Apple’s biggest innovation isn’t gadgets. It’s dodging taxes

The Cupertino tech giant is arguably better at dodging taxes than building iPhones

Published January 7, 2018 10:00AM (EST)

Apple Presentation (AP/Eric Risberg)
Apple Presentation (AP/Eric Risberg)

Most people probably think of Apple as a tech company, but equally important to its existence is its creative power to avoid taxation. Indeed, Apple may more aptly be described as a tax-dodging enterprise posing as a tech company. That’s because Apple's business, soup to nuts, is the protection of their capital. It is their North Star, their morning brunch and evening rest. In November 2017, Apple's cash hoard totaled $252 billion, 94 percent of it held offshore. The corporation has benefited from public investment and public credulity: almost all of the technology in your iPhone was developed by taxpayer-funded research. Apple  has repaid the public’s faith by working with Trump and the GOP to give us the recent tax overhaul — a pure piece of class war.

Indeed, Apple lobbied hard for the recent tax reform bill, and they benefit immensely from its passage. As Fast Company reported in November, “Tax reform is Apple’s number-one policy issue in D.C. this year.” Recode noted that Apple (along with Amazon and Google) spent "record sums" to lobby Trump last summer. Federal lobbying documents show that the tech giant retained the services of lobbyists to advocate for issues of "corporate tax reform" and "international tax reform and issues related to foreign regulatory actions,” among other matters. The greatest geniuses of Cupertino are its tax lawyers, not its engineers or programmers. This fact should be well known, and Apple — and its CEO, Tim Cook — should be roundly mocked for their greed and hypocrisy.

The corporate playbook for tax-dodging

The complexities of corporate tax shuffling are so byzantine that they make Frank Herbert's Dune universe seem simple. However, the conceptual outlines are basic: Private enterprises are obligated legally (and morally) to help pay for the civilization that supports them. That's how fair exchange works. In a functioning Jeffersonian democracy, small businesses and shopkeepers and farmers and laborers pay back some part of what they've earned. Share and share alike.

But modern corporations don't like sharing, any more than they like actual democracy. Big companies are creatures of profit, glassy-eyed and coldblooded. They keep money from the public by getting clever with the taxman. The public pays, and companies collect the profit. I've often wondered why U.S.A. Gymnastics sends young men and women to represent our country at the Olympic Games, when our businessmen have infinitely more flexibility. The biggest corporations in the country have riddled our tax code with loopholes. Exception upon exception. Gimmick upon gimmick. For instance, there is a building in George Town, on the Cayman Islands. It is called the Ugland House. You can visit it yourself, at 121 South Church Street. As of this writing, it is home to an estimated 18,857 corporate entities. Not literally home, of course. The companies are not actually there. They are merely registered there. No physical footprint is necessary.

Why would so many American companies register themselves in the Caymans? Elementary. American tax law allows corporations to defer paying taxes on profits earned overseas, until those profits are repatriated back home. So here's what you do, if you're a major corporation. You set up a subsidiary in a tax haven. You hide your domestic profit by having your subsidiary make foreign profit. To quote from a report by the Institute on Taxation and Economic Policy:

In reality, much of these “offshore profits” are often U.S. profits that companies have disguised as foreign profits to avoid taxes. [A more accurate description would be] “profits booked offshore for tax purposes."

It's all the same money, of course, but the legal system conveniently pretends otherwise.

About those offshore profits: You might be imagining a shady warehouse in a foreign country, hiding a mountain of legal tender. Perhaps, in your mind's eye, it looks like the hill of greenbacks the Joker sets on fire in “The Dark Knight.” A romantic image, but a false one.  Most American tax haven money is actually held here, in the good old United States. What makes it "foreign" is a layer of legal fictions. Tax-dodge money is kept in American banks (or invested in American assets). Now, if the money belongs to American companies, and is kept in American banks, what makes the money "foreign," then? Only this: the name on the bank account (or on the ownership certificate) belongs to a company that is registered in a tax haven. That's it. A name.

And it works. Well, for them. Not for us. Every dollar they keep from us must be balanced out by money from individual taxpayers and small business owners. As of this writing, the Fortune 500 are hostaging $2.6 trillion offshore, to avoid tax. A quarter of this amount is drawn from a quartet of companies: Pfizer. Microsoft. General Electric. And, of course, Apple. According to an October 2017 report by ITEP, before the Trump tax bill, Apple was “avoiding $76.7 billion in U.S. taxes on these earnings.”

