By John Lawrence
Apple Corporation is sitting on $178 billion in cash, and it literally doesn’t know what to do with it. But it knows one thing: it doesn’t want to give any of it to Uncle Sam or any other taxing jurisdictions around the world. That much is clear.
If it divided that money up, Apple could give $550 to every man, woman and child in the US. It’s enough money to buy Ford, General Motors and Tesla combined and still have $41 billion left over.
They could even buy a couple of small countries, but it doesn’t want to do that. Why bother? It’s literally an embarrassment of riches.
Apple sold an amazing 74.5 million iPhones in the last quarter of 2014, (the first fiscal quarter of 2015). This was an average of 34,000 iPhones an hour for every hour of the quarter! It brought in over $74 billion in revenue for the quarter.
This was higher in quarterly revenue than Microsoft and Google combined, the largest quarterly revenue ever to be recorded by a publicly traded company. Profits for the quarter were over a quarter billion dollars a day.
Investors, the supposed “owners” of the company, want that money given back to them, but it’s not happening. They could give all their employees a raise, but that’s not happening either. They could buy back their stock thus raising the price of it, and they have done some of that.
The problem is most of that $178 billion is sitting outside the country, so rather than “repatriate” the money which would cost them a hefty amount of taxes, they borrow money instead to do their meager stock buy backs in order to get investors off their backs, AND they lobby Congress for a “tax holiday” which would let them bring the money home without paying tax on it.
They could reduce the prices on their iPhones, or build a factory and set up a production line in the US. This would create American production jobs instead of all those kind of jobs being created in China. Of course, it would cut into their profit margins slightly so it is out of the question.
Besides, you can’t wake up American workers at one o’clock in the morning and put them on the production line for 12 hours like their production company in China, Foxconn, does on Apple’s behalf.
Apple is in business to make money even if they have no other use for it than to sit atop a shitpile of it. This kind of massive anal-retentiveness which hoards money rather than utilizing it for life sustaining and enriching purposes amounts to the worship of “filthy lucre.”
Norman O Brown, author of the book, Life Against Death, has said, “… money is seen to be nothing other than deodorized, dehydrated shit that has been made to shine.” Meanwhile, millions of homeless people around the world go hungry.
With so much money at their disposal that they don’t know what to do with, the question is begged, “Why not pay the taxes on it and help out their fellow Americans and their country?” But that’s not the way corporations work. They assiduously seek out every possible tax break their lawyers can dream up.
When asked why this is necessary, given that they don’t even need the money, CEO Tim Cook replies words to the effect that paying taxes on this money would give his competitors an unfair advantage.
For every iPhone Apple sells, it makes a phenomenal 40% in profit.
Well, it might do that if it meant that Apple would not be able to invest in new plants or equipment, but that is surely not the case. Apple is lacking for absolutely nothing so it is hogwash that not spending or giving back money it doesn’t need is putting them at a disadvantage with respect to their competitors.
In fact it is building a new headquarters in Cupertino, CA that will cost $5 billion and feature 40-foot panes of curved glass from Germany that will form the exterior. They plan to move in in 2016. It is nothing less than an over the top display of ostentatious wealth and conspicuous consumption.
In the fourth quarter of 2014 Apple made $18 billion in profits, the most money an American corporation has ever made in one quarter.
By comparison Exxon corporation made slightly more than half of that – $9.45 billion; Chevron made $7.25 billion. Campbell Soup Corporation, which has been a fixture in American households for over 100 years, made a paltry in comparison $8.3 billion in total revenues in 2014 and out of that only $800 million in profits for the whole year. That figures out to be a profit margin of 9.6%. Apple’s quarterly profits were 22.5 times bigger than Campbell Soup’s yearly profits. For Apple’s full fiscal year of 2014, profit was $39.5 billion on revenue of $182.8 billion.
Most of this came from the tremendous sales of the iPhone 6. In a conference call with financial analysts, CEO Tim Cook, said that demand for iPhones was “staggering”. For every iPhone Apple sells, it makes a phenomenal 40% in profit. That’s an impressive profit margin. But lowering prices or creating American jobs which would entail accepting a more modest profit margin is not in Apple’s DNA or for that matter in any other red-blooded American corporation’s DNA.
