Back in October 2010 we presented an analysis by Bloomberg which showed not only that courtesy of not paying taxes at its statutory rate of 35% Google was adding about $100/share to its then stock price of $607/share, but just how this was executed. Now, it is the turn of Apple, with its $110 billion in cash, to fall under the spotlight, with an extended expose in the NYT titled "How Apple Sidesteps Billions in Taxes" in which we learn that, shockingly, if you are at a table with only corporations sitting to your left and right, then you are the only person in the room paying taxes. Why - because global corporate tax "avoidance" schemes are not only perfectly legal, but they are actively encouraged, and in some cases form the backbone of a sovereign's (ahem Ireland) economic and even domestic policy, which just happens to be front and center in virtually every global corporate org chart permitting virtually the entire elimination of cash taxation at the corporate level.
As a reminder, here is what the Google tax avoidance structure looked like 2 years ago (and hasn't changed one bit since):
Now we find that Apple is also a material beneficiary of Irish tax creativity, which in turn has allowed the company to promptly raise a cash horde which may soon rival that of the Federal Reserve (and the Fed prints its money).
The NYT summarizes:
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 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 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 percent. (Apple does not disclose what portion of those payments was in the United States, 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 percent, which is about average for non-tech companies.
"Double Irish" is so popular it even has its own Wikiedia entry:
Typically, the company arranges for the rights to exploit intellectual property outside the United States to be owned by an offshore company. This is achieved by entering into a cost sharing agreement between the U.S. parent and the offshore company, in the terms of U.S. transfer pricing rules. The offshore company continues to receive all of the profits from exploitation of the rights outside the U.S., without paying U.S. tax on the profits unless and until they are remitted to the U.S.
It is called "The Double Irish" because it requires two Irish companies to complete the structure. The first Irish company is the offshore company which owns the valuable non-U.S. rights. This company is tax resident in a tax haven, such as Bermuda or the Cayman Islands. Irish tax law provides that a company is tax resident where its central management and control is located, not where it is incorporated, so that it is possible for the first Irish company not to be tax resident in Ireland. The first Irish company licenses the rights to a second Irish company, which is tax resident in Ireland, in return for substantial royalties or other fees. The second Irish company receives income from exploitation of the asset in countries outside the U.S., but its taxable profits are low because the royalties or fees paid to the first Irish company are deductible expenses. The remaining profits are taxed at the Irish rate of 12.5%.
For companies whose ultimate ownership is located in the United States, the payments between the two related Irish companies might be non-tax-deferrable and subject to current taxation as Subpart F income under the Internal Revenue Service's Controlled Foreign Corporation regulations if the structure is not set up properly. This is avoided by organizing the second Irish company as a fully owned subsidiary of the first Irish company resident in the tax haven, and then making an entity classification election for the second Irish company to be disregarded as a separate entity from its owner, the first Irish company. The payments between the two Irish companies are then ignored for U.S. tax purposes.
The addition of a Dutch Sandwich to the Double Irish scheme further reduces tax liabilities. Ireland does not levy withholding tax on certain receipts from European Union member states. Revenues from income of sales of the products shipped by the second Irish company are first booked by a shell company in the Netherlands, taking advantage of generous tax laws there. Funds needed for production cost incurred in Ireland are transferred there, the remaining profits are transferred to the first Irish company in Bermuda. If the two Irish holding companies are thought of as "bread" and the Netherlands company as "cheese", this scheme referred to as the "Dutch Sandwich". The Irish authorities never see the full revenues and hence cannot tax them, even at the low Irish corporate tax rates. There are equivalent Luxembourgeois and Swiss sandwiches.
And so on: lots of ins, lots of outs, lots of what have yous - all quite technical, and best if left to your professional tax avoidance attorney. The end result is the following:
Or, in other words, profits increase, taxes stay flat or decline. Most importantly don't try this at home kids, because hefty jail time usually is usually imposed when an individual is caught engaging in comparable such tax "avoidance" schemes, or at least one is quite terrified to speak American (sic), and understandably so, in the middle of Zurich or Geneva.
Yet for those who want to cut to the chase and visualize just what some of the crowning achievements of globalization are, the entire Apple tax scheme is summarized below:
The complete narrative can be found over at the NYT but the bottom line (net of no taxes of course, for cash flow purposes that is... GAAP taxes always gets the 35% treatment of course) is simple: companies can get away with paying negligible taxes if they so desire.
At the end of the day the question of corporate taxation is more philosophical than anything: by now everyone knows that America is becoming progressively more insolvent courtesy of exponentially rising spending and a tax revenue base that now funds less than half of all US spending, in the process forcing the Treasury to issue ever more debt, which in turn also makes Fed monetization of debt inevitable.
All of this is occurring at a time relentless populist class warmongering focusing on the individual income tax level, and just what according to one or two people in the administration is deemed a fair level of being "rich."
Which begs two questions:
- Since the only reason for the myth of corporate taxation is to fund the retainers of international tax avoidance lawyers, why not just do away entirely with corporate tax, period. If the justification for such pervasive global schemes (whereby hundreds of companies use them), is that double taxation is ultimately senseless, that's fine, but then at least equalize the playing field, because while an Apple may be able to afford the complicated tax loopholes that allow it to pay 10% tax, there are thousands of Small and Medium businesses, those that do generate domestic jobs, which can't afford this, and are thus stuck paying 3-4 times more relative taxes compared to the Apples and the Googles of the world, generating far less jobs than if they could retain triple the cash they do currently.
- Probably more importantly, if America truly does not care about the foregone hundreds of billions in taxes associated with such ubiquitous corporate tax loopholes, then let's just drop the entire farce that America desperately needs more tax inflows (apparently not if corporate taxes are being paid only by the biggest suckers) and while at it, let's just kill individual level taxation as well, so nobody has to pay any taxes. After all at this point what does it matter: if the Fed is indirectly monetizing half of US deficit funding, why not just go all the way, and at least avoid the hypocritical undercurrent prevalent within this and all other US administrations
Probably the biggest lesson for the day, which also should be known to all, is that it is the corporations that run the world, with governments and politicians merely placeholders to fool as many as possible that the this thing called democracy exists, and that the voices of the people, or the only ones who pay taxes, are heard.
Finally this also means that the fundamental American creed can now be adjusted to better reflect the times to "No Representation without Double Irish with a Dutch Sandwich taxation."