Thursday, November 9, 2017

The Paradise Papers

Bastian Brinkmann and Lena Kampf:

In 2014, the law firm Appleby – the recipient of Apple’s long list of questions – took the company on as a client. The Paradise Papers show that in 2015, Appleby listed two Apple subsidiaries as being based in Jersey. Laws on the island allow foreign companies to establish their tax residency there.


One possible explanation for the company’s presence in Jersey is that Apple wanted to quickly react to the Irish tax reform. Previously, Apple subsidiaries in Ireland, thanks to the trick outlined above, had been considered “stateless” from the perspective of tax law – they weren’t based anywhere at all. But that’s no longer allowed. It could be, then, that Apple’s homeless companies have now finally settled down – on the island of Jersey, where the tax rate is zero percent.


Those familiar with the procedure say that the end result of Apple’s restructuring is that not much has changed for the company. And in Apple’s publicly available financial information, there has indeed been virtually no change in the amount of taxes paid by the company since 2015. According to that information, Apple paid around 4 percent on profits made outside of the U.S. in both the years 2013 and 2014. In 2015, it was around 5 percent and approximately 6 percent in 2016. Fluctuations of that magnitude are common for international corporations.

Jesse Drucker and Simon Bowers:

“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.

Five months after Mr. Cook’s testimony, Irish officials began to crack down on the tax structure Apple had exploited. So the iPhone maker went hunting for another place to park its profits, newly leaked records show. With help from law firms that specialize in offshore tax shelters, the company canvassed multiple jurisdictions before settling on the small island of Jersey, which typically does not tax corporate income.


The documents reveal how big law firms help clients weave their way through the gaps between different countries’ tax rules. Appleby clients have transferred trademarks, patent rights and other valuable assets into offshore shell companies, avoiding billions of dollars in taxes. The rights to Nike’s Swoosh trademark, Uber’s taxi-hailing app, Allergan’s Botox patents and Facebook’s social media technology have all resided in shell companies that listed as their headquarters Appleby offices in Bermuda and Grand Cayman, the records show.

Wolfgang Krach (via Hacker News):

Public filings reveal that between 2010 and 2017, on average, Apple generated two-thirds of its profits outside the U.S. Evidently, it earned $41.1 billion in 2016 and $44.7 billion in 2017. What these filings also show is that since 2010, Apple’s foreign-earned income has been taxed at a rate of between 1 and 7 percent. Mr. Cook, do you believe this comports with the “moral responsibility” you have advocated? Such “tax optimization” – albeit legal – is only possible because specialized law firms such as Appleby devise complex company structures inaccessible to most other firms. Skilled workers, small business owners and employees in most countries outside the U.S., many of whom surely use Apple products, don’t have the means to shirk ordinary taxes.

Alastair Houghton:

In a very real sense, for instance, there is no such company as “Apple”. Rather, there is Apple, Inc (which is in the United States), Apple Europe Limited (in the United Kingdom), Apple Operations International (Ireland), Apple Sales International (Ireland), Apple Distribution International (Ireland), as well as a host of other entities. All of them are separate companies, and therefore separate legal entities, though some may hold shares in others and they likely share some directors too. The thing the public thinks of as “Apple” is not, in a legal sense, real — but instead is projected by the actions of a number of co-operating legal entities in various different jurisdictions. You might say this is a sleight of hand, but it’s how the world works because it’s how the laws passed by our politicians work.


Clearly both the delivery company and the website company will be able to calculate a profit figure (essentially sales minus costs), and so Corporation Tax will be paid at UK rate on the profit made by the delivery company and at some other rate depending on where the website company is incorporated on its profits. Now, let’s say the website company can choose where it incorporates — after all, it’s a website and the Internet is everywhere. So let’s pick somewhere with low tax rates. Luxembourg, say. […] It was fine before I gave them both similar sounding names, and before they had shared directors/shareholders. Why is it suddenly not OK now?

Kirk McElhearn:

If you are a company making widgets, and you don’t sell them directly, you sell them through distributors, and they in turn tell your widgets to retailers, who sell to end users. Lets say you sell your widgets at 50% of their retail price; the local distributors and retailers earn the rest of the money, and pay taxes on it.

But since Apple sells most of their products directly, either through their own store, their online store, or their subsidiaries, they are able to retain much more of the total price of their goods.

