a 24 percent rate. But Apple doesn't actually pay the 24 percent, since it isn't repatriating its overseas profits. The actual taxes Apple pays are 13 percent of profits, as computed by Sullivan. That's a relatively low rate compared with other multinationals.

But keeping the money overseas limits what Apple can do with it. It means, for instance, that Apple can't use it to buy another U.S. company, or give it to shareholders.

To get the money home without paying full U.S. taxes on it, the company advocates a change in U.S. tax law. It's a member of Working to Invest Now in America, or WinAmerica. The coalition is lobbying for two congressional bills that would temporarily reduce the tax rate on such earnings to 5.25 percent. That would encourage the repatriation of some of the $1.4 trillion in cash that U.S. companies have sitting in overseas accounts, the group says.

The temporary tax amnesty enacted in 2004, resulted in hundreds of billions being brought home to the U.S. But according to the Congressional Research Service, it didn't create jobs or stimulate the economy, as had been hoped.

Google Inc., Oracle Corp., Microsoft Corp. and Cisco Systems Inc. are also members of WinAmerica, but none of them stand to gain as much as Apple from a tax amnesty, because they have less cash overseas.

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indio007
3.8 / 5 (10) Jul 23, 2012
How come , as an individual US citizen, anyone would have to pay taxes on overseas income (expatriation is the only way out) but a corporation doesn't unless they transfer it to the US.
That is BS.
Skepticus
2.8 / 5 (11) Jul 23, 2012
How come , as an individual US citizen, anyone would have to pay taxes on overseas income (expatriation is the only way out) but a corporation doesn't unless they transfer it to the US.
That is BS.

Don't you know, stupid, what laws can't be circumvented by money, it would be by LOTS of money. That's what all the lobbies from Washington down to your local sewers are doing. Get a grip on reality, or instigate a revolution, if you can..!
harryhill
4 / 5 (4) Jul 23, 2012
Correct me...I thought that if you were employed overseas for over 18 months, you were not taxed in the US.
eachus
5 / 5 (2) Jul 23, 2012
These are rules about capital, not income, and the line between the two is always fuzzy. Say you open a store in London. You may buy a building, but even if you rent, you need "working" capital to cover the value of inventory, payroll related liabilities like health insurance, vacation accruals, depreciation on store furnishings and so on.

If your store is successful, you can repatriate "excess" capital as profits. That's where the tax liability appears. There are lots of accounting tricks to minimize taxes on foreign capital and profits, or move it to other countries, but if you repatriate the money it is taxed at US rates, which are the highest in the industrialized world, less foreign taxes paid.

Like the hidden ball trick in baseball, moving money around overseas only works for so long, then you have to pitch to the next batter, and the IRS takes its cut.
wgard
not rated yet Jul 23, 2012
Again, this is ABOUT a technology company. (See comment re: "CISCO to cut 1,300 jobs in realignment".) The article would be appropriate for a business/economics/political/tax policy publication, perhaps, but I fail to see what it has to do with science or technology.
dtxx
1 / 5 (3) Jul 23, 2012
Correct me...I thought that if you were employed overseas for over 18 months, you were not taxed in the US.


I thought you had to be outside the US for 331 days out of 365 in order not to file here.
eigenbasis
2 / 5 (2) Jul 24, 2012
Blah blah blah... More wall st. hype. The huge bear flag on your stock chart should tell you to short Apple right now
antialias_physorg
3.1 / 5 (7) Jul 24, 2012
How come , as an individual US citizen, anyone would have to pay taxes on overseas income (expatriation is the only way out) but a corporation doesn't unless they transfer it to the US.

Corporations are only people when it suits them.
Squirrel
3.4 / 5 (5) Jul 24, 2012
Why should US tax dollars buy Apple products for use by government workers if Apple "games" its obligations so as not to pay its fair share of them?

