Where does Apple pay taxes?

Or why Apple pays 8% taxes on foreign profits and accumulates due tax payments offshore indefinitely.

The release of the Paradise Papers has again put Apple in the spotlight for tax avoidance, showing that Apple has shifted their profits from Ireland to Jersey. Apple has since replied with the tax mantra: “Apple pays every dollar it owes in every country around the world.”. Contrary to the norm, this time they have provided a detailed explanation:

Their response can be summarized in four points:

  • Apple is the largest tax payer in the world (for instance 7% of all the corporate tax in Ireland is paid by Apple).
  • Their shift in operations to Jersey is to “specifically ensure US tax payments were not reduced”. — I will not enter on this, but this seems to mean “to ensure that payments in other countries are maintained at minimal levels, while keep deferring US tax payments”.
  • Apple’s worldwide effective tax rate is 24.6% , higher than the average for US multinationals.
  • Apple’s effective tax rate on foreign earnings is 21%.

However, in this calculation they included deferred taxes ($5.2 billion out of $15.7 billion in taxes in 2016). Deferred taxes are taxes due to the US government that do not need to be paid until the money is repatriated. These due taxes can be deferred and reinvested indefinitely, and they are usually deferred forever, or until a tax holiday, where the money can be repatriated paying less than the owed $5.2 billion. Taking as an example the tax holiday of 2004, where companies were able to repatriate profits paying 5.25% instead of 35%, Apple will pay around $0.8 billion. Using the WSJ update on Trump’s plan, repatriated profits would be charged at 12%, and the owed tax will be $1.8 billion.

What are the numbers if we include deferred taxes at a different rate?:

  • Taxes paid on domestic profits ($20.3b): $7.1b = 35%
  • Taxes paid on foreign profits ($41.1b): $2.1b paid to foreign governments + $1.2b paid in the US (interests from loans) + $0.8–1.8b if repatriated during a tax holiday: 10–12.4% (8% while the money is not repatriated)

And breaking up the tax payments by countries:

  • US: $7.1b + $1.2b in interests + $0.8–1.8b during tax holiday = $9.2–10.2b compared with profits of $20.3b
  • Abroad: $2.1b compared with profits of $41.1b (5%)
  • Total: $11.3b from $61.4b = 18.4%

Why is the revenue that foreign governments see only 5%? Because the majority of the value in Apple products is created in the United States, where the product is developed and maintained. Thus, foreign profits can be moved as intellectual property payments outside both the country where the iPad was sold, and the United States. In this third country the taxes can be deferred and the profits reinvested.

The numbers were obtained from this report by Fortune: