How Apple cuts millions in state taxes
RENO — 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 in Reno in a subsidiary named Braeburn Capital, 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. By putting an office to collect and invest the company’s profits out of Reno, just 200 miles away, Apple sidesteps state income taxes on some of those gains.
California’s corporate tax rate is 8.84 percent. 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 countries like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox in Luxembourg or an anonymous office here — that help cut the taxes it pays around the world.
Almost every major corporation tries to minimize 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 — a record for any U.S. business.
Sweet and tart subsidiary
When someone in the United States buys an iphone, ipad or other Apple product, a portion of the profits from that sale is often deposited into accounts controlled by Braeburn, then invested in stocks, bonds or other financial instruments, say company executives. Some profits from those investments are shielded from California tax authorities by virtue of Braeburn’s Nevada address. (Braeburn is a variety of apple that is simultaneously sweet and tart.)
Since founding Braeburn, Apple has earned more than $2.5 billion in interest and dividend income on its cash reserves and investments around the globe. What’s more, Braeburn allows Apple to lower its taxes in other states, because many of those jurisdictions use formulas that reduce what is owed when a company’s financial management occurs elsewhere.
While Apple’s Reno office helps the company avoid state taxes, its international subsidiaries — particularly the company’s assignment of sales and patent royalties to other nations — help reduce taxes owed to the United States and other governments.
The Luxembourg subsidiary, named itunes S.ar.l., has just a few dozen employees, according to corporate documents filed in that nation and a current executive. But when customers across Europe, Africa or the Middle East — and potentially elsewhere — download a song, television show or app, the sale is recorded in the small country, according to current and former executives.
The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through Luxembourg.
In 2011, itunes S.ar.l.’s revenue exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of itunes’ worldwide sales.
Tax codes for industrial era
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 royalties on intellectual property, like the patents on software that make 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: Though 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.
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 them.
Apple was a pioneer of an accounting technique known as the Double Irish with a Dutch Sandwich, which reduced taxes by routing profits through two Irish subsidiaries — today named Apple Operations International and Apple Sales International — and the Netherlands and then to the Caribbean. In 2004, Ireland, a nation of fewer than 5 million, was home to more than onethird of Apple’s worldwide revenues, according to company filings.
Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin 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 about 9.6 percent. (Apple does not disclose what portion of those payments were in the United States or what portion is assigned to previous or future years.)
By comparison, Wal-mart Stores Inc. last year paid worldwide cash taxes of $5.9 billion on its booked profits of $24.4 billion, a tax rate of 24 percent, which is about average for non-tech companies.
‘Among the top payers’
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. We are incredibly proud of all of Apple’s contributions.”
The statement also said that Apple “pays an enormous amount of taxes which help our local, state and federal governments. In the first half of fiscal year 2012, our U.S. 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 U.S. 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. But the $5 billion figure appears to include taxes ultimately owed by Apple employees.