April 29, 2012

"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...."

Apple is only taking advantage of opportunities that exist in the tax code. Why do they exist?

A completely separate question, woven through the linked NYT article, is the way some states — notably California — take so much in tax that they drive businesses away. There's a competition among the states, and it punishes them for getting too greedy.

I get the impression the NYT would like to shame corporations into willingly forking over more money to the government. Here's a great anecdote:
In one of his last public appearances before his death, Steven P. Jobs, Apple’s chief executive, addressed Cupertino’s City Council last June, seeking approval to build a new headquarters.

Most of the Council was effusive in its praise of the proposal. But one councilwoman, Kris Wang, had questions.

How will residents benefit? she asked. Perhaps Apple could provide free wireless Internet to Cupertino, she suggested, something Google had done in neighboring Mountain View.

“See, I’m a simpleton; I’ve always had this view that we pay taxes, and the city should do those things,” Mr. Jobs replied, according to a video of the meeting. “That’s why we pay taxes. Now, if we can get out of paying taxes, I’ll be glad to put up Wi-Fi.”

He suggested that, if the City Council were unhappy, perhaps Apple could move. The company is Cupertino’s largest taxpayer, with more than $8 million in property taxes assessed by local officials last year.

Ms. Wang dropped her suggestion.

Cupertino, Ms. Wang said in an interview, has real financial problems. “We’re proud to have Apple here,” said Ms. Wang, who has since left the Council. “But how do you get them to feel more connected?”
Feel more connected.... Absurd! The article ends with a quote from the president of a Cupertino area community community college complaining that companies like Apple are "philosophically antitax, and it’s decimating the state." I'd love to hear what Steve Jobs would say to that. It's the pro-tax philosophy that decimates a state.

IN THE COMMENTS: Maguro said:
Needs an "Apple is like Elizabeth Warren" tag.

37 comments:

rhhardin said...

Taxes as income transfer is a third world economic organization (hit the guy on the head and take his stuff), with third world results.

In a free market system, you can only get rich by making somebody else better off.

For instance Apple makes Apple customers better off.

That works out pretty well, and is called first world.

Lefties are always third world.

Leland said...

I would like to shame NYT reporters in giving up their pensions.

madAsHell said...

"decimating the state"

A 10% reduction would be a good start.

tm said...

I thought the NV thing was pretty lame as an example of abusive tax. If they only had a PO Box there, or if they got profits there through aggressive transfer pricing, that'd be one thing, but they actually have people there working. So where's the problem?

That was the only new piece of info in the article; the other stuff is well-known to those of us that practice in tax or follow tax policy. So the article came off as sort of lame to me.

Quayle said...

Why can't you be like that generous, altruistic company Google.

Their products are free.

And they are all about not doing evil.

Huh, Apple? Why can't you?

I know we leftists used to talk about big brother and the danger of big brother compiling a huge database about people.

But you just have to know the math to understand:

Corporations are bad.

Governments are good.

Collecting information on people is bad.

(Now follow closely, here's the tricky part.)

Governments (good) + collecting information on people (bad) = bad.

Corporations (bad) + collecting information on people (bad) = good.

Did you get that?

cryptical said...

You know corporate tax rates are too high when it's more profitable for Apple (or any company) to hire people to devise tax avoidance strategy than it is to just pay the tax. Just think if they could hire software engineers to make their product better (or better products) with the money they save on tax lawyers and accountants. Just another example of Government distorting the marketplace.

LilyBart said...

Its out of control spending that decimates a state.

Richard Dolan said...

"Philosophically antitax" is a bizarre phrase. No one holds a "philosophy" of taxation that I know of. Taxes are just a necessary burden of life in society, where public goods are a necessity and have to be funded. The dispute is all about what qualifies as a necessary public good. In addition to paying taxes, some are also inclined to charitable activity. The difference is that taxes are required and charity is voluntary. Ms Wang didn't quite get the difference. I dopn't know what Jobs' views were on public-spirited charitable works, but I think he didn't care for injecting that idea in a hearing ostensibly concerned with approval of a new development, where the suggestion that Apple give free wifi came with an unsubtle whiff of extortion.

