Apple and tax planning

[eric j]

Hi,

My slowly diminishing emotional attraction to Apple places me possibly among a minority. Some 15 years ago I was attracted to the Mac not only for its ease-of-use superiority but also because of an identification with the battling-to-survive underdog. The latter aspect is clearly no longer appropriate.

Now I'm starting to rank Apple among those corporate giants who play (currenty legitimate) games that, by reducing their their own tax liabilities, inevitably add to the tax burden on the common man.

This report from the New York Times illustrates my concern:-

http://www.nytimes.com/2012/04/29/business...tml?_r=1&hp

Of course, Apple is just one among many and my attitude may be a consequence of my being a pensioner suffering from the gradual erosion of my purchasing power. I am still fortunate in being able to afford a reasonable standard of living but today's report in a British newspaper that the richest in the UK last year were able to increase their wealth by some 5% adds to my sympathy for the Wall Street protesters.

Sorry for the rant.

eric j

[Paddy]

A couple of points here, in no particular order:

1. Apple is a corporation, a corporation whose sole fiduciary duty is to its shareholders. Not you or me (unless we're shareholders) or any other entity. Apple is only doing, and doing spectacularly well, what every corporation with good financial management tries to do. Maximize profits. Minimize expenses. Taxes are an expense.
2. We have romantic notions about this corporation because we seem to form emotional bonds with their products - probably a bit ridiculous when examined closely. For years, we long-time Mac users were a small(er), exclusive club; we enjoyed that camaraderie - the feeling of superiority that WE had the keys to the kingdom (computers that just worked!) while the rest of the world cursed their lowly PCs. The fact that the company whose products we championed struggled only added to the romance. Obviously, one glance around a North American university classroom or airport waiting area today will disabuse anyone of the notion that Mac owners are all that unique now.
3. Nobody can be bothered kicking (or writing stories about) a company that is just one of many, doing ok. Those, like Apple, flying high and the former high flyers are good story fodder for those wanting to sell newspapers. Moral outrage - even if ridiculously misplaced, sells. Envy of success...gloating over another's supposedly deserved misery. Not pretty, but very human, apparently. Angels one day, demons the next.

Generally, I'd suggest that the jurisdictions in which Apple is doing business only have themselves to blame IF they're not happy with the corporate tax structure and what companies such as Apple end up paying in taxes. Many states and countries twist themselves into pretzels trying to attract more corporate investment in the blind belief that no matter how they manage to do it, it will benefit the state or country. Complaining about it after the fact is nothing more than whining.

The tax structure in many countries protects those LEAST in need of the protection, which is hardly surprising when you consider where the power rests. Changing it requires a tremendous act of political will, fuelled by a cultural change I simply don't see happening any time soon in the US or most western democracies. Wall Street protesters have a problem - lots of complaints, but not a lot of solutions - or certainly not solutions that those in power will ever endorse, which combined with a general lack of interest/deep understanding of anything political or economic in the general populace dooms them to being a fringe element. I could say more - much more, but I'd be in a TS no-go zone, so I'll stop there.

Now repeat after me: Apple is a company. Apple exists to make money for its shareholders. Apple is not a philanthropic organization dedicated to the betterment of the human condition. Neither is Microsoft, Walmart, Google, General Motors or Intel. Some companies are better "citizens" than others (and some just better at publicizing it) - but NONE of them, unless badly managed, pay any more taxes than they have to.

[Xairbusdriver]

I think losing an emotional connection with a non-person (despite what the SupremeCourt says) is great! If you are serious about your concern for unjust tax rules, you'll not find much support from those who benefit from them. I suggest you focus your energies on those who created those rules, no matter what Capital they may call home. There is an oft quoted statement that says the destruction of a culture is not long after it discovers they can vote themselves benefits. (I'll look up the name later... )

[jchuzi]

Apple's response

[Xairbusdriver]

"But... but... we're not interested in facts! That would involve 'investigative' reporting and it probably wouldn't sell as many papers!!! Let's keep our priorities straight!!!"

If you want to see obscene profits and low taxes, take a look at the three or four oil companies that are left in the country! Oh, wait, I doubt those NYT reports do much driving...

I'm sure they're not upset about Apple pushing the interwebs and causing newspapers problems with the out-of-date business model. Nah...

[kimmer]

QUOTE(jchuzi @ Apr 29 2012, 01:33 PM) <{POST_SNAPBACK}>

Apple's response

Too bad there isn't a LIKE button for this response. I'd click it about a 100 times! Well done, Apple, well done.

I find it odd that when a company is innovative, creative, successful and still based here in the US, that folks want to slam them for being greedy capitalists. I know, I know ... I'm on the edge if not over it ... but this kind of stuff just frosts my cookies.

[jchuzi]

And, to avoid any suspicion of hypocrisy, I will admit that I leave no stone unturned in finding legal means to minimize my own taxes. Why should we expect anything less of Apple? The company is not doing anything illegal.

[Paddy]

Good for Apple - I'm glad they responded.

[jwboyd]

AAPL is back on my "Buy" list after being quiescent for several weeks. Now, if I could only find the cash to buy more at $600 per share . . .

[jcarter]

We took our original, yes, ancient stock certificates into our mutual fund account office, and they went happy crazy at seeing these 'antique certificates'. And they wanted to copy them for us, before they turned them into our account.
Pretty cool, they were young, and had never seen certificates like these. Fun it was.
And they are worth more than we thought,,,,,,,
I agree with you all, Apple is a legit company and they are making money just fine, as their products are wonderful, right?

