Apple and “The Facts about Apple’s Tax Payments”

Yes, the Apple tax thing has come out again, with the disclosure of the Paradise Papers. Apple has taken the somewhat unprecedented step of issuing a long statement about taxes.

They’re not really breaking any laws (though there are few transnational laws that govern this sort of thing), but it’s worth noting one inconsistency in Apple’s statement. The company says (and in bold):

The vast majority of the value in Apple products is created in the United States, where design, development, engineering work and more are accomplished

They say this in order to defend their use of offshore tax shelters to hold on to the money until they can convince the US Congress to let them repatriate the money at a discount. Yet later they say:

Apple has cash overseas because that’s where it sells the majority of its products

And there’s the rub. If you are a company making widgets, and you don’t sell them directly, you sell them through distributors, and they in turn tell your widgets to retailers, who sell to end users. Lets say you sell your widgets at 50% of their retail price; the local distributors and retailers earn the rest of the money, and pay taxes on it.

But since Apple sells most of their products directly, either through their own store, their online store, or their subsidiaries, they are able to retain much more of the total price of their goods. If the company were to book the value of each item they sell as a wholesale price, due to Apple Inc in the US, and the remainder as money generated locally (through their local subsidiaries), this would be fair. (No one thinks that Apple should pay taxes on the full profit they earn from selling iPhones in any country outside the US. Everyone recognizes that the products are designed in the United States, and that a certain amount of their value comes from that country.)

Because that’s exactly how they sell; they have a local subsidiary (one per country for the largest countries, one per region for certain regions), and they have retailers that they own in many countries that sell to end users.

This is how Apple is stiffing the non-US countries where they sell (and it’s not limited to Apple; more and more US companies are using this trick to not pay local taxes), and it’s simply unfair. Why should Apple not have to pay taxes to cover, for example, the roads, trains, and other infrastructure that allow them to sell in a given country? Yes, they pay VAT – which is something they merely collect for the government – but why should they be able to avoid paying income tax on items they sell in a country, where the “value” is partly the ability to sell it in that country? Apple is taking money from countries where they sell their products, but they are not contributing to the educational systems, to the justice systems (which they rely on), or to the well-being of the countries where there customers are. It’s simply not fair.

One note about this statement:

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

This statement is manipulative; sales tax and VAT are not taxes that Apple pays. These are taxes that companies collect for the government and then pass on. They do not pay sales tax or VAT out of their profits; it’s not an expense for the company. It’s money in that equals money out. (Sales tax is different from VAT, and Americans often don’t know what VAT is. Here’s an explainer, if you’re curious about the difference between the two.)

24 thoughts on “Apple and “The Facts about Apple’s Tax Payments”

  1. Don’t know why you and others seem to be so concerned about Apple’s corporate taxes. In reality, corporate income tax rate should be zero everywhere. Corporations don’t pay income tax, individuals do. The corporate income tax just appears as a product cost increase that flows down to the buyer. I’m all for all corporations doing all they can to minimize taxes. It makes their products cheaper.

  2. You are ignoring one fundamental fact: Apple is owned by its shareholders. Recently, a share in APPL costs about $175. Earnings per share were about $9 per year and from that, Apple is paying dividends of $2.52. How much more taxes do you want Apple to pay? $1 per share? $3 per share? Whatever the amount, it comes directly off the earnings per share. And since those taxes would have to be paid in cash, it is very likely that Apple would have to cut the dividends they are paying by the same amount.

    By the way, note that APPL dividends are income in the hands of their investors. So a dividend cut means they report less income for tax purposes and therefore pay less tax.

    The bigger impact would be the stock price. A $1 drop in earnings is likely to lead to a $15 to $20 drop in the share price. That $1 per share of extra corporate taxes would cut around 10% off the value of each share. Investors who sell will have a capital loss, which is deductible for tax purposes, again leading to reduced personal income tax.

    So when you say “Apple should pay more tax”, really you are just pillaging APPL shareholders. Corporations don’t exist separately from their shareholders.

    • Many shareholders of large companies do not live in the United States, therefore they will not pay income tax to the United States. Also, income tax on dividends is lower than it is on regular income. And for those making a lot of money, capital gains tax — which would be levied on the profit they would make from selling shares — is also lower than income tax.

      Certain retirement investment vehicles are tax-free, so people earning dividends from shares would not pay any tax.