In California especially, but pretty much everywhere the 'blue' model still reigns supreme, that's a problem causing people and businesses to vote with their feet.

Maguro said...

Needs an "Apple is like Elizabeth Warren" tag.

F said...

The president of that Cupertino-area community college knows his institution is tax-exempt because it is an educational institution. Unless, of course, they are not "philosophically anti-tax" and eagerly pay taxes the law exempts them from.

Doc Holliday's Bastard said...

Does anyone else feel that the Feds should just figure out the total cost for operating off-shore business for tax avoidance (taxes, creating a subsidiary, running that subsidiary in a foreign country...etc.) and then set our corporate rate just below that? Theoretically, instead of getting nothing from a future multinational corporation, we, like the city of Cupertino, end up pulling in oodles of money. Instead we have a tax system designed to push American companies offshore once they get rich enough to do it, and to keep foreign companies from headquartering in the US. Awesome.

edutcher said...

The 'Double Irish With a Dutch Sandwich'.

Sounds like my ancestry.

(or a 40s porn flick with Paul Henreid and Maureen O'Hara)

And I love the line from the community college guy, "companies like Apple are 'philosophically antitax, and it’s decimating the state'".

He needs to take one of his own Biz Ad classes. That's how you make a profit, keeping costs down.

Zero may be ignorant, but it sounds like he's got more company than we want to think.

EDH said...

I was just working on the Warren link...

“See, I’m a simpleton; I’ve always had this view that we pay taxes, and the city should do those things,” Mr. Jobs replied, according to a video of the meeting. “That’s why we pay taxes. Now, if we can get out of paying taxes, I’ll be glad to put up Wi-Fi.”

Indeed, the message to business in many quarters is "that tax money you just paid, now it belongs to the 'rest of us'.

Now, what are you going to contribute?"

jimbino said...

Richard Dolan,

Yes, "philosophically antitax" is a very important concept, and I adhere to it in my own life, just like Apple does.

When faced with working more, hiring more folks, or moving into new markets, a person or firm considers both the profit and tax consequences. If vastly greater revenues bring vastly greater taxes, profit may stay the same or even fall, with the result that the move will not be done, people will not be hired and the new products will not be created.

Indeed, it is so hard for that reason to move off welfare. The person loses foodstamps, medicare and daycare and starts paying taxes, making the move impossible.

bagoh20 said...
This comment has been removed by the author.
The Drill SGT said...

I find it fascinating. The Liberals love Apple that makes 29+% profit on revenue and demonize Exxon that makes 7+% on revenue. One is a great asset, the other a gouging win-fall profiteer.

jimbino said...

I'd hate to see everybody leave California. We here in flyover states have always looked to California for new ideas. After those novel ideas are tried out for a few years in California, we consider adopting those that haven't killed or seriously maimed them.

If California were to lose all its steam, we would be on our own without guinea pigs to rely on.

Right now, Walmart in CA sells hard liquor, while it doesn't here in Texas. 1.75L of José Cuervo costs $23 in a CA Walmart, but costs $38 in a Texas discount liquor store. That's an idea we could use.

fleetusa said...

CA and IL have the same disease as most of Europe. They impose high taxes and other regulations as wanted by the unions. Then existing (and future) job opportunities start drying up. The solution is to demonize the employers, increase taxes and the cycle starts over.

Wait until France elects FHolland. There will be more economic and jobs turmoil to watch.

Chip S. said...

I believe the "double-Irish-with-a-Dutch sandwich" was a particular favorite of Ted Kennedy and Chris Dodd.

halojones-fan said...

Companies in general are more willing to give California the middle finger and walk out the door. Witness the whole Lucasfilm/Marin scenario, where Marin county thought that they could dictate terms to Lucasfilm, and it turned out that Lucasfilm was entirely willing to go somewhere else, and now the Marin city council is all "hey whoa wait what happened duuuuuude..."

