How Apple legally avoids billions in corporate taxes each year

Each year Apple -- an many, many other tech companies -- manages to avoid billions in corporate taxes around the world and across the U.S. They do this by setting up offices and funneling money to tax-friendly places like Ireland and Reno, Nevada. Even though Apple's corporate headquarters is in Cupertino, California, having offices to collect profits and invest money in countries and state with little or no corporate tax, they legally hang on to vast amounts of profit each year.

The New York Times, in another one of their Apple headlined exposés, points out that Apple's office in Reno, Nevada, only consists of a handful of employees. Nevada's corporate tax rate is 0%. California's is 8.33%. You can see where the savings add up rather quickly. And this office is one of many that Apple has established across the globe in order to legally cut back on taxes owed.

Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year. As it has in Nevada, Apple has created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox or an anonymous office — that help cut the taxes it pays around the world.

A treasury economist, Martin A. Sullivan, estimated that if Apple wouldn't have used tactics such as these, their tax bill last year alone would have been around $2.4 billion higher. Apple paid around $3.3 billion in taxes on a reported $34.2 billion last year.

Apple has responded to the New York Times' assertions that Apple evades taxes:

Apple also pays an enormous amount of taxes which help our local, state and federal governments. In the first half of fiscal year 2012 our U.S. operations have generated almost $5 billion in federal and state income taxes, including income taxes withheld on employee stock gains, making us among the top payers of U.S. income tax.

Apple has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules. We are incredibly proud of all of Apple’s contributions.

Although it's not made obvious in the New York Times article, Apple isn't the only company that takes advantage of tax code in this way. Most tax code was written with tangible goods in mind and most tech companies also deal with digital goods and transactions. It's very easy for companies such as Apple, Google, Microsoft, and other tech giants to collect the profits from these sales in low or no tax states and countries. In comparison, a company like Walmart that makes most of their revenue by selling tangible items would have a harder time using some of the same. Walmart recently paid $5.9 billion in taxes on $24.4 billion in revenue.

Although tech companies are lobbying heavily against it, and seeking enormous tax breaks before they repatriate their income, it's probably only a matter of time before tax codes are revised to better reflect the way in which the digital economy nows operates and does business. Until then, Apple and other tech companies alike will probably continue to enjoy the benefits of outdated tax code.

Source: New York Times