How Apple and the Rest of the Tech Giants Avoid Billions in Taxes

On the outskirts of Cork, Ireland, sits the European headquarters of Apple Inc. There, housed in one glass building, are two companies, both owned by Apple. Now, Apple is an undeniable global behemoth, but what’s a company synonymous with Cupertino doing in Ireland? Well, Cork-based Apple Operations International and Apple Sales International are two pieces of a global tax strategy that helped Apple pay just $713 million this year on foreign profits of $36.8 billion. That’s a tax rate of 1.9 percent.

This component of Apple’s massive tax dodge is an accounting maneuver known as the “Double Irish with a Dutch Sandwich.” (It’s a move also utilized by Facebook, Google, Microsoft, Oracle, and Pfizer, among other.) It takes full advantage of international tax laws to make sure the Cupertino leviathan pays as little as possible to any government on its sales outside the U.S. Considering that Apple’s most recent SEC filing states that foreign sales accounted for 63 percent of its total revenues, keeping that money tax free is extremely lucrative.

Apple Operations International and Apple Sales International, both unlimited corporations (which means they have no obligation to reveal financial information to the government) registered in the Republic of Ireland, may occupy the same building, but they are in fact two different companies. It might seem curious at first glance that in establishing its European headquarters, Apple would create two companies. The winding maze of tax law keeps behind a hidden fern the key to this mystery.

Apple sells its products all over the world, and for this it pays taxes. Simple, right? The general U.S. tax rate on corporate profits is 35%. When someone purchases an Apple product on US soil or foreign revenues flow into US offices, there’s no way for Apple to avoid paying US taxes.

In 1980, Apple opened a factory in Cork, beginning its ongoing relationship with Ireland’s unique corporation tax, which was only ten percent at the time. A European headquarters in Ireland would permit Apple to channel foreign revenues into an account beyond the reach of the IRS. It’s a complicated dodge, but its rooted in Apple savvy handling of its intellectual property.

According to Stanford professor Gio Wiederhold’s 2011 paper, Apple transfers a portion of its capital (its software and designs) to something called a “controlled foreign holding company.” The holding company buys the rights to Apple’s intellectual property. The holding company then licenses the rights to a third company, also owned by Apple. This third company handles the actual selling of the product, and it receives all the revenues. It also pays the holding company licensing fees or royalties as a cost of generating income off of the intellectual property. If the cost of the licensing fees is high enough, the amount of taxable profit dwindles. All the real revenue flows to the holding company in the form of licensing fees.

According to Irish tax law, a company registered in Ireland is liable for taxes only if its ‘central management and control’ was exercised there. If management has been exercising its control from somewhere like the Cayman Islands, where the tax rate is 0%, then the holding company will end up paying no taxes on its income. Thus Apple keeps profits from foreign sales out of the hands of governments and retains vast hoards in accounts in tax havens. According to Wiederhold,

The use of primary tax havens causes a loss to the U.S. Treasury of more than $100 billion annually [that’s in total, not just Apple], a substantial amount compared to the $370 billion total actually collected as corporate tax. The large amount of capital accumulated in taxhavens encourages ever-greater investment in foreign companies. The eight largest companies have $300 billion available in taxhavens. Cisco Systems alone reported it had $30 billion available in its tax shelters and expects to keep spending on foreign acquisitions. The taxes on Cisco’s available funds, were they to be used for investment in the U.S., exceed total funding for the National Science Foundation and Defense Advanced Research Projects Agency.

In order to bring money out of the tax havens and into the United States, Apple would have to pay U.S. corporate tax. As long as it has options outside the U.S., Apple and any of the other companies using the same tax shelter scheme have serious incentives to reinvest profits abroad. It might seem unsavory, but for Apple and the other tech giants, it’s smart business. More than anything, it’s an indictment of the absurd complexity of the global tax system, which means that huge companies can save billions by paying legions of accountants to whip up a tax-dodging Royale with Cheese.