For 20 years now, Apple has blazed a reputation for stylish design and innovative products, creating a near-cult following among fans. Apple's computers appeal to the artists and designers who set so many of today's trends. Their iPod has helped change how the world listens to music. Their iPad has made online content available nearly anywhere. And their iPhone is helping change the way we communicate with friends, family, and colleagues. (Just a few years ago, your mother-in-law didn't have a cell phone. Now she sends text messages and "checks in" on Facebook.)
Apple may be the most successful company on earth. At one point last year, they had more cash on hand ($76.2 billion) than the United States government ($73.8 billion). And Apple is currently the most valuable company on the planet, with a "market cap" (total value of tradeable shares) that topped $590 billion dollars on April 10. (That's right . . . those iTunes you casually download for a buck each have created a company worth over half a trillion dollars.) In fact, Apple's current market cap is more than the gross domestic products of Iraq, North Korea, Vietnam, Puerto Rico, and New Zealand — combined.
But Apple's most recent annual report reveals the company's genius for creating successful marketing strategies also extends to successful tax strategies. How else would you describe a strategy that lets Apple earn billions and pays less than 10% of their taxable income in tax?
How do they do it? Largely by keeping the money they earn
outside the United States, outside
the United States. Apple owns subsidiaries in tax havens like Ireland, the Netherlands, Luxembourg, and the British Virgin islands. They helped pioneer the "Double Irish with a Dutch Sandwich" strategy that hundreds of other multinational companies have imitated. Apple even maintains a subsidiary in tax-free Nevada — the blandly-named "Braeburn Capital" — to manage that enormous cash haul without paying tax in its home state of California. For 2011, the company paid a worldwide tax of $3.3 billion on $34.2 billion of profit. But one study
concludes that Apple would have paid $2.4 billion more without these rules.
Now Apple has become part of the political debate. At the risk of grossly oversimplifying a pretty complicated discussion, Democrats in Washington scoff that taking an extra $2.4 billion in tax last year would have squelched Apple's creativity. Republicans reply that using the cash to grow the business or distribute more dividends to shareholders will grow the economy faster than if it goes to the IRS. Both President Obama and presumed Republican nominee Mitt Romney have called for eliminating corporate tax loopholes in order to pay for lower rates (28% in President Obama's plan, 25% in Governor Romney's). Either way, Apple is likely to become one of the stories — like Warren Buffett paying a higher tax rate than his secretary — that come to define this year's campaign.
Taxes always play a part in Presidential races. But this time, with the economy still struggling and the Bush tax cuts scheduled to expire in a few short months, taxes will be even more important than usual. Our job, as November approaches, includes helping you understand just what the candidates' proposals mean for your bottom line. So keep up with these emails — and if you're curious how any of the proposals you hear about would affect your plan, call us!
Tom Sawyer, CPA, PFS, CTC
Sawyer & Latimer, P.A.