Bruce Hayden said...

I thought the NV thing was pretty lame as an example of abusive tax. If they only had a PO Box there, or if they got profits there through aggressive transfer pricing, that'd be one thing, but they actually have people there working. So where's the problem?

Had a CLE in my old firm on NV asset companies, let me assure you that for big companies, we aren't talking about transfer pricing - CA for one is extremely vigorous about going after transfer pricing, as is the IRS.

Rather, the way it typically works is that an asset is transferred into the NV company at a realistic, defendable, price. And, thenceforth, the appreciation, interest, royalties, etc. from that asset are managed by and taxed from the Nevada corporation.

So, in this case, cash is transferred into NV at a fair market value (easy to document with cash), and then it is invested and managed by that company. It could as well be IP (i.e. patents, copyrights, trademark, etc.) except that they have found an even better place to own their IP - Ireland. Just keep in mind that the valuation has to be realistic when transferred into this company - but with patents that is usually easy, because you can do it long before the patents issue.

The reason that you need a law firm involved if you are going to do this with much money or assets, is that you need to be able to document that the company is more than just a mere front. Board meetings must be real and documented. And, management decisions must be made by people on the Nevada company's payroll (though, as seen with Apple, they may also be on the payroll of other, possibly related, companies at the same time). It must always be kept in mind that both CA and the IRS are always going to try to pierce the corporate veil when it comes to this sort of thing.

Keep in mind what the NYT is highlighting here with the NV company - not money that Apple earned directly, but rather, the money that it earned off of money it earned earlier and paid taxes on.

Mary Beth said...

Needs an "Apple is like Elizabeth Warren" tag.

Did Apple say that the rest of us need to be paying more?

Bruce Hayden said...

The conflict between Nevada residents and companies versus the state of California has gone on for quite awhile now.

One of the more interesting cases was that of Gilbert Hyatt - the guy who won against the USPTO a week ago in the Supreme Court (Kappos v. Hyatt), and won against the state of California there almost a decade ago (Franchise Tax Bd. of CAL. V. Hyatt (02-42) 538 U.S. 488 (2003)).

Case is interesting. Hyatt claimed to have invented the microprocessor, and ultimately had some patents to back that (though they haven't done that well in litigation). So, he got some Japanese companies to agree to license his patents, for multiple hundreds of millions of dollars. Unfortunately for CA, he moved to NV before he got any of that money, and so paid no state income tax on it.

For most of a decade after that, CA tried to prove that he still lived there and owed the taxes. They hired private investigators, routinely went through his trash (in NV), etc. So, after most of a decade Hyatt brought suit in Las Vegas against the CA franchise tax board for harassment, invasion of privacy, etc. Ultimately got a $300+ million against CA, which was affirmed by the Supreme Court of Nevada (big surprise), and ultimately, the U.S. Supreme Court. Their argument was that CA law immunized the board from suit. Nevada said, sorry. The case was tried under NV law, and under NV law, the various departments and organizations within the state of CA are not exempt from suit for this sort of thing, and, esp. by a non-CA resident being harassed by a CA taxing entities.

Of course, to the best of my knowledge, CA has still not paid up on the NV judgment against it that was affirmed by the U.S. Supreme Court almost a decade ago.

This is just to illustrate the lengths that CA is willing to go in order to collect monies that have fled out of state that it thinks it is owed. And, why you need to document any attempts at moving income streams out of state very carefully.

tm said...

Keep in mind what the NYT is highlighting here with the NV company

I know. Again, I don't understand the problem. They actually have people in NV managing the money, so I don't see any issue.

Steven said...

@Doc Holliday's Bastard

The fundamental idiocy is taxing "corporate income". Eliminate that, and instead tax capital gains (which includes corporate income when it is passed on to individuals) at the individual income tax rate.

It's easy for Apple to have a subsidiary in Ireland; it's hard for Apple stockholders to all move to Ireland. Thus you manage to make the tax harder to avoid and you can eliminate a good deal of enforcement effort (since you're collecting individual income taxes already).

