Friday November 10, 2017

How Apple managed to pay almost no tax on billions in profits

An activist from the Association for the Taxation of financial Transactions and Citizen's Action (ATTAC) sticks a poster on the window of the Apple store during a protest in southern France.

An activist from the Association for the Taxation of financial Transactions and Citizen's Action (ATTAC) sticks a poster on the window of the Apple store during a protest in southern France. (Anne-Christine Poujoulat/AFP/Getty Images)

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This week's release of the Paradise Papers, a huge leak of financial documents, shed light on the world of offshore finance, where the globe's richest companies and individuals manage to shore up their wealth by eluding taxes.

Among the Papers' revelations was the news that Apple, the world's most profitable firm, had sidestepped a 2013 crackdown from Ireland by shopping around for a tax haven.

With the assistance of offshore law firm Appleby, Apple ended up moving the firm holding most of its untaxed offshore cash — now worth more than $230 billion US — to the Channel Island of Jersey, off the coast of France.

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Members of the international Association for the Taxation of financial Transactions and Aid to Citizens (ATTAC) take part in a demonstration outside an Apple store in Paris. (Jacques Demarthon/AFP/Getty Images)

No corporate income tax is levied on the islands, which are largely exempt from European Union tax regulations.

The moves by Apple came following a U.S. Senate subcommittee found in 2013 that the company had avoided tens of billions of dollars in taxes through using overseas tax havens.

The German newspaper Suddeutsche Zeitung, which first published the revelations, reported that Apple has $128 billion US in offshore profits untaxed by the U.S.

The tech giant insisted this week that the reports were inaccurate, arguing it made changes to its corporate structure in 2015 that were designed to preserve tax payments to the U.S., not to reduce taxes elsewhere.

    

Reuven Avi-Yonah

Law professor Reuven Avi-Yonah, director of the International Tax LLM Program at the University of Michigan. (S. Soderberg/UM Photography)

Apple's Irish exploits

Apple might be insisting it isn't doing anything wrong, but the company has certainly managed to skirt a tax crackdown, Reuven Avi-Yonah, director of the international tax program at the University of Michigan Law School, tells Day 6 host Brent Bambury.

"They've done it by basically licensing their intellectual property, which is what drives the various devices — the iPhone, the iPad and so on — to a company that is incorporated in Ireland but is considered a resident of Bermuda for tax purposes. And Bermuda doesn't have an income tax, so their money accumulates there and doesn't get taxed."

The Irish tax rate has long been attractive to companies around the world, and Apple took advantage of additional loopholes — a move dubbed the "Double Irish" — where under Irish law their subsidiaries were considered a Bermuda company, not subject to Irish taxes. Ultimately, Apple ended up paying below one per cent in taxes there rather than the still fairly low rate of 12.5 per cent.

Ireland has since closed that loophole thanks to pressure from the European Union, prompting Apple to move its offshore holdings to Jersey.

"There's nothing in Jersey in terms of any real activity or employees — it's just a mail office address," Avi-Yonah explains.

Offshore law firms like Appleby play a key role in assisting multinational firms like Apple avoid high corporate taxes, he points out.

"What they do is basically enable companies, and individuals as well, to put their money where they don't pay tax," Avi-Yonah says. "They provide all the infrastructure that is necessary for this to be respected as a bonafide Jersey company or other company."

     

Macbook

A Macbook laptop pictured at a new Apple retail outlet in Nanjing City, China. (Zhang Peng/LightRocket via Getty Images)

Is this legal?

What may surprise many readers poring over the many stories resulting from the leak of the Paradise Papers is that these types of offshore financial dealings fall within the bounds of the law.

"It's not illegal," Avi-Yonah notes. "In fact, this was all exposed in a public hearing with Tim Cook, the CEO of Apple, in the U.S. Senate. He said it's legal, and I think everybody accepts it."

But are companies like Apple doing the right thing by attempting to avoid having to pay high taxes?

"​In my opinion, no," Avi-Yonah argues. "I think there's something immoral about it. Fundamentally, these things have no business other than tax avoidance. [Apple's] income mostly comes from research that was done in California, and they could have paid 35 per cent of that. But they choose not to do that, and the only reason they choose not to is because of tax avoidance."

     

iPhone2

A customer in China tries a new red iPhone 7. (Zhang Peng/LightRocket via Getty Images)

Corporate shell game

Though the revelations in the Paradise Papers might be new to some, companies like Apple have been playing this game for a long time, Avi-Yonah says.

"There's plenty of evidence — it's all over the place," he notes. "They say, for tax avoidance or tax minimization purposes, 'We absolutely must have a company that's treated as a Bermuda company,' which means that the board must be in Bermuda.

"Although what I've seen, for example in [certain] situations, even though technically there's a Bermuda member of the board, he doesn't attend the meeting, and everybody else phones in."

The 2013 Senate hearing aside, in general Americans seem to take the attitude that it's fine for Apple to avoid paying high taxes elsewhere as long as they're pulling their weight at home, Avi-Yonah says.

But, as the Organization for Economic Cooperation and Development has made clear, nearly $240 billion US is lost in tax avoidance by large companies, more than half of which are American.

Yet, there hasn't been increased pressure on offshore tax havens to change their laws.

"There are too many countries in the world where you can do this sort of stuff," Avi-Yonah says. "Because most big multinationals are from one of the G20 countries, if those countries got together, they could put an end to this."

    


To hear the full interview with Reuven Avi-Yonah, download our podcast or click the 'Listen' button at the top of this page.