Shawn Tully:

But the U.S. code provides ample room for sheltering and avoiding taxes on foreign income, a major reason it needs an overhaul. The rules essentially divide foreign profits into three categories. One bucket of profits is more or less taxed at the full rate of 35%. On a second bucket, the multinational can defer paying the U.S. tax due. And a third category is excluded from all U.S. taxation, amounting to corporate America’s biggest loophole.


The U.S. GAAP financial accounting rules stipulate that if a multinational either reinvests earnings from operations to grow its business, or intends to do so in the future, it’s required to neither pay U.S. tax on those profits in cash, nor to accrue a tax expense for the future that lowers net income. However, if plans change, and multinational decides that it will eventually bring those profits back, it has accrue U.S. tax on that income.

It’s important to note that Apple is extremely responsible in the use of this exemption for reinvested earnings. Many multinationals report that they intend to plough all of their foreign profits into operations, and hence, don’t make any accruals for U.S. taxes on their offshore earnings. Apple the rare tech titan that books large annual accruals that lower net income.

Via John Gruber:

The news coverage on Apple’s tax avoidance would lead you to believe (and in fact has led many to believe) that Apple pays a lower effective tax rate than most companies, when the truth is they pay a higher rate than most of their peers.


You can argue that Apple should voluntarily pay more in taxes than they’re legally obligated to, but no one who holds such views would ever get hired as a finance executive at a large publicly held company.

Previously: Apple, Ireland, and the EU.

Update (2017-11-09): See also: Todd Ditchendorf and my tweets.

Update (2017-11-13): Apple:

Apple believes every company has a responsibility to pay its taxes, and as the largest taxpayer in the world, Apple pays every dollar it owes in every country around the world. We’re proud of the economic contributions we make to the countries and communities where we do business.

See also: Sean O’Grady.

10 Comments RSS · Twitter

Re: Gruber...

The issue isn't that Apple isnt paying as much tax as it's peers.

The issue is that they have repeadily said that they are simply abiding by the law and that they would pay more if the law required it. In this case, they are skirting Ireland's/EU's laws instead of complying with the laws like they said they would. They are being as deceptive and slimey as any other white-collar criminal.

Additionally, they say that they are simply following the US tax code as it was written, but I wouldn't be surprised to learn that they (and their peers) are somehow lobbying and writing those tax codes.

They're making the rules, abusing the rules, and hoarding profits all on the back of devices that are sold at a high markup, which are heavily based on tax-payer funded research.

Tim Cook and the rest of the C-suite at Apple should feel ashamed of the actions they have taken, and really take some time to re-evaluate the corporate culture that allowed these practices to become normalized within.

"Maximizing shareholder value" should NEVER be considered an excuse to operate in this way.

It's depressing how easily people can go from "I like the products this company provides" to "I will defend whatever harmful behavior this company is participating in, attack anyone who criticises this harmful behavior, dissemble as much as possible, and effectively act as an unpaid, voluntary PR agent for a for-profit international corporation." I guess it's not surprising. "Brands" like Apple are really good at tricking people into thinking that they are their friends. But it *is* depressing how easily people fall for this.


"It's depressing how easily people can go from "I like the products this company provides" to "I will defend whatever harmful behavior this company is participating in, attack anyone who criticises this harmful behavior, dissemble as much as possible, and effectively act as an unpaid, voluntary PR agent for a for-profit international corporation."

Assuming this is a followup to the first comment of the thread, it's really worth noting that the blogger in question is most definitely not an unpaid, voluntarily PR agent.

While his income does not directly come from Cupertino, it's been reported he earns more than $500,000 a year for peddling his dissembling. He's reasonably well paid for acting as a PR agent to make the brand shine. And he's good at it! The blog is a very clever mix of truth and dissembling. I've long thought of it as Cupertino's Pravda.

@Ben It seems to me that Apple is complying with the relevant laws. The issue is that the laws have loopholes, and Apple is taking advantage of them, while Tim Cook tells everyone that Apple doesn’t “depend on tax gimmicks.” So I would say they are being deceptive.

@Lukas and @Chucky I don’t think it’s helpful to question anyone’s sincerity without evidence. How about explaining why a particular argument is wrong? Or why this might be a case, like accessibility, where Apple should be proud to ignore the “bloody ROI”? Personally, I think it is hurting their brand—though perhaps only short-term—as over the past week I’ve heard several non-techy people make unsolicited comments like, ”It’s a pity they’re a bad company because I like my iPhone.”

"I don’t think it’s helpful to question anyone’s sincerity without evidence."

