TOPICS > Economy

How Apple, Other Tech Companies Take Advantage of U.S. Tax Code

April 30, 2012 at 12:00 AM EST
Apple paid a collective tax rate of 9.8 percent around the globe in 2011 while Wal-Mart paid 24 percent, according to a recent New York Times investigation. Jeffrey Brown, the Times' Charles Duhigg and economist Martin Sullivan discuss how Apple uses offices in Nevada and elsewhere to minimize its taxes and maximize profits.
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JEFFREY BROWN: And we turn to a side of the tech revolution that rarely gets attention: How much do our leading tech companies pay in taxes?

The New York Times has taken a close look at Apple, one giant among many that take perfectly legal steps around a tax code written for an earlier industrial age. The Times reported that Apple, headquartered in Cupertino, California, uses offices in Nevada, where there is no state corporate income tax, and in countries with lower tax rates, like Ireland and the British Virgin Islands to help cut the taxes it pays around the world.

It cites government and corporate data showing that over the last two years, the 71 technology companies in the S&P 500 stock index, including Apple, Google and Yahoo!, paid a rate that was on average a third less than other companies on that list. Apple, for example, paid a collective rate of 9.8 percent in taxes around the globe. In comparison, Wal-Mart paid 24 percent.

Charles Duhigg co-wrote the Times article. He’s the author of the book “The Power of Habit: Why We Do What We Do in Life and Business.” Also with us, Martin Sullivan, the chief economist for Tax Analysts, a nonprofit organization that produces tax news and analysis.

And, Charles Duhigg, I will start with you.

Start with a brief example of what you found at the office in Reno. What does it do and how does it help Apple lower its taxes?

CHARLES DUHIGG, The New York Times: Apple has a small office in Reno that is down an anonymous hallway. It’s named Braeburn Capital. And, in fact, when I went to go visit, even the neighbors of this particular office didn’t know what they did there. There’s only a handful of people who work there.

But what Apple has done is, it takes all of its profits from across the United States and it Funnels them into Braeburn Capital, who then manages that cash, Because Nevada and Reno has no capital gains tax, it has no corporate income tax. So if that money had been sent to Cupertino, where Apple is based, then the company would have had to end up having to pay almost 9 percent taxes on its gains.

But as a result of sending it to Nevada, they get to invest that money tax-free.

JEFFREY BROWN: Now, Martin Sullivan, these and other examples cited in the article, as we said, they’re perfectly legal. Right? So what is it? We are just seeing more of it now, more of this kind of thing?

MARTIN SULLIVAN, chief economist, Tax Analysts: That’s right.

Charles is describing at the state level what’s happening also across international borders. The world is becoming more global. The capital is more mobile because the capital is no longer physical capital. We’re talking about technology, patents and trademarks. And that can move across borders without any disruption to business.

And because our tax laws are leaky, the consultants and the economists and the lawyers that work for these corporations are able to shift the profits out of the reach of the IRS and into the tax havens.

JEFFREY BROWN: Well, Charles, that’s what was so interesting about this, is that it’s partly about determining where profits are made by a company, and in an electronic commerce age, that’s much more complicated, right?

CHARLES DUHIGG: That’s exactly right.

Back when Detroit was the head of auto manufacturing, it was clear where profits were created. Right? A car was made in Detroit. There was little argument that you could make that some of the money from that should be sent overseas to Ireland.

But when it comes to things like apps that you download, software, things that have patents as their most valuable components, then can you make an argument or companies can make an argument that the profits from sale of iPods or other products should be sold to — should be sent to other continents, because that’s where they have will located the intellectual property or the license for the intellectual property.

JEFFREY BROWN: And, therefore, Martin Sullivan, you see this discrepancy between tech companies and we give the example of Wal-Mart?

MARTIN SULLIVAN: That’s right.

Because tech companies and for that matter pharmaceutical companies have so much technology, they’re — these companies have the opportunity to shift profits that conventional industrial businesses or service companies or retailers just don’t have that capability.

They make most of their profits from doing things that are located in the United States that cannot be transferred.

