Is Apple (NASDAQ:AAPL) obscuring its actual tax rate behind a web of offshore profit shifting? Earlier this week CEO Tim Cook told the Senate Permanent Subcommittee on Investigations that Apple paid $6 billion, or 30.5 percent, of its income in federal taxes. But does this figure tell the whole story?
The 30.5 percent tax rate cited by Cook only covers Apple’s U.S. income of $19 billion. This is approximately a third of Apple’s global pretax income.
Martin Sullivan, the chief economist at the non-profit organization Tax Analysts, believes Apple is being disingenuous with its 30.5 percent tax rate figure. Sullivan states via Bloomberg that “Apple has shifted enormous amounts of profits from the United States to an untaxed entity overseas. That’s the issue.”
If Apple’s total worldwide income is considered, the company actually pays a much lower tax rate than 30.5 percent. According to Scott D. Dyreng, an assistant professor of accounting at Duke University, Apple pays an actual tax rate of less than 14 percent.
Apple is able to keep its overall tax burden low by shifting profits into countries with more favorable tax rates. Thanks to the differences between American and Irish tax laws, Apple only pays a two percent tax rate for its Ireland-based subsidiaries. Since 2009, approximately $30 billion in profits have been shifted to one Irish subsidiary that doesn’t even have any employees in Ireland.
Although Apple’s overseas profit shifting may seem fishy on the surface, it seems that the Cupertino-based company is following the letter of the law — if not the spirit. Apple is also not the only corporation to use these tax-avoidance strategies to minimize its tax burden. Google (NASDAQ:GOOG), Starbucks (NASDAQ:SBUX), and Amazon (NASDAQ:AMZN) have faced similar questions about their offshore tax practices in parliamentary hearings in the U.K.
However, this recent Senate hearing is drawing even more attention to this corporate practice, which may spur lawmakers to legislate against it. One possible way to reign in multinationals’ tax-avoidance strategies would be to require companies to disclose how much they pay in taxes in each individual country. This would give governments and investors a much clearer picture of how much a company actually pays in total taxes.
Here’s how Apple has traded so far this week.
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