May 19, 2013 6:59 pm

Apple faces grilling over US tax rate

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People walk past the Apple logo at the Apple Store at Grand Central Terminal in New York ON January 25, 2013. Apple shares slid about 12 percent on January 24 after the tech giant posted record profits and sales of its iPhones and iPads but offered a disappointing forecast for the coming months.©AFP

Apple would have paid a tax rate of about 15 per cent last year, far below the 25.2 per cent it reported, had it not used a form of reserve accounting that sets it apart from other big US technology companies.

The rare accounting treatment has helped to distract attention from Apple at a time when the tax-avoidance strategies of other cash-rich US tech companies, notably Google, have come under public attack, according to tax experts.

However, Apple’s tax planning is likely to come under the microscope on Tuesday when Tim Cook, chief executive, appears before the US Senate’s permanent investigations subcommittee.

The committee, which has already grilled executives from Microsoft and Hewlett-Packard, has targeted the techniques US companies use to shift profits to lower-tax countries.

Like other US multinationals, Apple does not reveal how it shuffles costs and revenues between subsidiaries in different countries, making it hard to assess how it determines where its taxable profits are earned, according to analysts.

“It’s impossible to tell how the funds flow from the product idea to development, how it goes from the suppliers to the retail stores,” said Gerald Granovsky, an analyst at rating agency Moody’s.

Mr Cook insisted last week that Apple paid all the US taxes it was liable for and “does not funnel its domestic profits overseas”.

The 25.2 per cent tax rate Apple shows in its accounts is boosted by billions of dollars it sets aside each year to cover future tax liabilities, which would fall due if it repatriated part of its $102.3bn of overseas cash holdings.

These provisions added some $5.8bn to its reported taxes last year, lifting the total by 70 per cent and reducing its profits. The figure is an accounting entry and has no effect on the actual amount of taxes paid.

Other US tech companies do not set anything aside, choosing instead to say that their overseas cash is permanently invested abroad.

One sign of the effectiveness of Apple’s international tax planning is that the share of profits it reports in the US is lower than the share of its sales, according to Martin Sullivan, chief economist at Tax Analysts, a non-profit tax research group. Since much of its product design, marketing and other critical activities take place in the US, the share of profits booked there might be expected to be far higher, according to Mr Sullivan.

In a statement, Apple said it had paid $6bn in federal taxes last year, making it one of the biggest taxpayers in the country. By keeping its research and development in California and creating a market for app developers, it also said it had created “hundreds of thousands of jobs”.

Apple’s higher reported tax rate has added to an impression that it does not engage in the sort of tax avoidance that has brought opprobrium to some of its rivals, said Ed Kleinbard, a professor at USC Gould School of Law.

Apple stirred up controversy last month when it opted to borrow $17bn to save itself from having to repatriate any of its foreign cash. That manoeuvre saved it a US tax bill of as much as $9bn.

In anticipation of Tuesday’s hearing, Mr Cook said last week that he would call for a simplification of the US tax law. Apple, like other tech companies, has argued before for the adoption of a so-called territorial tax system, which would not apply any US tax to profits earned abroad.

Such an approach, which is used by most developed countries, would free companies such as Apple to repatriate future profits earned aboard without facing any extra taxes.

The Senate committee was unlikely to be deflected into a discussion about tax policy, said Prof Kleinbard. “There’s a fundamental issue with the strategy – this is not the tax-writing committee. They’re proposing it to the wrong people,” he said.

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