Saturday, April 28, 2012

The Genius of Steve Jobs Extended to Tax Planning

Steve Jobs, who may have been an original gold bug and never even got a license plate for his car, was a serious tax planner, which saved Apple from billions in taxes. In something of a hit job on Apple, NYT has a feature piece on Apple's tax planning, that includes this:
Every second of every hour, millions of times each day, in living rooms and at cash registers, consumers click the “Buy” button on iTunes or hand over payment for an Apple product.

And with that, an international financial engine kicks into gear, moving money across continents in the blink of an eye. While Apple’s Reno office helps the company avoid state taxes, its international subsidiaries — particularly the company’s assignment of sales and patent royalties to other nations — help reduce taxes owed to the American and other governments.

For instance, one of Apple’s subsidiaries in Luxembourg, named iTunes S.à r.l., has just a few dozen employees, according to corporate documents filed in that nation and a current executive. The only indication of the subsidiary’s presence outside is a letterbox with a lopsided slip of paper reading “ITUNES SARL.

Luxembourg has just half a million residents. But when customers across Europe, Africa or the Middle East — and potentially elsewhere — download a song, television show or app, the sale is recorded in this small country, according to current and former executives. In 2011, iTunes S.à r.l.’s revenue exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of iTunes’s worldwide sales...Apple, say former executives, has been particularly talented at identifying legal tax loopholes and hiring accountants who, as much as iPhone designers, are known for their innovation. In the 1980s, for instance, Apple was among the first major corporations to designate overseas distributors as “commissionaires,” rather than retailers, said Michael Rashkin, Apple’s first director of tax policy, who helped set up the system before leaving in 1999.

To customers the designation was virtually unnoticeable. But because commissionaires never technically take possession of inventory — which would require them to recognize taxes — the structure allowed a salesman in high-tax Germany, for example, to sell computers on behalf of a subsidiary in low-tax Singapore. Hence, most of those profits would be taxed at Singaporean, rather than German, rates...

In the late 1980s, Apple was among the pioneers in creating a tax structure — known as the Double Irish — that allowed the company to move profits into tax havens around the world, said Tim Jenkins, who helped set up the system as an Apple European finance manager until 1994.

Apple created two Irish subsidiaries — today named Apple Operations International and Apple Sales International — and built a glass-encased factory amid the green fields of Cork. The Irish government offered Apple tax breaks in exchange for jobs, according to former executives with knowledge of the relationship.

But the bigger advantage was that the arrangement allowed Apple to send royalties on patents developed in California to Ireland. The transfer was internal, and simply moved funds from one part of the company to a subsidiary overseas. But as a result, some profits were taxed at the Irish rate of approximately 12.5 percent, rather than at the American statutory rate of 35 percent. In 2004, Ireland, a nation of less than 5 million, was home to more than one-third of Apple’s worldwide revenues, according to company filings...

Moreover, the second Irish subsidiary — the “Double” — allowed other profits to flow to tax-free companies in the Caribbean. Apple has assigned partial ownership of its Irish subsidiaries to Baldwin Holdings Unlimited in the British Virgin Islands, a tax haven, according to documents filed there and in Ireland. Baldwin Holdings has no listed offices or telephone number, and its only listed director is Peter Oppenheimer, Apple’s chief financial officer, who lives and works in Cupertino. Baldwin apples are known for their hardiness while traveling.
Jobs, of course, probably did not personally understand all the nuances of international tax law, but it's obvious his push to get excellence out of his employees, included a push to get the most out of his tax planners.


  1. Steve Jobs, a man who lived up to his name. A man who showed the world how production drove demand.

  2. Yes but was it legal? When the patents were transferred to Ireland the patents surely should have been revalued at today's prices for the patents?

    There would have been a massive profit realised in California on the revalued patents and that profit should have been taxed in California.

    You have to be careful with transfer pricing of cross-border movement of goods in an attempt to generate profits in low tax jurisdictions and losses in high tax countries.

  3. If we were smart, we'd cut our corporate tax rate to 10 or 15% and increase the amount of taxes we collect. There are too many loop holes. Its been done before. Kennedy cut rates and the amount of taxes collected increased. Reagan did the same. Hey they did it in Russia and markedly increased their collections. Our law-makers are too dumb to try it. They think only to raise taxes and get more.

  4. The way he led and inspired people was his genius!

    Incredible as it may seem, behind tax strategy and all the other strategies was true knowing that everything is possible if it is conceivable.