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Apple Tax Evasion Summary


On May 21, 2013, the Senate led a hearing on Offshore Profit Shifting and the
U.S. Tax Code regarding Apple Inc. and their efforts of tax evasion. To begin, Senate
investigators found Apples tax rate was 20.1% compared to their reported 24-
32%1, making a difference of about $8-9 billion2 annually from 2009-20123.
However, these tax rates are only based on the money Apple allowed to be taxed on.
Although the company has not done anything technically illegal, it avoids taxes by
strategic locations of certain assets.

No Tax Residency

Although Apple is run out of Cupertino, CA, they have a small office in Reno
called Braeburn4 Capital, Nevada that collects and invests profits because the state
has a corporate tax rate of 0% compared to Californias 8.84%5. Similarly, Apple has
subsidiaries internationally to reduce taxes, as $102 of $145 billion in cash, cash
equivalents, and marketable securities lies offshore as of 20136. One example is
Luxembourg-located company iTunes S..r.l. that records all sales from
downloadables. In 2011, the company made over $1 billion, about 20% of iTunes
worldwide sales7. Likewise, Baldwin8 Holdings Unlimited was founded in the British
Virgin Islands, a known tax haven, to store profits and lower tax costs. Baldwin
Holdings has no listed offices or telephone number and only one employee: Peter
Oppenheimer, Apples CFO who lives in Cupertino9.
The key affiliates located in Cork, Ireland due to the countrys low corporate
income tax of 12.5%10 are Apples most lucrative foreign subsidiaries. However,
since the 1990s, the Government of Ireland has provided Apple with a tax rate in

Shwartz, Nelson D., and Charles Duhigg. "Apples Web of Tax Shelters Saved It Billions, Panel
Finds." The New York Times. The New York Times, 20 May 2013. Web. 10 Jan. 2015.
2
Shwartz, Delson D., and Charles Duhigg.
3
Guglielmo, Connie. "Apple, Called A U.S. Tax Dodger, Says It's Paid 'Every Single Dollar' of
Taxes Owed." Forbes. Forbes Magazine, 21 May 2013. Web. 10 Jan. 2015.
4
Type of apple characterized as being hard and firm
5
Duhigg, Charles, and David Kocieniewski. "How Apple Sidesteps Billions in Taxes." The New
York Times. The New York Times, 28 Apr. 2012. Web. 10 Jan. 2015.
6
U.S. Senate, Committee on Homeland Security and Governmental Affairs. Offshore Profit
Shifting and the U.S. Tax Code Part 2 (Apple Inc.). Hearing. May 21, 2013 (S. Hrg. 113-90).
Washington: Government Printing Office, 1983. Page 10.
7
Duhigg, Charles, and David Kocieniewski.
8
Type of apple characterized as large, smooth and juicy
9
Duhigg, Charles, and David Kocieniewski.
10
Edwards, Jim. "Here's How Much Money Apple Avoids Paying In Taxes By Pretending It's
Based In Ireland." Business Insider. Business Insider, Inc, 11 June 2014. Web. 10 Jan. 2015.

the low single digits, and since 2003, a rate of 2% or less11. From 2009 to 2011,
subsidiaries paid a tax rate of 0.05%12 or nothing at all. This is because Apple takes
advantages of the differences between Irish and USA tax residency rules. Apple
Operations International (AOI), a holding company that owns most of Apples
offshore entities, has no physical presence and no employees other than 2 Apple Inc.
employees from Cupertino and 1 Irish employee of a different Irish subsidiary that
AOI owns13. Since AOI is not managed nor controlled in Ireland, Ireland does not
recognize its tax residency. Since AOI is not incorporated in the United States, the US
does not recognize its tax residency. Using these loopholes, the AOI has not paid any
corporate income tax for the last 5 years14, despite making up 30% of Apples total
net profits during the same time frame15. The same is true of another Ireland-based
company called Apple Sales International (ASI) that operates without any
employees but a California-based Board of Directors from Apple Inc. In 2012, ASI
made $36 billion in earnings16.