Apple implemented an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean.
Apple goes to elaborate lengths to avoid not only Federal taxes but California state taxes as well. Most of its intellectual work is done in California, but for accounting purposes it has moved much of its financial operations to a subsidiary in Nevada called Braeburn Capital where there is a zero tax rate. With a small number of employees in Reno, Apple has avoided millions of dollars in taxes in California and 20 other states.
California’s tax rate is 8.84% while Nevada’s is zero. By having an office 200 miles east of its Cupertino, California headquarters to collect and invest its profits, Apple avoids millions of dollars in California taxes.
Apple also saves billions by setting up offices in low tax jurisdictions throughout the world such as Ireland and the Netherlands. Apple implemented an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean.
Apple’s creativity and innovativeness in avoiding taxes has been replicated by other corporations which have gone to great lengths to avoid taxes too. They look up to Apple as their teacher in tax avoidance.
If it weren’t for such tactics, Uncle Sam would have collected about $2.5 billion more from Apple last year. This means that average Joes, who do not have the benefits of overseas low tax jurisdictions and an army of accountants and lawyers to help them figure their taxes, have to make up the difference.
Last year Apple paid a tax rate of less than 10% considering taxes paid around the world. By comparison, Wal-Mart last year paid worldwide cash taxes of $5.9 billion on profits of $24.4 billion, a tax rate of 24 percent, which is about average for non-tech companies.
De Anza College is located a mile and a half from Apple’s Cupertino headquarters. It is struggling to keep its head above water:
[De Anza is] a community college that Steve Wozniak, one of Apple’s founders, attended from 1969 to 1974. Because of California’s state budget crisis, De Anza has cut more than a thousand courses and 8 percent of its faculty since 2008.
Now, De Anza faces a budget gap so large that it is confronting a “death spiral,” the school’s president, Brian Murphy, wrote to the faculty in January. Apple, of course, is not responsible for the state’s financial shortfall, which has numerous causes. But the company’s tax policies are seen by officials like Mr. Murphy as symptomatic of why the crisis exists.
“I just don’t understand it,” he said in an interview. “I’ll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for Pete’s sake.
“But then they do everything they can to pay as few taxes as possible.”
You’d think that Apple would take De Anza under its wing and keep it alive with some of that pile of cash it’s sitting on. But there is an additional complication: most of that $178 billion shitpile is sitting in overseas banks. Having paid little in taxes on it so far, Apple is reluctant to bring it back to the good ole US because by so doing it would have to pay the US corporate rate of 30% minus whatever taxes it has already paid.
With so much money at its disposal, going ahead and paying US taxes on it is merely the right thing to do. Then it could turn around and help out De Anza College.
Every time someone downloads a song from iTunes, Apple avoids paying taxes on the profit from that download. … [T]he server from which iTunes songs are downloaded, [is located] in Luxembourg where they pay no taxes on the profits.
But these guys could care less. It’s a point of pride to pay as little in taxes as possible no matter what hoops it has to jump through in order to do it including even the Double Irish and Dutch Sandwich. It could help out De Anza with a portion of the money it has made by locating Braeburn Capital in Nevada.
If Braeburn were located in Cupertino, where Apple’s top executives work, a portion of the $2.5 billion in interest and dividend income that has been processed by Braeburn would be taxed at California’s 8.84 percent corporate income tax rate instead of Nevada’s zero percent rate.
Braeburn is only one method that Apple uses to avoid taxes. Every time someone downloads a song from iTunes, Apple avoids paying taxes on the profit from that download. Since it costs no more to download the same tune one time or a million times, those profits are pretty high.
So the clever people at Apple, who can locate the server from which iTunes songs are downloaded, anywhere in the world, have decided to locate it in Luxembourg where they pay no taxes on the profits.
“We set up in Luxembourg because of the favorable taxes,” said Robert Hatta, who helped oversee Apple’s iTunes retail marketing and sales for European markets. “Downloads are different from tractors or steel because there’s nothing you can touch, so it doesn’t matter if your computer is in France or England. If you’re buying from Luxembourg, it’s a relationship with Luxembourg.”
Consequently, tax payments are denied to Britain, France and other countries as long as everything is routed through Luxembourg.
Apple’s 1984 Superbowl commercial, in which IBM was dramatized as taking over the world, is now more aptly interpreted with Apple in the role of IBM.
About 70% of Apple’s profits are earned abroad while only 30% are earned in the US, and that’s by design in order to escape paying US corporate taxes. But all of the design and the intellectual heavy lifting is done in the US. Former Treasury Department economist, Martin A. Sullivan said that “given that all of the marketing and products are designed here, and the patents were created in California, that [percentage of profits earned in the US] should probably be at least 50 percent.”
“Apple, like many other multinationals, is using perfectly legal methods to keep a significant portion of their profits out of the hands of the I.R.S.,” Mr. Sullivan said. “And when America’s most profitable companies pay less, the general public has to pay more.”
Other tax experts, like Edward D. Kleinbard, former chief of staff of the Congressional Joint Committee on Taxation, have reached similar conclusions. “This tax avoidance strategy used by Apple and other multinationals doesn’t just minimize the companies’ U.S. taxes,” said Mr. Kleinbard, now a professor of tax law at the University of Southern California. “It’s German tax and French tax and tax in the U.K. and elsewhere.”
Suffice it to say that Apple has not yet found a viable strategy for investing its $178 billion shitpile of cash whether in terms of building new plants, paying more taxes or in doing good deeds in the US or elsewhere in the world. Whether or not its gargantuan profits are considered obscene, I leave to the eyes of the beholder.
One thing is for sure though: Apple’s 1984 Superbowl commercial, in which IBM was dramatized as taking over the world, is now more aptly interpreted with Apple in the role of IBM. In the same quarter in which Apple posted $18 billion in profits, IBM’s total revenue fell nearly 12 percent to $24.11 billion. Revenue from hardware fell 39 percent to $2.41 billion.
IBM’s revenues may have declined for 11 consecutive quarters and its stock price has fallen, but its CEO, Virginia Rometty, is taking home a performance bonus of $3.5 million. Oh how the mighty have fallen!
John Lawrence
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Thanks John.
You’ve hit on one of my sore spots here! I firmly believe, and stories like this only help to reinforce that belief, that free-market capitalism will be (some say it already has) the downfall of America. It is little more than legalized exploitation. It is perfectly natural for the strong to exploit the weak, and some say that is nature’s way of ensuring the survival of the fittest. To that argument I would argue that survival of the fittest at the expense of the “less fit” is precisely what separates us humans from most of the lower animals. We humans with our enlarged brains must overcome this tendency to exploit those weaker than ourselves if we are to survive as a race and not destroy the planet that supports us all in the process.
Capitalism served its purpose when the white man first came here; it was free-market capitalism that enabled, no encouraged, American business to exploit first the red man and then the black man to the white man’s advantage. That vehicle for exploitation now stands firmly in the way of human progress, while a world-wide population explosion and the needs of all those people threaten us all unless we change our ways in a hurry.
The answer lies in in conceiving and developing a new economic paradigm that works for everyone, not just the strong. I am not an economist and am not smart enough to propose a solution. I can only hope that some brilliant economist will before it’s too late.
Thanks for giving me a chance to vent. I just hope the men in the white coats don’t come after me for saying all this!
Does Apple’s 178 Billion Dollar Shitpile contribute to deflation? They’ve removed that money from circulation, which reduces the average person’s ability to purchase. But we’ll always pay the inflated prices of Apple devices, which are brought online so frequently with new blinking lights and slick cosmetic lines that we start to lose the ability to consume the next generation coming along in, what?, another year.
Deflation isn’t a pretty thing. Smaller companies can’t hire because they don’t have Apple’s cash, some must fire, and lots of unemployed people start standing in lines. Today, you can read stories about Denmark offering negative interest loans — actually paying people to borrow– just to get some cash into the market for goods. It would be more direct and cheaper to start providing the poor cash, but then, that would be socialistic, wouldn’t it?
Sure, Apple has taken all this money out of the economy, but the Fed is continually putting more in. Maybe this is why interest rates are so low and money is virtually free to borrow because not only is Apple taking money out of the economy but so are the owners of all the other major corporations. For instance, all the profits from Wal-Mart’s earnings end up in the hands of one family which cannot possibly spend (or put back into the economy) all that money. So as the large corporations decrease the money supply, the Fed is in the process of expanding it. If all goes well, there will be neither inflation nor deflation.
Have any of you people been watching the news ? Just what do you think the government
would do with all that new tax money ? We would still be 18 trillion in debt. You want solutions to all these problems ? Let Apple run the finances of all departments of the government. That would put an end to waste, fraud, abuse and taxes government employees owe would be collected.
Sounds like pure capitalism to me. Apple take over the government and all our problems will be solved.
Phillip, I agree with you that if Apple were to “repatriate” its huge stash of cash and pay US corp taxes on it, that revenue would probably just disappear into the black hole of the federal budget.
However, the point I want to make in response to your comment is that the problem is not what to do with all of Apple’s extra cash, but the economic structure that enabled them to acquire it in the first place.
As far as letting Apple run the federal government (or requiring whoever runs the federal gov’t to run it the way Apple runs its business) would not solve anything. In fact it would only make the problem worse. Apple’s management objective is clearly to maximize its own profit. If the federal gov’t ran the gov’t in a way that produced budget surpluses the way Apple does, it could not possibly be a gov’t run of the people, by the people and for the people. Apple is for Apple, not for the people. There is an important difference.
Good article… If you want to reward those that manufacture in the USA and not just rant about companies that don’t… Buy a Moto X phone. The only smart phone made in the good ol’ U S of A !
Now there’s a thought!
Apple is the very definition of Benedict Arnold Capitalism. These Appletons view USA as nothing more than a platform to generate wealth. Let’s trade them for the overseas cash. Arnold himself spent the rest of his life in England. Give our Appleton Arnolds a taste of shameful exile.
My point exactly, Philly!
Most US corps have no loyalty to anyone or anything but themselves. For the most part they try continuously to take as much as possible from customers, vendors and employees and move that to shareholders (including top management who are usually shareholders as well as management.
The Chairman of Exxon said it perfectly when he replied to Matt Lauer on the Today show one morning after Hurricane Katrina had devastated New Orlean. In response to Lauer’s question as to why Exxon was jacking up the price of gas at this time, the Chairman of Exxon replied, “…I’ll push gas prices as high as I can because that’s my job: to make the shareholders of Exxon as rich as I can.” Well, that was all I needed to hear!
The Chairman of Exxon was absolutely correct. There are federal laws still on the books today that were created when the stock market was formed whose intended purposed was to protect people from being fleeced by shady stock brokers. Those laws OBLIGATE management of publicly traded companies to place stockholder profits above all other considerations when making management decisions. I believe this explain the present day corporate mindset and would be the first thing that needs to be changed, in my mind.
Many businesses like Apple have totally lost any ethics or community loyalty modes. My dad once told me that in Detroit’s heyday if the banks or businesses were not helping the community generally they would be avoided and lose their clients. Of course they also had to be a member of a church with ethics if they wishedto succeed
Amen!
Opportunistic tax aggressiveness especially by international firms is in, and tax minimization or avoidance has become a science. This throws corporate ethics and moral capitalism out the window in the interest of shareholder returns. In any conflict between a code of ethics that binds a firm to pay its fair share of taxes and a policy of tax aggressiveness aimed at reducing the tax burden to improve shareholder returns, shareholder interests will likely dominate the choice. Corporations will rationalize they’re only following the existing rules in the process of meeting their ‘true’ tax obligations.
Yes, tax avoidance is in. It’s up to governments to close tax loopholes manipulated or bought by special-interests. Perhaps companies should be required to make public their ethical intentions when it comes to paying tax obligations. People should know the role ethics plays in corporate tax behavior as opposed to the corporate morality that legally exploits tax advantages to the law’s limit.
