How Apple's Phantom Taxes
Hide Billions in Profit
By PETER SVENSSON AP
Technology Writer
NEW YORK July 23, 2012
(AP)
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.
Apple 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 tax 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 presidential campaign.
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 profit stays outside
the United States.
Apple may pay some
corporate income taxes on that profit to the country where it sells the iPad,
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 multinational
corporations, 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 federal income taxes 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 net income. 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 tax rates 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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