JEFFREY BROWN: But even a company like Wal-Mart — I mean, companies that are international, that don’t — but still make actual products, as opposed to the intellectual property?

MARTIN SULLIVAN: Well, everybody has international profits. They are multinationals by definition.

JEFFREY BROWN: Right.

MARTIN SULLIVAN: But what is happening in the case of the technology companies is, they do most of their research in the United States. And that’s where they create most of their value.

However, they assign those rights to tax haven holding companies, and when they do that, most of the profits from their primary business is moved offshore. So it’s really an order of magnitude of difference.

JEFFREY BROWN: Now, Charles Duhigg, I gather Apple didn’t want to talk about specific offices, but they issued a statement. They basically said: We play by the rules. We’re proud of our contributions to our communities, and we pay an enormous amount of taxes.

All true, right?

CHARLES DUHIGG: Well, and it’s absolutely true that they play by the rules. Every major company does this. Right? And this what is the tax code allows.

What’s less clear is how much Apple actually pays in taxes. The U.S. is unique in that the books, the set of books that they release to the public, to the SEC, is different from the set of books that they release to the IRS. So we don’t actually know what any company in the United States actually pays in taxes. The only people who know that are the IRS and the company itself.

And, as a result, there’s a lot of ambiguity. Apple told us that they have paid $5 billion so far in this fiscal year, in the first half of the fiscal year, in taxes. We don’t know if that’s accurate or if that’s inaccurate.

We do know that that includes the taxes that Apple employees have paid, personal income taxes that the company withholds and sends on their behalf. But this gets to sort of the heart of one of the difficult things here, which is that it’s hard for taxpayers to really know what’s going on because we can’t see into companies’ tax books.

JEFFREY BROWN: You’re nodding your head.

MARTIN SULLIVAN: Well, we can’t see exactly into their tax books, but the trends are so large, the movement of profit is so great, that it’s very clear that, over the last five or 10 years, we have seen a trend where multinational corporations are moving a greater share of their profits offshore.

And not only are they moving it outside the United States, but they are also moving it into tax havens. So this gives them tremendous incentive to locate profits and businesses outside of the United States.

JEFFREY BROWN: So is all this about — I will start with you, Martin Sullivan — is all this bringing about a larger debate about with states at the federal level about sort of changing the tax code as technology changes, as commerce changes?

MARTIN SULLIVAN: Well, there’s an enormous debate going on right now in the international tax community.

On the one hand, there’s the argument by conservatives and Republicans to totally exempt foreign taxes — foreign profits from tax. And, meanwhile, you have folks on the other side of the spectrum who say we need to close these loopholes in order to help pay down the deficit.

There is some middle ground. The middle ground would be to reduce our corporate tax rates to improve our competitiveness, as I think almost everybody in Washington is arguing for that right now, the president and the Republicans.

But we need to pay for that some way. And to pay for that, we must close loopholes. And this type of loophole that Charles is talking about is probably the biggest loophole we have.

JEFFREY BROWN: And, Charles, just briefly, you were looking at this through the lens also I guess of the state, right, of California in this case?

CHARLES DUHIGG: That’s right. And California misses out on a lot of revenue, as do 20 other states when Apple opens up an office in Reno, Nev.

JEFFREY BROWN: And so are they looking — are they — is there a debate under way in states like that over what to do?

CHARLES DUHIGG: There will be.

What’s interesting is I called a number of members of the California legislature, and even they were not actually aware of what was going on. Particularly as we’re entering this age of austerity, as states are experiencing budgetary difficulties, I think you are going to see a lot more conversation about trying to get tax revenues, because the truth of the matter is that the tax system which was designed for an industrial age, as you mentioned, it is not equipped for an electronic age.

And yet technology is one of the largest growth industries in the United States. And so our tax system both at the state and federal level needs to reflect what the actual business of America is now.

JEFFREY BROWN: All right, Charles Duhigg, Martin Sullivan, thank you both very much.

CHARLES DUHIGG: Thank you.

MARTIN SULLIVAN: Thank you.