      A whole lot would have to change to compensate zero corporate income tax. This article makes a good point:

    • Please, however, pay attention to what I wrote the article. I am not arguing that Apple pay more income tax in the United States; I am arguing that they pay more income tax, or appropriate income tax for their sales, in other countries.

      • But they are paying the taxes that they are legally obligated to pay. You want them to voluntarily forgo legal means of keeping those taxes low. And that comes straight out of APPL shareholder’s pockets. How do you think that would fly at the next shareholder’s meeting?

        As I posted to the other thread, Jersey uses their zero tax rate specifically to attract multinationals. What else can they use? Look at the incentives that various cities are proposing to Amazon in order to become the home of their second headquarters. If any of those places had the ability to offer reduced corporate tax rates, don’t you think they’d consider it? They see the spin-off benefits as exceeding what they are giving up to attract the business to their location.

        Jersey isn’t “bad” for offering a zero tax rate to attract businesses. Apple isn’t “immoral” for taking up the offered zero rate. There is no simple “right” amount of taxes to pay.

        • The problem is the lack of an appropriate legal framework for this sort of thing. No company has a right to just move its domiciliation to wherever they want because of tax rates. (Unless they physically move their headquarters.) And, as I’ve pointed out, the problem is more that Apple is able to say that they didn’t make any taxable profits in the countries where they sell goods. That has nothing to do with where they are domiciled fiscally.

  3. But where would or should the taxes be paid? Where is the profit made? Where it is finally sold? Where is it manufactured? The countries it travels through to get to the final sales location? Where it is designed? Where the CEO lives? What defines where the profits are made in a global company? And what happens if the US claims that ALL profits should be considered as US profit and the UK makes the same claim? Does Apple just pay taxes on everything everywhere to every country?

    And why doesn’t the company have a right to move to where it gets a lower tax rate? It’s taxed as if it were an entity (income tax) so why can’t it move to where it wants to avoid higher taxes? All other entities (humans) can move like that. If we want to tax companies as if they are really entities, then they should have the same freedoms as entities.

    What really should be done is to abolish income taxes on companies and let prices for products fall as a result, plus that would let the profits flow to the shareholders where they get taxed just ONCE. Now they are taxed twice, which is unethical.

    • Read what I wrote above. If the company sells their products to their subsidiaries at a fair wholesale price, then the subsidiaries would be fairly taxed in the territories where they operate.

      And regarding the US approach; they allow companies to deduct the taxes they pay in other countries, if they pay taxes. This is one of the main reasons why Apple stashes money in tax havens: because they’re not paying taxes outside the US, and they don’t want to repatriate it to pay taxes in the US.

      • “Fair wholesale price”. It is not as easy as you imagine–there is no single right price. See the following paper as an example. OECD recognizes 5 transfer pricing methods (sometimes called models). Not surprisingly, multinationals evaluate those methods and argue for the one that puts the most profit in the lowest taxed jurisdiction. The taxing authorities on both sides may audit these decisions and then argue for a scheme that puts the most profit in their jurisdiction. Then the negotiations start and when they finish, generally, nobody is very happy but they’ve come up some value in the middle that gets accepted. That’s how the sausage is made.

        For example, what is the right transfer price for the iOS system software? Is it the same in Germany, Japan and Australia? (Think translation and testing.) Apple has spent hundreds of millions of dollars developing iOS but duplicating another copy for device sold in, say, Switzerland costs NOTHING. (Because the French and German translations have already been created and tested for other markets.) How much should Apple Switzerland have to pay? Should it even be based on the number of devices sold in that country or just a flat fee? Maybe a flat fee plus a per-device levy. Experts in transfer pricing can write reams of documents justifying this approach or that just for the iOS system software. (They probably have!) Do you really think they’ve all come down to the same amount?

        On your other point, yes, the US tax system is really a mess. Taxes on foreign earnings are so punitive that it makes sense to borrow to pay dividends rather than repatriate the money. Apple didn’t make those rules either.

  4. Many countries have written laws that allow, even encourage certain behaviors. Now, swaths of the media and many individuals are expressing shock and outrage, that these laws have a) done what was intended, and b) had some unintended consequences. Many of the pundits want to blame Apple and other companies for both a and b. To some extent, this is justified, as corporations have done their best to get preferential laws passed in all jurisdictions. However, for the most part, the criticism should be focus on the lawmakers, and the solution will come from better laws and regulations (if at all). Asking corporations to be nicer is not a winning strategy.

