How Apple's phantom taxes hide billions in profit

By Peter Svensson

Associated Press

Published: Monday, July 23 2012 12:40 p.m. MDT

Apple declined to comment on the specifics of its tax strategies or why it records tax liabilities that other multinationals avoid.

"Apple has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules," the Cupertino, Calif., company said in a statement.

Yet Apple has made clear that it has no intention of repatriating its profits from overseas at the current U.S. tax rate. When CEO Tim Cook announced that the company would start paying a dividend this summer, he said the board determined the size of the dividend solely by looking at the amount of cash the company has in U.S. accounts.

"We do not want to incur the tax cost to repatriate the foreign cash at this time," Chief Financial Officer Peter Oppenheimer told investors in March.

Apple's net tax liabilities started building three years ago, when its sales started rocketing because of the iPhone. In that time, the company has reported a total of $69 billion in net income. If it had applied the same accounting practices as other multinational technology companies, and not marked some overseas profits as subject to U.S. taxes, its profits would have been about $78 billion, or 13 percent higher.

The boost to net income could mean a boost to the stock, since companies are usually valued on their earnings. If investors were to value Apple based on the last 12 months of earnings, with the tax liabilities added to earnings, the stock might be 13 percent higher.

Willens and Sullivan say that Apple could erase its liabilities by considering the profits "permanently reinvested" overseas, acknowledging that they will never be brought home. That would erase the tax liability, but it could make Apple look like a less responsible corporate citizen.

"I doubt they're going to do that on their own, because they don't want to be set up for criticism," said Willens.

Groups such as Citizens for Tax Justice compile lists of the tax rates corporations report. Apple looks like a relatively good taxpayer on such lists, with a 24 percent rate. But Apple doesn't actually pay the 24 percent, since it isn't repatriating its overseas profits. The actual taxes Apple pays are 13 percent of profits, as computed by Sullivan. That's a relatively low rate compared with other multinationals.

But keeping the money overseas limits what Apple can do with it. It means, for instance, that Apple can't use it to buy another U.S. company, or give it to shareholders.

To get the money home without paying full U.S. taxes on it, the company advocates a change in U.S. tax law. It's a member of Working to Invest Now in America, or WinAmerica. The coalition is lobbying for two congressional bills that would temporarily reduce the tax rate on such earnings to 5.25 percent. That would encourage the repatriation of some of the $1.4 trillion in cash that U.S. companies have sitting in overseas accounts, the group says.

The temporary tax amnesty enacted in 2004, resulted in hundreds of billions being brought home to the U.S. But according to the Congressional Research Service, it didn't create jobs or stimulate the economy, as had been hoped.

Google Inc., Oracle Corp., Microsoft Corp. and Cisco Systems Inc. are also members of WinAmerica, but none of them stand to gain as much as Apple from a tax amnesty, because they have less cash overseas.

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