Apple has made my retirement days when the weather is winter and awful, just the most fun, with Photoshop, DreamWeaver, and everything else that is fun with the internet. Like education, Ive never had more wonderful educational opportunities without driving all over the state, ever.

[tacit]

There's a serious, and rather elementary, problem, with the NYT article. Apparently, the reporter has never taken an accounting class.

Apple's tax liability looks very low right now because of the way corporate income taxes work. In December, Apple's corporate tax rate will suddenly take an astronomical jump.

Why? Because Apple's sales are soaring; Apple has reported twice as much income so far this year as it did last year.

Corporate tax doesn't work like income tax on individuals does. With normal individual income tax, you earn money, a percentage of it is taken out of your paycheck, and then at the end of the year you do the paperwork to determine what your actual tax should have been (accounting for deductions and so on), how much you paid, and what the difference is.

With corporate tax, you pay *estimated* tax that's based on your previous fiscal years' income. Then at the end of the year when you know what your *actual* income was, you pay the difference or get a refund.

So Apple is paying estimated tax for 2012 based on its 2011 sales. But so far in 2012 it has generated double the revenue that it did in 2011...which means that it is only paying half as much tax as it should be. At the end of 2012, when the year's books are closed, Apple will have to pay the difference. Then their 2013 estimated tax payments will be based on 2012's revenues.

So yes, its tax looks really low right now...because it's paying tax based on estimates that are only half of what it brings in. At the end of the fiscal year, it will have to pay tax to make up the difference.

The nominal tax for a corporation of Apple's size is 33%. With its tax rebates, deductions, and various other accounting shenanigans, its effective tax rate will likely be somewhere around 22-25%. The 9-10% the article is talking about is only estimated tax, based on last year's income, which was nowhere near this year's income.

[jcarter]

But dont they take a look at their income during the year and adjust their estimated tax payments up?
Thats the smart way to do it, then come the next year, they/you/I wont get hit with a big payment.

[Paddy]

QUOTE(tacit @ May 1 2012, 01:55 AM) <{POST_SNAPBACK}>

There's a serious, and rather elementary, problem, with the NYT article. Apparently, the reporter has never taken an accounting class.

Apple's tax liability looks very low right now because of the way corporate income taxes work. In December, Apple's corporate tax rate will suddenly take an astronomical jump.

Why? Because Apple's sales are soaring; Apple has reported twice as much income so far this year as it did last year.

Corporate tax doesn't work like income tax on individuals does. With normal individual income tax, you earn money, a percentage of it is taken out of your paycheck, and then at the end of the year you do the paperwork to determine what your actual tax should have been (accounting for deductions and so on), how much you paid, and what the difference is.

With corporate tax, you pay *estimated* tax that's based on your previous fiscal years' income. Then at the end of the year when you know what your *actual* income was, you pay the difference or get a refund.

So Apple is paying estimated tax for 2012 based on its 2011 sales. But so far in 2012 it has generated double the revenue that it did in 2011...which means that it is only paying half as much tax as it should be. At the end of 2012, when the year's books are closed, Apple will have to pay the difference. Then their 2013 estimated tax payments will be based on 2012's revenues.

So yes, its tax looks really low right now...because it's paying tax based on estimates that are only half of what it brings in. At the end of the fiscal year, it will have to pay tax to make up the difference.

The nominal tax for a corporation of Apple's size is 33%. With its tax rebates, deductions, and various other accounting shenanigans, its effective tax rate will likely be somewhere around 22-25%. The 9-10% the article is talking about is only estimated tax, based on last year's income, which was nowhere near this year's income.

That's a pretty big mistake to make - and I'm quite surprised that Apple themselves didn't pick up on it and demand that the Times publish a correction/explanation (and not just in one of those little "oops, we made a mistake" boxes.) Forbes did catch this - and you've got to love their headline: Apple's 9.8% Tax Rate: New York Times Ignorance Again and Tim Worstal minces no words in his utter contempt for the NYT's reporting:

QUOTE

So, what the NYT/Greenlining calculation has done is compared the profits in 2011 not with the taxes paid on profits from 2011. It has compared profits in 2011 with the taxes calculated on the basis of 2010′s profits.

Which is obviously clear and present nonsense, entire argle bargle of which at least the newspaper should be ashamed.

The fact that the NYT relied entirely on the "report" from pressure group the Greenlining Institute, without checking the facts, is disturbing, though certainly not unprecedented.

[Paddy]

QUOTE(jcarter @ May 1 2012, 08:37 AM) <{POST_SNAPBACK}>

But dont they take a look at their income during the year and adjust their estimated tax payments up?
Thats the smart way to do it, then come the next year, they/you/I wont get hit with a big payment.

Nope - that's not the way it's done for corporations:

QUOTE

How Much to Pay
The IRS general rule is that you must pay the smaller of:

90% of your total expected tax for this year, or
100% of the total tax shown on your last year’s return. Your last year tax return must cover all 12 months.

For some reason or other, the IRS figures that individual taxpayers are more adept crystal ball gazers than corporations and demands that they estimate their income ahead of time and pay installments based on those estimates. Given the size of the payments involved, and the complexity of the situation, you can perhaps understand this approach.

[jcarter]

Thats interesting, If I were the IRS, I would 'let' the corporations like Apple, up their payments thru the year.
Think of all that Apple dough that the govt could spend during the year!