Well, a many years long track record does exist, and sometimes that's really helpful in interpreting overall patterns of intent.

My total disbelief in his sincerity is not about this individual argument of his. (I wasn't even really addressing that, cuz I didn't think Lukas was either). I find him to be an insincere, dissembling, propagandist in his overall body of work. (YMMV, of course). And given that his propaganda strategy is to mix both insightful truth and dissembling whataboutism, knowing he's that insincere in totality doesn't bring into question any individual argument of his. Some of his arguments are correct! That's why he's good at what he does.

>I don’t think it’s helpful to question anyone’s sincerity without evidence

I'm specifically *not* doing that. That's why I wrote "Brands like Apple are really good at tricking people into thinking that they are their friends." I don't think any of the people defending Apple are dishonest. Instead, what I think is happening here is that humans are herd animals, and want to belong to ingroups, and brands like Apple are really good at exploiting that, to the point where people will automatically value their "friendship" with a brand above their own ethics (see also: Louis C.K.'s fellow comedians aren't going after him in the same way they went after other people who did similar things, because C.K. is their friend).

That's not dishonest. These people aren't lying, they're just being human. And I think it's worth talking about, because I myself would like to avoid falling into that trap as much as I can. So I think we should talk about this, and also critically evaluate our own actions and opinions, and why we hold them.

To me, in this particular case, it's not even worth talking about the specific arguments these people are making, because they're so blatantly absurd. I also don't much care about whether this was a good business decision for Apple, or a bad one, and whether or not it's hurting their brand. Discussing this topic in terms of how badly it affects Apple's bottom line is one step away from just accepting that shitty behavior doesn't matter, as long as it makes money, which - I think - is an untenable position. I mean, it would be interesting to know how badly this hurts Apple (if at all), but to me, that's unrelated to whether the behavior was bad. It's bad regardless of whether it hurts Apple's brand, and whether it costs them money.

I'm not Apple's accountant, I don't have to worry about their bottom line. I only have to worry about whether they behave like jackasses. And call them out for it when they do.

@Lukas I thought that’s what you were doing because you said they “dissemble,” which Dictionary defines as “conceal one's true motives, feelings, or beliefs.” I completely agree with your point about “just being human.” We all have to strive not to fool ourselves and fall into that trap.

Yes, it’s definitely unrelated to whether the behavior is bad. I see your point about “accepting.” On the other hand, is it more important to do the right thing or to do it for the right reason? People are probably not going to agree on the morality. You don’t have to change the CFO’s moral compass if it becomes obvious that it’s hurting the brand.

Yeah, I should not have said "dissemble". I meant that people write stories that detract from the actual thing that's happening, or reframe it to detract from Apple's behavior (e.g. the "but it makes money" framing, or the "other companies are even worse" framing, or the "voluntarily paying more in taxes" framing), but not that people intentionally conceal their actual thoughts. I was thinking of their external behavior, not their internal state, so my word choice was misleading.

> On the other hand, is it more important to do the right thing or to do it for the right reason?

I don't think it matters, but I think that, if we want Apple to change their behavior, we have to criticize their behavior, and not be distracted by discussions about how much money it makes them. If people rob a home, you don't discuss how lucrative the robbery was for the people who participated, and argue that the robbery might have been okay if enough money was stolen, particularly since a lot of people rob homes. Instead, you ask if somebody was hurt, what you can do to help the victims, and what the police is doing to catch the culprits.

> You don’t have to change the CFO’s moral compass if it becomes obvious that it’s hurting the brand.

And I don't think we can. I agree that, if we want to change Apple's behavior, the goal has to be to make it costly for Apple to keep up their current behavior. My point, though, is that "making it costly for Apple to keep up their current behavior" means attacking their current behavior, and pointing out that it is unethical.

Getting sidetracked by discussions about what other companies are doing, or how you wouldn't voluntarily pay more taxes than you have to (which isn't even true, since most people don't spent a lot of time trying to optimize their taxes), or how it's okay for Apple to do this because they make more money, or even by focusing the discussion on whether any of this is affecting their bottom line, is making it easier for Apple to get away with this stuff, because all of these discussions are distractions from Apple's shitty behavior.

[…] he could have said that Apple was paying the taxes required by law without also claiming not to “depend on tax gimmicks”. Or he could have defended the reasoning behind the iPhone battery throttling without claiming that […]

[…] The Paradise Papers, Apple, Ireland, and the […]

Leave a Comment