Tech Industry

The Times takes on Apple again, with report on taxes

Following the year's earlier reports on Foxconn and on Apple's practice of sending manufacturing overseas, The New York Times publishes a piece that claims Apple has been a pioneer in developing ways to sidestep taxes.

The New York Times is once again putting Apple under the microscope, with a new, in-depth report about the tactics the company uses to cut its global tax bill by billions of dollars every year.

"Almost every major corporation tries to minimize its taxes, of course," the report says. Nevertheless, "Apple serves as a window on how technology giants have taken advantage of tax codes written for an industrial age and ill-suited to today's digital economy."

The report claims Apple has been a pioneer in developing ways to sidestep taxes and that companies seeking to do the same have used its methods as templates.

The article comes as Apple -- which, with products like the Mac, the iPhone, and the iPad, has inspired devotion from numerous consumers worldwide -- is perhaps still trying to move beyond past negative reports regarding the practices of manufacturing partner Foxconn. It's also been criticized by some in regard to domestic job creation and the hugely profitable company's lack of factories in the U.S. The Times published articles about those topics in January, setting off a wave of discussion.

This time around, the Times reports that Apple essentially sets up its business to take advantage of parts of the U.S. and the world that have lower tax rates for corporations. For instance, though its headquarters are located in California, and it has no manufacturing or customer-care operations in Nevada, Apple set up a small office in Reno -- a mere 200 miles from its Cupertino HQ -- to collect and invest its profits. California's corporate tax rate is 8.84 percent. Nevada's is zero.

That's just one example. Citing unnamed former executives at the company, the Times reports that Apple's innovation does not lie solely with product development. The company has also led the way with tax-dodging strategies such as the "Double Irish With a Dutch Sandwich":

Apple, for instance, was among the first tech companies to designate overseas salespeople in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsidiaries on other continents, sidestepping income taxes, according to former executives. Apple was a pioneer of an accounting technique known as the "Double Irish With a Dutch Sandwich," which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations -- some of which directly imitated Apple's methods, say accountants at those companies.

With practices like this, the report claims, Apple has been able to "allocate about 70 percent of its profits overseas," though "the majority of Apple's executives, product designers, marketers, employees, research and development, and retail stores are in the U.S."

The Times also says the advent of digital goods has changed the game for companies. The report gives details of an Apple subsidiary in Luxembourg: "The only indication of the subsidiary's presence outside is a letterbox with a lopsided slip of paper reading "ITUNES SARL." But because of that presence, the Times says, songs, TV shows, and apps downloaded via iTunes by people across Africa, Europe, and the Middle East are recorded as having been sold in Luxembourg.

The advantages of Luxembourg are simple, say Apple executives. The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through Luxembourg. Taxes that would have otherwise gone to the governments of Britain, France, the United States and dozens of other nations go to Luxembourg instead, at discounted rates.

"We set up in Luxembourg because of the favorable taxes," said Robert Hatta, who helped oversee Apple's iTunes retail marketing and sales for European markets until 2007. "Downloads are different from tractors or steel because there's nothing you can touch, so it doesn't matter if your computer is in France or England. If you're buying from Luxembourg, it's a relationship with Luxembourg."

The result, the Times says, citing government and corporate data, is that tech companies -- including Apple, Google, Yahoo, and Dell -- are among the least taxed, paying worldwide cash taxes in the last two years that were a third less than those paid by other companies in the Standard & Poor's 500-stock index.

The paper claims that without the tax strategies it uses, Apple would have paid $2.4 billion more in federal taxes in the U.S. last year. As it stands, though, the company paid at a rate of 9.8 percent, versus nontech representative Wal-Mart's 24 percent.

The article goes on to discuss the budget crunch that's hit many, if not most, states in the U.S., and it points out that the issue is complex: Apple and other tech companies do create jobs and wealth that remain in the U.S., and they also engage in significant charitable activities. But, the Times says, some feel that those things don't make up the loss of tax revenue. The article quotes Brian Murphy, president of De Anza College, a community college near Apple HQ, where Apple co-founder Steve Wozniak went to school from 1969 to 1974. The school is severely threatened by the current budget crunch.

"I just don't understand it," Murphy told the Times. "I'll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete's sake. But then they do everything they can to pay as few taxes as possible."

And the Times relates an episode involving late co-founder Steve Jobs and the Cupertino City Council. During the approval process for Apple's new campus, then-Councilwoman Kris Wang asked how residents might benefit and suggested that Apple might provide free Wi-Fi to the city, as Google had in neighboring Mountain View.

"See, I'm a simpleton;" Jobs replied. "I've always had this view that we pay taxes, and the city should do those things. That's why we pay taxes. Now, if we can get out of paying taxes, I'll be glad to put up Wi-Fi." He then suggested that if the council was unhappy, Apple could move -- and take with it the many millions of dollars it pays in property taxes annually. Wang dropped the Wi-Fi idea.

"We're proud to have Apple here," she told the Times for the article. "But how do you get them to feel more connected?"

For its part, Apple provided the Times with a statement that says, among other things, that the company "has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules," that the company is "incredibly proud of all of Apple's contributions," and that Apple "pays an enormous amount of taxes, which help our local, state and federal governments."

CNET contacted Apple for comment. We'll update the story when we get more information.

You can read the Times report in its entirety here.