Conglomerate Blog: Business, Law, Economics & Society

The late Larry Ribstein coined the phrase "the Apple Rule" when Apple seemed to be the only corporation engaged in options back-dating that got a pass from regulators and prosecutors. Now, it seems that the Apple Rule applies to corporate income taxes as well.

Here is Glommer Emeritus Vic Fleischer's very funny take on Apple's hearing in front of the U.S. Senate two days ago (or "the ghost of Steve Jobs Goes to Washington").

Here is Vic's more detailed explication of Apple's global tax maneuvers.

There are several ways that a company can lower its global tax bill by separating an otherwise integrated business model into components located in various subsidiaries in various taxing jurisdictions. To oversimplify things, a global operation can attempt to have subsidiaries in high tax jurisdiction bear costs (whether from paying high interest rates on intercompany loans or bearing the brunt of mark-ups for various inputs or fees for use of intellectual property) and have subs in low or zero tax jurisdictions recognize profits. This is easier for companies with very important intellectual property, but has been used by bricks-and-mortar companies like Starbucks (all green coffee is sold through a Swiss Starbucks and roasted by a Netherlands company and the markup paid to those entities; royalties for the "Starbucks experience" are paid to the Netherlands entity as well).

Apple's CEO assures us that Apple does not use "tax gimmicks." Instead, it has two subsidiaries that are incorporated in Ireland but managed from the U.S., which means that they are considered under Irish taxing authority by the U.S. and considered under the U.S. taxing authority by the Irish. They pay zero taxes. Apple also has two Irish subsidiaries that do pay taxes to Ireland, but they are very, very low taxes. And, a lot of profits are recognized by these four subs.

Apple's CEO also reminds us that Apple pays a lot of taxes to the U.S., about $6 billion in 2012, $3.4 billion in 2011, so we should feel pretty lucky. (See above for Vic's response.)

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The late Larry Ribstein coined the phrase "the Apple Rule" when Apple seemed to be the only corporation engaged in options back-dating that got a pass from regulators and prosecutors. Now, it seems that the Apple Rule applies to corporate income taxes as well.

Here is Glommer Emeritus Vic Fleischer's very funny take on Apple's hearing in front of the U.S. Senate two days ago (or "the ghost of Steve Jobs Goes to Washington").

Here is Vic's more detailed explication of Apple's global tax maneuvers.

There are several ways that a company can lower its global tax bill by separating an otherwise integrated business model into components located in various subsidiaries in various taxing jurisdictions. To oversimplify things, a global operation can attempt to have subsidiaries in high tax jurisdiction bear costs (whether from paying high interest rates on intercompany loans or bearing the brunt of mark-ups for various inputs or fees for use of intellectual property) and have subs in low or zero tax jurisdictions recognize profits. This is easier for companies with very important intellectual property, but has been used by bricks-and-mortar companies like Starbucks (all green coffee is sold through a Swiss Starbucks and roasted by a Netherlands company and the markup paid to those entities; royalties for the "Starbucks experience" are paid to the Netherlands entity as well).

Apple's CEO assures us that Apple does not use "tax gimmicks." Instead, it has two subsidiaries that are incorporated in Ireland but managed from the U.S., which means that they are considered under Irish taxing authority by the U.S. and considered under the U.S. taxing authority by the Irish. They pay zero taxes. Apple also has two Irish subsidiaries that do pay taxes to Ireland, but they are very, very low taxes. And, a lot of profits are recognized by these four subs.

Apple's CEO also reminds us that Apple pays a lot of taxes to the U.S., about $6 billion in 2012, $3.4 billion in 2011, so we should feel pretty lucky. (See above for Vic's response.)

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