    I agree with Kirk’s thesis, that the rules should be changed to be more equitable. I will quibble on one point, when he says, “Apple doesn’t collect sales tax, at least not in the US.” Apple collects sales tax on everything I buy from them. Most of my purchases are made online, delivered to a US location. Some are at the local Apple Store. In both sales channels, Apple does collect the sales tax from me. In my state, the tax is specifically, legally, explicitly a tax on the business. But that doesn’t change the fact that the business collects the same amount from me, the customer as they pay in sales tax to the government, making this aspect of sales tax revenue neutral, as Kirk says.

    • You’re right about the sales tax, of course; they’re their own biggest retailer. I wasn’t thinking, because here it’s VAT. I’ll fix that. Bit it is revenue neutral.

      • when I buy a digital takecontrolbook I pay 21%VAT. JoeKissel will transfer the collected taxmoney to the Netherlands. Really?

  5. “Bit [sic] it is revenue neutral.” And so is the so-called Income tax. Apple just collects it, factors it into the price to end up with the target NIAT (Net Income After Tax). So income tax, like all taxes on businesses, is revenue neutral.

    And I’m not a libertarian. I just don’t agree with taxing businesses as if they are entities. The profits are taxed multiple times in that scheme, which is basically unfair.

    Consider this: Apple sells an iPhone for US$1000, makes a gross margin of, let’s say $600 on the component parts, but has other expenses (salaries, R&D, facilities, licensing, etc, etc, etc) and ends up with maybe $200 net profit before taxes (20%, which is pretty good). Now the government comes along and says, “Send us 35%, please.” So Apple sends along $70, leaving $140. That $140 is distributed to the shareholders who have risked their capital to allow Apple to do business, who then pay a tax on that income again, usually in the 25-30% range. So let’s be generous and say 25%. That’s another $35 in taxes on the profit, just paid by someone else. Net is that the government got $105 of $200 net profit (52.5%), all for doing nothing directly to help invent, design, create, manufacture or sell the product. And that $105 was paid for by the customer who bought the iPhone. Now I’m not saying governments shouldn’t levy taxes, but taxing business profits is just plain theft, paid for by the consumer.

  6. I understood everything I need to know when you said, “convince the US Congress to let them repatriate the money at a discount”. As a stockholder it’s my money, Apple’s money they’ve preserved for me, their money.

    Otherwise the funds would have ended up in the hands of politicians who once decided the outrageous rate they believe is reasonable would again be squandered on some liberal pipe-dream.

    Believing our infrastructure is crumbling because successful corporations don’t pay what you think they should in taxes, instead of the political hacks misappropriating funds, demonstrates to me our government run, tax funded, public school system must be working for those tax takers.

  7. I would like to pose a question for those with more knowledge of this than myself. Kirk makes this statement:

    “This statement is manipulative; sales tax and VAT are not taxes that Apple pays. These are taxes that companies collect for the government and then pass on. They do not pay sales tax or VAT out of their profits; it’s not an expense for the company.”

    When Apple orders a component such as the gorilla glass front and back for an iPhone 8 and X from Corning, does it pay sales tax on the cost of the purchase to the city/county/state where the component was manufactured? If from a company in another country, does it pay VAT on the amount of the component? If so, then Apple would be correct in their sales tax, VAT statement.

    • For VAT, yes. But they deduct that amount from the VAT they owe when they sell something. It is totally revenue neutral to businesses; only the final consumer pays it out of pocket.

    • In the US, there is a business-to-business exemption for the sales tax. Both parties report the sales, but don’t collect or pay the sales tax. When the final product is sold to the consumer, the consumer pays the full sales tax of the location in which the consumer lives, and the company then files those taxes with the appropriate state government.

      For Income tax, levied on the profits of the company, that expense gets passed along to the consumer, too, but in the pre-sales tax value of the product. So, in my previous example, the US$70 theoretical total tax on profit on an iPhone is folded into the cost (pre-sales tax) of the iPhone. Again, the net effect is that Apple collects the tax and it is revenue-neutral to Apple. If the income tax were repealed totally, Apple could lower the price of the iPhone by $70 and be whole.

      • Yes, VAT is different. Each company pays at at each step of the manufacturing process, but then recovers it later. Only the final tax paid by consumers ends up in the treasury.

  8. Is that true for 100% of VAT Apple pays? For example, for the office equipment for its employees around the world that they would pay VAT on, is that also recovered or only items directly associated with cost of goods sold?

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