How Apple Thinks Different about tax-dodging

To quote Henry Blodget, tech companies are "ideally suited to skirting to tax laws." Tech products can be distributed and sold anywhere in the world. They don't rot on freighters; there are no organic parts to break down when your back is turned. Additionally, our tax system was written for the age of steel and coal. Modern tech companies, like Apple, score profit from intellectual property or digital products (such as downloaded songs). This makes relocating capital that much easier. As Charles Duhigg points out, despite being a mighty and profitable industry, Big Tech is "among the least taxed" sectors of the American economy.

As Reuters describes it:

In effect, the company attributes a large portion of the value of its products to patents and other intellectual property such as trademarks. Apple then assigns some of that IP, proportional to overseas sales, to subsidiaries in countries with low tax rates and assesses substantial patent royalties on sales. Those royalties then flow back to those low-tax locations, like Ireland.

Many conventional global corporations (such as Wal-Mart) pay around 24 percent in tax. According to Duhigg, in 2011, Apple's global cash tax rate was 9.8 percent. Even among tech giants, Apple is a special case, weaving and ducking like Ali to avoid paying taxes on the local, state and federal level.

Duhigg catalogs a number of Cupertino's schemes. Some of them are easy to understand. For instance, when California was desperate for revenue, Apple — a California company — set up a subsidiary in Reno called Braeburn Capital to handle its cash. The reason, Duhigg explains, is that Nevada has no state corporate income tax and zero capital gains tax. In related news, California’s Cupertino Union School District announced in June that they were projecting an operating deficit over the next five years. The CUSD offices are seven minutes away from Apple headquarters, if you go north on Sunnyvale-Saratoga, turn left on Alberta, right on Hollenbeck, left on Cascade, and right on S. Mary.

So far, so clear. But the shell game gets weirder the deeper you look. To paraphrase Prince, Cook has so many devices, everything that money can buy. For instance, Apple invented a dodge that, according to Duhigg, was called "Double Irish With a Dutch Sandwich" — running profits through Irish companies, then through the Netherlands, and finally through the Caribbean, to minimize its tax burden.

Sadly, Ireland has fallen out of favor. Two months ago, the New York Times reported that Apple had moved large amounts of money to the island of Jersey. What happened? Way back in 2013, a long Senate investigation revealed that Cupertino had squirreled away its money on the Emerald Isle. Cook's reaction was vehement. As the Times noted:

“We pay all the taxes we owe, every single dollar,” Mr. Cook declared at the hearing. “We don’t depend on tax gimmicks,” he went on. “We don’t stash money on some Caribbean island.” True enough. The island Apple would soon rely on was in the English Channel.

In August 2016, the European Union ordered Apple to pay Ireland $14.5 billion in taxes, plus interest. The Times continued:

Europe’s competition enforcer said that Apple’s illegal deals with the Irish government allowed the technology giant to pay virtually nothing on its European business in some years. The arrangements enabled Apple to funnel profit from two Irish subsidiaries to a “head office” with “no employees, no premises, no real activities,” the commission said. By doing so, Apple paid only 50 euros in taxes for every million euros in profit during 2014.

By that point, Apple had another plan. Why rely on Ireland, when Congress is so much closer to home?

How Apple pushed the GOP tax bill

Trump's electoral victory was terrific news for the wealthy everywhere — not just in Cupertino. Billionaires and corporations alike essentially hired the Republican Congress to overhaul the tax code, and they were successful. Trump's bill slashed corporate taxes, dropping the rate from 35 percent to 21 percent. This was pleasant news to Apple. Cook has kvetched for years about how hard everything is for the rich. He told us his preference last year:

"The issue is not that there's a tax on international earnings. The issue is the existing tax has been crazy," Cook said. "No one would bring it back at a 40 percent — I mean, 35 percent federal and then state taxes. That's the problem. I think it's smart for the United States to have some kind of tax revenue for international earnings — if that tax were reasonable."

Indeed. To quote Fast Company, Trump's tax bill allowed for "overseas cash" to "be automatically repatriated and taxed at a low rate." Under the GOP bill, companies receive credit for taxes paid overseas, and are allowed several years to pay off their debt. Let us speak frankly. When Trump signed the Tax Cuts and Jobs Act on Dec. 22, 2017, he rewarded Apple for keeping its money overseas, away from starving Americans and veterans with health problems. And Apple was party to all of this. Last year, the Big Five Tech companies increased lobbyist spending by 24.3 percent. By the third quarter of 2017, Apple spent $2.23 million petitioning Congress.

