Great piece by Shawn Tully for Fortune:
I figured that if this reporter found corporate taxes baffling, so
did lots of sophisticated Fortune readers. So I dug into the
financials of Apple to grasp how the world’s most valuable
publicly traded company accounts for taxes. Albert Meyer, a
forensic accountant and former academic who runs investment firm
Bastiat Capital, helped explain how and why Apple books or defers
taxes on different categories of income, and which rates it
applies to each category. With his help, I present a primer on
taxation of multinationals, using Apple as a case study.
I still don’t quite understand the whole thing, but I have a much better grasp than I did before. And I’m more convinced than ever that Apple is doing something complicated, not something devious.
It’s important to emphasize that Apple actually pays a lot of tax
compared to other U.S.-based corporations with immense foreign
earnings, and takes a highly conservative approach to tax
For FY 2016, Apple booked total pre-tax earnings of $61.4 billion.
On its income statement, Apple showed a “provision for taxes” of
$15.685 billion. That number is an expense that’s deducted
straight from pre-tax income of $61.4 billion to yield net income
of $45.7 billion. Hence, its reported “effective tax rate” was
25.6% ($15.685 billion divided by $61.4 billion), well below the
official 35%, but on the high side for multinationals, many of
which are in the teens.
The news coverage on Apple’s tax avoidance would lead you to believe (and in fact has led many to believe) that Apple pays a lower effective tax rate than most companies, when the truth is they pay a higher rate than most of their peers.
It’s important to note that Apple is extremely responsible in the
use of this exemption for reinvested earnings. Many multinationals
report that they intend to plough all of their foreign profits
into operations, and hence, don’t make any accruals for U.S. taxes
on their offshore earnings. Apple is the rare tech titan that books
large annual accruals that lower net income.
The problem isn’t Apple’s tax structure, it’s U.S. law. You can argue that Apple should voluntarily pay more in taxes than they’re legally obligated to, but no one who holds such views would ever get hired as a finance executive at a large publicly held company.
★ Wednesday, 8 November 2017