Today, Apple executives will testify before Congress about the details of their expansive tax-minimization system.
Major tech companies exploit differences between taxation policies in different nations in order to pay as few taxes as possible.
Apple isn’t the only one. In fact their competitor Microsoft has a massive system by which to avoid taxation, detailed in another Senate report from last September.
American companies keep sixty percent of their cash overseas and untaxed, some $1.7 trillion, according to a U.S. Senate HSGAC Permanent Subcommittee on Investigations released in September 2012.
That report used Microsoft as a case study for the leaps and bounds that U.S. corporations go through to minimize their tax exposure, and illustrate the current flaws with the international corporate tax regime.
The Senate investigation found that Microsoft reduced its 2011 federal tax bill by a whopping $2.43 billion — or 44 percent — by using a wide, international network of controlled foreign corporations and the exploitation of various loopholes in the U.S. corporate tax code.
According to Microsoft, the company paid $3.11 billion in federal taxes in 2011.
According to the full Senate report, Microsoft Corp does 85 percent of its research and development in the United States. Of its 94,000 employees, 36,000 are in product RD. The company had reported income of $23.2 billion, but with a federal tax liability of $3.11 billion only paid an effective federal tax rate of 13.4 percent. That’s much lower than the top statutory rate of 35 percent for corporations.
The way the group accomplished this is through a wide variety of foreign groups in tax havens like Ireland, Puerto Rico and Singapore, and by exploiting a recently updated tax loophole.
In fairness to Microsoft, they’re doing what nearly every other major technology company does. A Microsoft representative commented on the fiduciary responsibility to shareholders to maximize value.
The company accomplished this by selling the intellectual property rights for its retail businesses to different controlled companies in tax havens.
The report found that Microsoft has three main revenue sources resulting from its intellectual property. The first is retail software which is comprised of the sale of products to consumers, retailers, and enterprise licenses to governments and businesses. The second is web products like Microsoft Bing and Xbox Live. The third is licensing to computer manufacturers who pre-install Microsoft on the products they sell.
In the 1990s, Microsoft established three regional retail operating centers in Ireland, Puerto Rico and Singapore. These offices regionally oversee the first revenue stream, retail sales. The Ireland office oversees all retail operations in Europe, the Middle East, and Africa. Singapore oversees all operations in Asia, and Puerto Rico oversees all operations in North America.
These three retail operation centers — plus Microsoft U.S. — all buy in to RD cost sharing pool, which in turn gives them the right to sell Microsoft products in their respective zones. Each sector pays a percentage of the $9.1 billion Research Development budget equivalent to their percentage of retail sales.
The Ireland office pays approximately