Cost-sharing Agreement


Tax code states that intellectual property belongs to the location of its
development. Although the bulk of Apples research and development efforts are
done domestically, Apple is able to transfer a disproportionately large amount of
profit to its Irish companies through a cost-sharing agreement. The Irish companies
make small annual payments to the parent company for use of its intellectual
property and then collects much more in sales revenues collected from other Apple
affiliates17. Since there is no benefit or improvement done to the products using the
intellectual property in Ireland, the only purpose of this agreement is to remove
large portions of profits to be subject to US taxation. Between 2009-2012, ASI made
cost-sharing payments to Apple of $5 billion and made $74 billion. In comparison,
Apple Inc. paid $4 billion for the agreement and made only $29 billion in profit
during the same time frame18.

Check-the-Box

Subpart F of US tax code prevents multinational companies from shifting
profits to tax havens, but Apple uses check-the-box rules to avoid paying taxes on
their foreign base company sales (FBCS) and foreign personal holding company

11

Levin, Carl, and John McCain. Offshore Profit Shifting and the U.S. Tax Code Part 2 (Apple
Inc.) [Memorandum]. Washington, DC: Permanent Subcommittee on Investigations. Page 20.
12
Levin, Carl, and John McCain. Page 21.
13
U.S. Senate, Committee on Homeland Security and Governmental Affairs. Page 4.
14
Sheppard, Lee. "How Does Apple Avoid Taxes?" Forbes. Forbes Magazine, 28 May 2013.
Web. 10 Jan. 2015. Page 2.
15
Levin, Carl, and John McCain. Page 23.
16
U.S. Senate, Committee on Homeland Security and Governmental Affairs. Page 5.
17
Sheppard, Lee. Page 1.
18
Levin, Carl, and John McCain. Page 29.

income (FPHC)19. Apple can claim that its foreign subsidiaries are part of its Irish
company, causing the IRS to ignore transactions between these subsidiaries. The IRS
then sees AOI as just AOI, despite it including other subsidiaries including ASI, ADI,
Apple Singapore, Apple Retail Holding, and European retail stores20. ASI in Ireland
takes titles to the manufactured products as they ship to distribution centers
internationally, but does not physically move any product. This allows profits to be
sent to Ireland, despite products never being passed through the country21, where
Apple benefits from the low tax rate. For example, Apple made $34 billion in 2011,
and reported that its Japanese subsidiaries made only $150 million, about 0.44%,
despite Japan being one of Apples largest foreign markets. Profits were removed
from Japan and sent to Ireland, where ASI alone reported $22 billion in income for
that year22. Apple Inc. itself estimated to have avoided $12.5 billion in taxes from
check-the-box rules between 2011-201223.

19

Guglielmo, Connie. Page 1.

Levin, Carl, and John McCain. Page 21.
21
Chokshi, Niraj. "How, Exactly, Did Apple Shelter $44B From Being
Taxed?"Www.nationaljournal.com. National Journal, 21 May 2013. Web. 12 Jan. 2015.
22
Ting, Antony, iTax - Apple's International Tax Structure and the Double Non-Taxation Issue
(March 19, 2014). British Tax Review 2014 No.1. Available at
SSRN: http://ssrn.com/abstract=2411297
23
Levin, Carl, and John McCain. Page 34.
20

24

24

Fernholz, Tim. "The Seven Craziest Findings in the US Investigation of Apples Tax
Avoidance Practices."Quartz. Quartz, 21 May 2013. Web. 11 Jan. 2015.

What IRS Sees

Reality

Reality
Third party
manufacturing

Apple Singapore
Product only
passes through
Ireland in title

Apple Asia inCountry

Distributors

Apple Operations
International
(Ireland)
All sales profits
from other
foreign
subsidiaries
stays in low-tax
Ireland

Consumers in
foreign retail stores

Apple Retail
Holding Europe
Product only
passes through
Ireland in title

Apple Europe inCountry

Distributors

Conclusion


In 2011, Apple made 70% of its total $34.2 billion pretax profits abroad, but
the subcommittee estimated that the company only paid a total of 2.2% of
international taxes on that profit25. Investigators argue that Apple has avoided at
least $74 billion from the IRS between 2009-201226 that would have to be taxed if
the money were to return to domestic ground. Apple plans to keep its profits
overseas, as CFO Oppenheimer explains; repatriating cash from overseas would
result in significant tax consequences under U.S. laws.27 In 2013, Apple even went
into debt by borrowing money for the first time despite having billions in cash28, in
place of bringing company money back to domestic grounds. Apple, like other
multinationals, are pressing for a tax holiday, and ultimately have decided to wait it
out in hopes of future changes to the US tax code. In the companys hearing, Apple
claimed that it has paid every tax dollar it had to, and has not done anything illegal.
Rather, Apple CEO Tim Cook argued for dramatic changes to the USA tax system,
which he considers outdated that would stimulate economic growth. Apple claims to
support tax reform even at the result of paying more US corporate tax.29


