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What does it mean that Apple has been cleared? In the SEC’s eyes, Apple accounts for taxes in accordance with generally accepted accounting principles. The vaunted Securities and Exchange Commission has been stirring the pot of Apple’s complex finances for months now. And as TaxProf Paul Caron notes, the SEC approves Apple’s overseas tax strategies.
The SEC review was a worry on one level, especially after Senator Carl Levin (D-Mich.) lambasted the tech giant as “the Holy Grail of tax avoidance.” For a company and CEO as cool as Apple and Tim Cook, respectively, this was presumably not a huge worry. The SEC, after all, as not Senator Levin on a tax witch hunt.
Now the SEC has closed the book, finding that all is well. The SEC even went so far as to write this letter that it would take no action. Whatever you think of the U.S. tax system and the lengths to which companies go to pay less, the SEC’s action—or lack thereof—clearly makes sense.
Sure, the Senate Permanent Investigations Subcommittee’s report on Apple painted a grim picture. But Apple is less aggressive than many others. In his Senate testimony, CEO Tim Cook distanced Apple from tax gimmicks like IP offshoring.
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To reduce its tax burden, Google expands use of the “Double Irish”
New report: Google moved almost $12B through Bermuda shell company.
Facebook Mirrors Google's Offshore Tax Scheme
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What is a tax scheme and what’s legitimate tax planning? It may be a question of opinion. Besides, a “scheme” has different connotations in the U.S. and U.K. But however you slice it, Google and Facebook have something in common.
Both companies have used a kind of sandwich not for sustenance but for tax minimization. Recent reports state that Facebook flipped more than $700 million to the Cayman Islands last year as part of a “Double Irish” tax reduction strategy. See Facebook Defends its ‘Double Irish’ Tax Reduction Deal. Recall that former Zuckerberg pal and co-founder Eduardo Saverin took considerable heat when he exited the U.S. for Singapore. See Expats Face Steep Exit Tax Courtesy Of Facebook.
Yet Facebook is recently under more fire than Mr. Saverin. See Facebook Paid £2.9m Tax on £840m Profits Made Outside US. From an outsider’s perspective, it looks like Facebook Funneled Nearly Half a Billion Pounds Into the Cayman Islands Last Year. Yet Facebook’s technique may not be overly aggressive. Big multinational companies can hire tax lawyers to come up with ways to reduce the company’s effective tax rate from 35% to much less.
Google reportedly used the Double Irish and the Dutch Sandwich, saving the company billions in U.S. taxes. The Double Irish involves forming a pair of Irish companies to turn payments on intellectual property into tax-deductible royalty payments. The U.S. parent company forms a subsidiary in Ireland. The parent signs a contract giving European rights to its intangible property to the new company.
In return, the new subsidiary agrees to help market or promote those products in Europe. Thus, all the European income–that previously would have been taxed in the U.S.—is taxed in Ireland instead. Then the Irish company changes its headquarters to Bermuda–a true tax haven. So far, there has been no Irish tax, no Bermuda tax, and no U.S. tax.
Finally, the parent forms a second Irish subsidiary that elects to be treated as disregarded under U.S. tax law–by filing a one-page form. The first Irish company (now in Bermuda) can now license company products to the second Irish company for royalties. The net result is one low 12.5% Irish tax compared to 35% in the U.S.
Even this tax can be reduced, since the royalties going to the Bermuda company are deductible. Some of these steps may seem circuitous (they are). Tax treaties permit this, yet a deal done directly with Bermuda (and without all the layers) would incur a tax.