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How Apple Avoids Paying Billions in Taxes

Adam Clark Estes
How Apple Avoids Paying Billions in Taxes

Thanks to a complex network of offshore accounts and cleverly named subsidiaries, Apple, the world's most valuable company, paid just $713 million on its $36.8 billion in foreign earnings last quarter. That amounts to a rate of just 1.9 percent, a figure that makes Mitt Romney's 14.1 percent effective tax rate look downright generous. And believe it or not, Apple actually reduced its foreign tax rate by nearly 25 percent as the company's market cap soared to new heights this year. According to the Associated Press, it was 2.5 percent at this time in 2011. Did Apple get a tax cut? Nah, they just got better at avoiding the IRS.

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Apple is one of many major corporations that keeps its taxes low by stashing cash offshore. In reality, it's not as simple as just opening a bank account in the Caribbean and sending checks there every month. In order to get its rates down, Apple has actually set up subsidiaries and subsidiaries of subsidiaries in countries with low corporate taxes, and it shuttles funds between them in order to minimize its liabilities. The specific strategy that Apple uses is known as the "Double Irish with a Dutch Sandwich." This means that Apple directs its profits through two subsidiaries in Ireland -- Apple Operations International and Apple Sales International -- where corporate tax rates are about 12.5 percent compared to the 35 percent rate in the U.S. Some of the money goes through the Netherlands, due to some of Ireland's treaties with other European nations, to tax havens in the Caribbean. 

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In case you were wondering, this does cost the average consumer in the long run. "Apple, like many other multinationals, is using perfectly legal methods to keep a significant portion of their profits out of the hands of the I.R.S., and when America's most profitable companies pay less, the general public has to pay more," former Treasury Department economist Martin Sullivan told The New York Times earlier this year. Sullivan added that Apple's last annual report showed that only 30 percent of the company's pretax profits came from the U.S. "Given that all of the marketing and products are designed here, and the patents were created in California, that number should probably be at least 50 percent," he said.

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This is not a new strategy. Apple just seems to be getting better at it. And they should, since they were one of the companies that invented it back in the late 1980s. Now most major U.S. technology companies, including Facebook and Google, have their European headquarters set up in Dublin and enjoy the tax breaks that come with that. Like Sullivan says, though, this comes at a cost to the American consumer who has to pick up the slack. In response to The Times's coverage of the tax breaks earlier this year, Apple released a statement saying that it pays "an enormous amount of taxes," and that's true. Just not as many as they would without all of the tax tricks.