Have you ever dreamed of evading your income taxes, all with the blessing of Uncle Sam? Well if you have, the multi-billion dollar company Apple and other technology bell weathers are living your dream. How do they get away with it? They form subsidiaries in tax-friendly countries like Ireland, the Netherlands and Luxemburg which allow them to save billions of dollars in federal and state taxes. These foreign subsidiaries often consist of no more than a mailing address, with maybe a handful of employees working out of that office. Apple, for example, is based in Cupertino, CA, but it maintains a small office in Reno, NV to collect its profits and invest them through an entity known as Braeburn. Since Braeburn’s founding in 2006, Apple has earned more than $2.5 billion in interest and dividend income on its cash reserves and investments from around the world. Nevada does not charge a corporate tax. California, in contrast, has an almost 9.00% corporate tax rate.
As noted, Apple is not alone in legally avoiding billions in taxes every year. Other technology giants like Google and Microsoft engage in the same activity. Technology companies are ideally positioned to do this, whereas companies that manufacture physical products are not. Some of the technology giants’ revenues are derived from digital products or royalties on patents, so their profits can be moved more easily to tax-friendly states or countries. Manufacturers of physical products, on the other hand, have a much harder time shifting the actual sale of the physical product to a tax-friendly location. To give you an idea of the amount of money involved, the seventy-one technology companies in the S&P 500 paid on average one-third less in taxes over the past two years than other S&P 500 companies. Since we’re talking about multi-billion dollar companies, that is a significant chunk of change.
Apple, for example, assigned approximately 70% of its profits to countries outside of the U.S., specifically to places with lower tax rates than available in the U.S. If not for Apple’s profit-shifting, it would have paid approximately $2.5 billion more in taxes last year alone. Apple reportedly paid $3.3 billion in cash taxes world-wide last year on a profit of $34.2 billion at a tax rate of 9.8%.
Apple, of course, asserts that it has complied with all applicable laws.