Are Apple’s Tax Games Bad for America?

I stole this title from an article in The Atlantic, which can be read here. Many of you have read the New York Times report that Apple only paid a 9.8% tax rate around the world in 2011, while other companies like Wal-Mart paid 24%.

It’s not surprising that Apple, a company that makes $7 million dollars in profit per hour, can afford a decent team of accountants. This looks to have been a wise investment. Studies show that without its many tax shelters, Apple would have paid twice as much in federal taxes last year.

Apple pays low taxes thanks to a variety of exploited loopholes. But does that make Apple a group of corrupt criminals or cunning businessmen? That’s a question I’ll leave up to you, but before you make a decision, here are some important points to note:

So how does Apple exploit loopholes for its tax games? Here’s a look at its playbook:

• The “Double Irish with a Dutch Sandwich.” This is a tax-avoidance strategy invented by Apple and used by companies like Google and Microsoft that directs profits through the Netherlands to Ireland and then through the Caribbean.
• Braeburn Capital. Apple set up this subsidiary in 2006 to take advantage of Nevada’s lack of a corporate state tax rate, compared with the 8.84% rate in California. Only a handful of people work here, but it saves Apple millions of dollars a year.
• Apple’s sales teams in high-tax countries sell on behalf of subsidiaries in low-tax countries, avoiding income taxes.
• Apple employs a handful of employees in Luxembourg, where sales of items downloaded by customers in Europe and Africa are recorded and taxed at a discounted rate.

These strategies sound sneaky and deceitful. Yet it’s natural for a company to try to keep its tax bill as low as possible. In this day and age, all the major companies—Microsoft, Google, Oracle—are implementing strategies similar to those described above. Unless all these corporations begin paying higher taxes simultaneously, volunteering Apple to do so first would end up being a disservice to its shareholders.

You can call Apple’s low tax rate a lot of things, but above all, it has been profitable. Last week Apple announced it had net profits of $24.7 billion in the first half of the fiscal year with $110 billion in the bank. Without its tax loopholes, Apple would have fewer resources to invest in new products, return profits to shareholders, or create new jobs. By this reasoning, Apple’s tax dance around the world has generated more economic benefit than harm.

That’s one way to argue it. The other is to point out that lower taxes mean lower revenue for cash-strapped governments. For example, Apple’s home state of California is facing a fiscal crisis and expects a deficit of more than $9 billion over the next year alone. Perhaps if Apple paid higher taxes, California would find situations like this more manageable.

The state has cut some health care programs, significantly raised tuition at state universities, cut services to the disabled and proposed a $4.8 billion reduction in spending on kindergarten and other grades.

Ultimately, corporate income taxes still account for less than 10% of government revenue—a quarter of payroll or federal income taxes. But it’s an important debate, as we weigh the tradeoff between a corporation’s profitability and a government’s solvency.

What do you think? Does Apple’s philanthropy and job creation offset its decisions to minimize taxes? Would it be better to just lower the tax rate and tighten up loopholes?

What was your initial reaction after hearing Apple isn’t footing quite as large a tax bill as other American companies?

DISCLAIMER: Some sources have suggested that Apple’s tax rate is in fact higher than the 9.8% that the NYT reported, arguing that the NYT compared profits in 2011 with the taxes calculated on the basis of 2010’s profits. See the link to this argument here.