Time for a "good tax corporation only" buy policy by Washington and every entity funded by US taxes.
Vendicar_Decarian
3.7 / 5 (3) Jul 24, 2012
With most of it's profits coming outside the U.S. It has been illegitimate for a long time to consider Apple an American Company.
Shootist
1.8 / 5 (6) Jul 24, 2012
Again, this is ABOUT a technology company. (See comment re: "CISCO to cut 1,300 jobs in realignment".) The article would be appropriate for a business/economics/political/tax policy publication, perhaps, but I fail to see what it has to do with science or technology.


Anything to further the leftist narrative.
Vendicar_Decarian
3 / 5 (2) Jul 24, 2012
Yes. Science and technology are absolutely leftist.

Wooden buggies, magical thinking, ignorance and deceit are the hallmarks of Conservative "Thinking".

"Anything to further the leftist narrative." - ShooTard
holoman
3.7 / 5 (3) Jul 24, 2012
Another corporate rip-off.

Maybe they can be another GE, NO TAXES !
Caliban
5 / 5 (2) Jul 24, 2012
The money is accumulating overseas because corporations are counting on lower U.S. tax rates in the future. At 35 percent, the U.S.[MARGINAL] corporate tax rate is among the highest for developed countries.


Notice the addition in brackets. This is the key bit of information usually omitted by the "onerous taxation" crybabies.

You would be hard pressed to find a corp. -ANY- corporation that pays taxes at the 35% rate. Most pay substantially below that rate, and many -especially the very largest ones- pay ZERO in income tax, or are due tax CREDITS.

You can have a look at the shortlist of the worst offenders at the above mentioned Citizens for Tax Justice(among others).

By some estimates, there may be as much as $32 TRILLION(!!!!) being hidden in offshore accounts:

http://www.rawsto...urce=Raw Story Daily Update&utm_campaign=f7ddf3b86b-7_23_127_23_2012&utm_medium=email

Flow my tears...
eigenbasis
5 / 5 (1) Jul 24, 2012
Blah blah blah... More wall st. hype. The huge bear flag on your stock chart should tell you to short Apple right now


I said this yesterday, after hours today down over 5%... stock charts don't lie. Someone couldn't accept the truth and rated my comment a 1, hope you weren't long their stock!
Vendicar_Decarian
not rated yet Jul 24, 2012
Very, very old news. Is it just beginning to be reported in the U.S.?

"By some estimates, there may be as much as $32 TRILLION(!!!!) being hidden in offshore accounts:" - Caliban
antialias_physorg
not rated yet Jul 25, 2012
Apple is probably just waiting until they have 'parked' enough money to buy the election for one term. Then a law will be passed that will make the stuff untaxed if brought home. If it's even 1 dollar then they win. In the meantime it's a waiting game (or simply hoping that a competitor will do it first and save them even that bit of expenditure)

We had a similar waiting game with the nuclear industry in germany. The end of nuclear power was already law - but they simply waited and did nothing until the conservatives came back in power 8 years later. Lo and behold Merkel and her gang then reversed that law in short order (to general protests from the people - but what do they count for?)
Fukushima happened three months after that.
'Awkward' doesn't even begin to describe it.
aironeous
3 / 5 (1) Jul 28, 2012
If they succeed it will go to the CEO's just like the trend of abusers of capitalism have shown CEO pay rises right along side profits while average wage stays the same then they call themselves "job creators" placing themselves above the rest of the human race.

let us pray,
Oh job creators. Your arrogance and dishonesty and tax avoidance while at the same time trying to make yourself look patriotic is quite immoral and deceitful.
Will you so love the country rich in diversity and respecting of property rights that raised you, that helped you become rich, to give your only begotten profit hiding scam artist walking piece of turd anti american foreign bank account BS back into the hands of the country that still allows you to be a citizen? The 32 trillion you hide overseas to avoid paying taxes is causing more and more pressure on those with less money to pay more taxes and you know it yet you see it and your conscience is non existent.
aironeous
not rated yet Jul 28, 2012
If corporations are people then why don't they go to jail? Why don't they get their property confiscated to pay taxes?
antialias_physorg
1 / 5 (1) Jul 28, 2012
They don't pay taxes. They get bailouts...like...real...people...erm...scratch that.