It would also eliminate all the corporate lobbying for tax loopholes and such in the corporate tax code, which companies are much more suited to do than individuals.

It would suddenly have foreign countries start using US subsidiaries to avoid taxes, too, instead of the other way around, to the benefit of the US.

RichardS said...

Does the NY Times corporation do anything to minimize its taxes? Does the Sulzberger trust?

Revenant said...

CA and IL have the same disease as most of Europe

I wish it was that simple.

The reality is that CA and IL have the same disease as most of the other states and the federal government itself.

You even see it from supposed conservatives -- "we can't cut defense spending because [insert name of 12th-world nation here] is a threat!". We are BROKE. Wake up and smell the fuckin' coffee.

Maybe ten percent of Americans are serious about getting our financial house in order. That's barely enough to swing an election, let alone control one of the two parties.

cubanbob said...

The simplest and most efficent thing to do is to eliminate both federal and state coporate income taxes and instead tax the shareholders individually on the pass through income in the form of dividends at the individual's AGI for both state and federal income taxes. The money corporations would save by not having to maximize their tax avoidance schemes would be eneormous and generate enourmous tax revenues on taxes paid by individuals.

RichardS said...

Good point, Cubanbob.
How would that have an impact on dividends? Warren Buffett famously refuses to pay a dividend--many think because he does not want to pay the taxes on it.
Some also suspect that he wants higher dividend taxes, in order to reduce pressure on him to pay one.

Jason said...

Well, Buffett usually believes that he can beat market returns by reinvesting profits within BRK. If you and your management team think you can beat the market returns by reinvesting, then the right thing to do is reinvest, and not pay a dividend. If you don't think you can generate market beating returns, then it doesn't make sense to reinvest in the company. Give the money back to the shareholders.

This argument has nothing to do with tax. It's still true even in the absence of a dividend tax rate. And you can't just sit on the money - the government discourages that by charging tax on accumulated earnings. The incentive is to truly invest it in acquisitions, capital equipment and property or R and D, or pay a dividend.

bgates said...

it’s decimating the state

California has a flat corporate income tax rate of 8.84% of gross income, says tax-rates.org, and a sales tax of 7.25%. So the state is already decimating the corporations, and then some.

EMD said...

Boy, that Steve Jobs was some kind of hippie.

Steven said...

RichardS -

Reinvestment of the money by the corporation, if done competently, shows up in the stock price, and thus the capital gains taxes paid by people selling the more valuable shares. If done incompetently . . . the people who wasted the money tend to get removed by the shareholders.

Andy Freeman said...

> Walmart in CA sells hard liquor, while it doesn't here in Texas. 1.75L of José Cuervo costs $23 in a CA Walmart, but costs $38 in a Texas discount liquor store. That's an idea we could use.

Walmart isn't always the cheapest booze in CA. I've seen cheaper for the exact same thing at both grocery stores and Costco.

Nora said...

A couple of weeks ago there was an article in Seattlr times about how Amazon is not involved in the local community, i.e. does not contribute local charity, with an example given, that I can remember, that Amazon did not even reply to some organiztion that asked to sponsor fireworks. I sorted the comments on most popular and the first 2 pages were all comments of outrage at Seattle Times and stupidity of the jorno who wrote it.
I would not be surprized that Seatlle Tiimes are still wondering why they loose readers.

Rusty said...

cubanbob said...
The simplest and most efficent thing to do is to eliminate both federal and state coporate income taxes and instead tax the shareholders individually on the pass through income in the form of dividends at the individual's AGI for both state and federal income taxes. The money corporations would save by not having to maximize their tax avoidance schemes would be eneormous and generate enourmous tax revenues on taxes paid by individuals.


Which then becomes a disincentive for individuals to invest. Individual investors will seek out those investments with less tax risk.

How about lowering the overall corporate tax rate? Build an incentive for corporations to keep their profits and manufacturing at home.
Outrageously complicated, I know.

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