Frank, thanks for your insight, but Apple and most other corporations are not even that concerned about shareholder returns. Legally, shareholders own the company, but management controls how much in terms of shareholder returns they get.
Carl Icahn, a large owner of Apple stock has demanded that Apple buy back its own stock thus raising the stock value which would enable shareholders to cash in by selling some of their stock.
Here’s a quote from Business Insider:
“… Apple explicitly addressed the “cash question” — the demand by one very vocal new investor, Carl Icahn, that Apple borrow $150 billion and use it to buy back $150 billion-worth of stock, thus “returning cash to shareholders.”
“Icahn’s argument is that this one-time bonanza will unlock the value trapped in Apple’s massive $147 billion cash balance and result in an immediate boost in Apple’s share price. Other Apple investors, however, myself included, think that borrowing $150 billion would be a terrible idea, regardless of its impact on Apple’s share price. We would rather see Apple increase its buyback and/or dividends over time, rather than loading itself up with debt and buying back stock in one huge lump sum.”
As it turns out, and as alluded to in the article, Apple has borrowed money to buy back its own stock rather than repatriate (and pay taxes on) the [now] $178 billion pile of cash sitting offshore. It seems like a convoluted way to appease a major shareholder, but it goes to show the lengths management will go to to avoid paying taxes, and Icahn has no choice other than to sue in order to get what he considers, as a shareholder, to be rightfully his.
Apple and most other large, publicly traded, multi-national corporations are not that worried abou shareholder returns because they are usually very healthy, but they have to deal with the likes of Carl Icahn because a high-profile feud with a major shareholder like Icahn would not look good to their other shareholders. I agree that it’s a shame they prefer to buy back their own stock than to allow it to be taxed, but isn’t that precisely the problem? We’ve created an economic structure that permits this to occur, so why are we surprised when it does?
Paul, buying back their own stock has nothing to do with taxation. It’s true that by borrowing the money to do so rather than spending the (untaxed) money that they already have gives them an additional tax break because of the debt, but buying back the stock per se does not give them a tax break.
I understand John that buying back their stock doesn’t give them a tax break. They get that by keeping the money out of the country, but buying back their stock so Icahn can cash it out is not the most lucrative thing they could do with their money, as they would view it.
John,
Firms buy back their own stock with excess cash or very lastly with debt, to stabilize or push market prices up for external shareholders and employees – sometimes thinking or knowing the stock is undervalued. They are banking that all stakeholders will eventually win: current shareholders who sell, top management and employees who sell their shares at a good price or are happy their stock values rise or have a better chance of doing so, the company may benefit by creating a new stock support base that later opens up possibility to sell stock back at a good profit. The return firms can earn on passive cash invested in U.S. Treasuries is substituted for a stock appreciation return, contented management and shareholders. But using debt at a 3-4% interest rate (or 2-3% after tax) seems crazy when a firm is washing in cash earning 3-4% on Treasury bonds or possibly earning 5-6% on intermediate-term corporate bonds. But the Karl Icahns are nasty financial wizards and power players at another level … the archetypal greedy capitalists obsessed by the cocaine of money-making, ethics and business morality be damned!!!
This is about internal corporate huge money-making incest among the few where capital resources don’t get recycled to local communities or the average man. But that’s the system we have. I think it’s a morally decadent business culture few understand except the “professional top.” It tends to open the door for an array of devious, legal or semi-legal, tax or money management manipulation techniques benefiting the few immensely and disproportionately … like offshore tax havens. It’s a macrocosm of our accelerating income and wealth inequality system where the wealthy insiders are controlling the dice.
Apple isn’t exercising free-market capitalism; it is exercising crony capitalism whereby the powerful get such things as foreign tax breaks Americans do not get, or the ability to use overseas labor without tariffs, etc. The playing field is not fair or level, so that is not free-market capitalism. Using the power of government to control the markets is not fair to anyone, it is corporatism. While Apple crows about record profits, they got those profits by cheating Americans out of the jobs then not paying taxes on the profits they make.