William Raabe teaches graduate tax courses in the Fisher College of Business. His research focuses on tax law and policy at the state, federal and international levels.
There is a lot of talk about how much tax individuals should pay, but it seems like big corporations find ways to eliminate most of their federal income taxes. How do they do this? Is it really legal?
The big corporations employ many lobbyists, so they tend to get Congress to give them the tax law that they want. You and I don’t really have lobbyists, so our tax bills tend to be at the mercy of the business cycle and the levels of government spending.
Apple is a good case study for how effective tax planning can make a successful tech company even more profitable after taxes are considered. The company’s business model produces plenty of free cash, but it operates in an industry that is based as much on intellectual property as physical plant and employee productivity. As the current tax laws largely were drafted to operate in a manufacturing and merchandising economy, Apple, Google, Facebook, Cisco and others can exploit to their tax advantage a number of items that a more current tax code would address.
Apple’s tax planning appears to follow the letter and the spirit of current tax law. Even though most of Apple’s executives, engineers and designers work in the US, much of the company’s profit is taxed elsewhere. Here are some highlights of how Apple uses the current tax situation effectively:
- Over time, the company moves its physical plant to low-tax jurisdictions, such as Nevada, Ireland and the Netherlands.
- The company lobbies for and then uses tax incentives, e.g., for research and experimentation activities, that are offered by federal, state and local governments around the world.
- Apple uses tax planning arrangements that create subsidiaries in low-tax countries, such as in the British Virgin Islands.Then, using proper transfer pricing techniques, sales transactions are routed through the low-tax jurisdictions and more profits are left after-tax for corporate growth and development.
- Another tax-shifting strategy employs so-called commissionaires, who arrange sales of the company’s goods but never take possession of any inventory. Thus, Apple’s profit derived from the work of distributors in high-tax countries is taxed in a low-tax country like Singapore.
All of this happens in the open, so why is there no pushback from other taxpayers?
The operations are out in the open if you know where to look. Financial statement data can be obtained for free in several places on the web, although the tax results usually are buried in the small print of the statement footnotes. There you can find interesting tables that give the effective tax rates for the company’s domestic and offshore operations. You could compare the low tax rates of most tech companies with the much higher tax rates that are paid by manufacturers and retailers.
The tax returns themselves are not publicly available, unless they are the subject of a court case, say where the IRS challenges the internal transfer pricing practices of the taxpayer. But most tax litigation is settled by the parties before the case gets to a public forum like a court decision. So the details of how the multinationals do all of this often stay confidential.
In response to criticism surrounding its multinational tax planning, Apple counters that the company and its employees still pay billions of dollars in payroll, sales, property and individual income taxes. And Apple’s retail stores certainly draw customer traffic that benefits other tenants in shopping malls.