Apple’s cash hoard

$252 billion. That's  more than the foreign-currency reserves of Britain and Canada. A quarter trillion dollars. Sound that out in your mind, and then say it with your mouth. The phrase "quarter trillion dollars" is 22 letters and six syllables, and I'm afraid it doesn't quite do justice to the amount of capital involved. Modern speculative fiction has bleached our sense of scale. Honestly, what does a quarter trillion dollars even mean, when you've just gotten back from seeing the Last Jedi's First Order Dreadnought?

Still: Quarter. Trillion. Dollars. Once you're familiar with the words, try to conceive of how universally vast the amount is. Not in terms of what it will buy; for the moment, reckon with it as an abstract quantity, divorced of real purchasing power. Then, after a day or so of weighing this, if you're so inclined, get down to the stupefying practice of understanding what a quarter trillion dollars will nab you. Forget the indefensible, obscene spectacle of anyone, or any private enterprise, having that much wealth in a supposedly free country or theoretically just world. Pretend you are not a human being, but a shark — the Devonian prototype for capitalistic excess, a creature of cartilage and thoughtless hunger.

With a quarter trillion dollars, you could have paid for a year of the Iraq War, and still had enough left over to fund universal preschool twice over. You could rebuild half of the entire U.S. highway system, or own the entire NFL. According to Redfin, the combined Walton Family has about $145.8 billion, and could buy every home in Seattle, with $30 billion left over. By contrast, Bill Gates could only buy Boston. But Apple could buy Boston and Seattle and have enough left over to snag Durham. Let's go stranger: There are an estimated 7.6 billion of us superfriends on Earth. If you handed each and every one of us a dollar a day, it would still take a solid-gold month for you to run out of a quarter trillion. The 40-year earning total for an average American is $1.4 million. Whole lot of striving in that amount. Now consider: it would take 180,000 human lifetimes to build up Apple's hoard.

As Michal Rozworski pointed out in Jacobin, tax evasion shapes what is "politically possible."

Not only is there less money to deliver basic social services, but a vicious cycle of austerity is created. Less money places more pressure on cash-strapped governments to outsource basic services to the same tech companies shirking taxes. With Silicon Valley, it’s disruption all the way down. The irony is that, as economist Marianna Mazzucato has shown, the major technologies in the iPhone are the progeny of state-sponsored research. The public sector took the risks, and now Apple and others are reaping the profits.

But the offense goes deeper.

Those of us in the progressive, college-educated professional class grew up on the myth of Apple. The enlightened company for enlightened people. The idea that Apple could be of the same flesh as the Republican Congress seems impossible, like claiming Jack Kennedy was a secret cross-burner.

Every corporation exists to profit. No surprise. But Apple lived and died under the myth of the sunrise. By contrast, Exxon never pretended to be anything but a vast petrochemical machine for turning clean air into carcinogens. Nobody has ever loved Exxon for what it is. Exxon is a means to an end. But Apple claimed to be an end in itself. Owning Apple products not only made you a better version of you, it made you better, period: a part of tomorrow, in some nebulous, mystical way. Under the gaze of Cupertino, the hard reality of bits and ones and zeros was removed; the sharp edges of Taiwanese-made computer parts were literally and figuratively smoothed away. The material conditions of Apple products never changed. What Jobs and his successors sold was a good story about an opaque box. The addition -- the part you paid for -- was the myth. The promise.

Well, what of it? Your parents probably told you the royal rule for understanding human behavior: Don't watch what they say, watch what they do. Some part of Apple churns out neat devices. But the greatest part of its energy, expertise and ambition is protecting what it already has. And if that's true, then what's the distinction between Cupertino and any other company? Why buy into the whole dreary trip? "What Leary took down with him," Hunter Thompson wrote, "was the central illusion of a whole life-style that he helped create" — that is, the fallacy that after all the trouble to get hip, "somebody... or at least some force — is tending the light at the end of the tunnel.” The people at One Infinite Loop are another collection of Gilded Age barons, but with this one difference: Our great-grandparents knew what J.P. Morgan was, but Apple has us all fooled.

By Jason Rhode

Jason Rhode is a writer from West Texas. He has been published by Paste Magazine, McSweeney’s, The Comics Journal, and Monkeybicycle. He appeared on an April 2011 episode of Jeopardy, and one day he will command all the good lads in Eastcheap. Follow him on Twitter at @iamthemaster.

MORE FROM Jason Rhode

Related Topics ------------------------------------------