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The Tax Prophet Newsletter   Issue #108 May, 2012

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In This Issue:
Introduction
Gaming the System
Tax Strategy
Sandwich
No State Taxes
Conclusion


How Apple Games the Tax System

Introduction

Apple Inc. is aggressively manipulating the U.S. and California tax systems with questionable tax strategies and saving billions in the process.

Ironically, large Silicon Valley companies pride themselves in gaming the tax system, even though government facilities and colleges their employees attend are crumbling from a lack of tax revenues.

Gaming the System

Because high tech companies deal with electronic assets that can be sold anywhere in the world, many form subsidiaries in tax havens (countries that have no income tax) to conduct their computer-generated sales.
Example: If Apple sells an ITune or IPad app in California, the sale produces federal and California gross revenue. If the same song or app is sold through an offshore tax haven country, no federal or California revenue is generated and Apple is not taxed on the income until it is transferred to the U.S.


Tax Strategy

Apple devised a complex tax strategy to place income offshore. Basically, it transfers electronic assets (IPad apps, or ITunes) to a subsidiary located in a tax haven. The subsidiary then sells the item to customers outside the U.S. and collects the revenue. As long as the revenue remains offshore, there is no U.S. or state tax due.

Note: Many other U.S.-based multinational corporations use these strategies to park billions, if not trillions of taxable income offshore.


Sandwich

The following is referred to as a "Irish-Dutch Sandwich" because it involves two countries:

1. IP is transferred from the U.S. parent to an Irish subsidiary, managed by individuals residing in a tax haven country (Cayman or British Virgin Islands). Sales occur in Ireland, but the proceeds are transferred tax-free to the tax haven. Due to a quirk in Irish law, company is not taxed because the manager reside in another country.

2. Usually, overseas profits are diverted to the Netherlands (the Dutch part of the sandwich) and then to the tax-haven.

Note: The Rolling Stones and U2 use the Dutch sandwich to avoid taxes on their revenues generated outside their country of residence. See my newsletter Tax Haven for Rock Stars.


Avoiding State Taxes

Apple devised another scheme to avoid paying state taxes on U.S. investments: It simply sends profits to a subsidiary located in Nevada and the subsidiary invests the funds.

Example: Assume Apple earned $10 billion in the U.S. and paid $2.0 billion in taxes. The after-tax surplus is then moved to a Nevada subsidiary for investment. Assume $8.0 billion is invested in a publicly-traded company and two years later, the investment is sold for $10 billion.

Apple has a $2.0 billion gain for federal tax purposes. But it pays no state income tax because Nevada does not tax income. Had the funds been invested by the California company, Apple would owe approximately 9% in taxes or close to $180 million.


Conclusion

By forming shell subsidiaries that serve no real business or economic purpose, Apple avoids paying taxes on its overseas income, even though it is headquartered and has employees, plant and equipment, and conducts research and development in California.

Apple also avoids paying state taxes by investing its surplus through a Nevada subsidiary, since Nevada does not tax income or gains.



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All contents copyright 2012 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.