Quotes:

https://www.youtube.com/watch?v=fUIK9F2rIis from Bloomberg Business30

Rand Paul defending Apple: Im offended by a 4 trillion government bully,
berating, and badgering on of Americas greatest success stories. Tell me one of
these politicians up here who doesnt minimizes his taxes. Tell me a chief financial
officer you would hire if he didnt try to minimize your taxes legallyI would say
what we really need to do is apologize to apple, compliment them for the job
creation theyre doing, and get about doing our job. Look in the mirror and lets make
the tax code better fairer and more competitive worldwideWe should be giving
them an award today. We should be congratulate them for being a great
American company and not vilifying them for obeying the law.

https://www.youtube.com/watch?v=FiJez6DtZWc from Bloomberg Business31


25

Duhigg, Charles, and David Kocieniewski.

Shwartz, Nelson D., and Charles Duhigg.
27
Berman, Jillian. "Apple Not Bringing Overseas Cash Back Home, Blames U.S. Tax
Policy." The Huffington Post. TheHuffingtonPost.com, 19 Mar. 2012. Web. 15 Jan. 2015.
28
Gongloff, Mark. "Apple Would Rather Go Into Debt Than Bring Home $100 Billion In
Offshore Cash." The Huffington Post. TheHuffingtonPost.com, 24 Apr. 2013. Web. 15 Jan. 2015.
29
Guglielmo, Connie. Page 2.
30
Bloomberg Business. (2013, May 21). Apple Deserves Apology From U.S. Govt: Rand Paul
[Video file]. Retrieved from https://www.youtube.com/watch?v=fUIK9F2rIis
31
Bloomber Business. (2013, May 21). Apples Tim Cook: U.S. Tax Code Handicaps Companies
[Video file]. Retrieved from https://www.youtube.com/watch?v=FiJez6DtZWc
26

Tim Cook: Apple has become the largest corporate income tax payer in American.
Last year our US cash tax effective tax rate was 30.5% and we paid nearly 6
billion dollars in cash to US Treasury. Thats more than 16 millions dollars
each day. And we expect to pay even more this year.Apple has real operations in
real places with apple employee selling real products to real customers. We pay all
the taxes we owe every single dollar. We not only comply with the laws but
with the spirit of the laws. We dont depend on tax gimmicks. We dont move
intellectual property offshore and use it to sell our products to the United States to
avoid taxes. We dont stash money on some Caribbean island. We dont borrow
money from our foreign subsidiaries to fund our U.S. business in order to skirt the
repatriation taxOur foreign subsidiaries hold 70% of our cashunder the current
US corporate tax system it would be very expensive to bring that cash back to
the United States. Unfortunately the tax code has not kept up with the digital
age. The tax system handicaps American corporations in relation to our foreign
competitors who dont have such constraints the free movement of capital.

From the opening statement of Senator Levin32:

A recent study found that 30 of our largest U.S. multinationals, with more than
$160 billion in profits, paid nothing in Federal income taxes over a recent 3-year
period.

In regard to Irish subsidiaries having no tax residency:
Apple is exploiting an absurdity, one which we have not seen other companies use.
The absurdity need not continue if the entity is controlled by its U.S. parent to such
a degree that the shell entity is nothing more than an instrumentality of its parent,
a sham that should be treated as the parent itself rather than as a separate legal
entity. AOI, AOE, and ASI all sure seem to fit that description.

Apple has sought the Holy Grail of tax avoidance, offshore corporations that it
argues are not, for tax purposes, resident anywhere in any nation.

The question that each of us should ask today is: Shouldnt we close unjustified
tax loopholes and dedicate the revenue to educating our children, protecting
our Nation, building its future, and reducing its deficit? Closing these kinds of
unjustified loopholes could provide hundreds of billions of dollars to reduce the
deficit and avert damaging budget cuts to our defense, to our schools, our roads, the
safety of our food supply, and other important priorities.

32

Levin, Carl, and John McCain. Page 3.