This week I spent some time digging into the accusations of Senators Levin and McCain regarding Apple tax avoidance. Most people know that tax avoidance is perfectly legal (and every accountant will advise on how to accomplish it), whereas tax evasion is illegal.
Anyway, I wrote a fairly opinionated piece, as is usually the case with what I write, about this topic at iMore. You can see how many people think I’m a jerk in the comments. Some of it is entertainment, some of it is quite interesting to consider. Read it here.
Understanding Apple’s Holding Company
What bugs me the most is what I can only describe as a horrendous misunderstanding by most people (even the financial media) to grasp the concept of a holding company.
Apple uses a holding company in Ireland, and it is absolutely true that this holding company generates HUGE profits and pays essentially no tax. That is the headline story people write about, and the implication is there is something sinister about it. There isn’t. It’s totally logical and Apple explained it very well in its document here on page 14:
It should be emphasized that AOI does not reduce Apple’s tax bill in the US. If AOI did not exist, the funds it receives from other foreign subsidiaries through dividends would simply remain in the custody of those subsidiaries and would not be subject to US corporate income tax. However, without AOI, Apple would lose the considerable risk management and administrative benefits it provides for the Company’s international operations.
The bottom line is that Apple’s foreign subsidiaries generate real income and pays real income tax. They then funnel the remaining after tax money through to an Apple holding company using inter-company dividends.
Question: If you had 3 or 4 bank accounts and you decided to move all that money to a single (new) bank account, do you think you should pay tax for moving your money? Of course not! Yet that new bank account (which in this analogy is Apple’s holding company) would recognize huge revenue and no expenses, so it would post a gigantic profit if it was a company. So why the hell is everyone acting so stupid about this, as if Apple is doing something wrong?
Apple’s holding company is simply a repository for its offshore cash, and a way to manage the money from one company. It’s the equivalent of putting all your loose change in one jar, rather than scattering it throughout your house.
Senate Poking its Nose Where it Doesn’t Belong
If you look at the document written by Levin and McCain (which you can read here), they spend a lot of time harping on issues that have no bearing on US Treasury tax collection.
For example, the idea of this holding company in Ireland – it’s irrelevant. The tax that is paid (or not paid) is determined by the operating companies that Apple owns outside of the USA. The profit from these companies (after tax) is moved to a holding company, and the US Treasury really has no say about any of this provided the cost sharing agreements between the US and foreign entities are reasonable.
There is a whole section devoted in this article to the fact that Apple’s holding company is not a tax resident of any particular jurisdiction. The holding company is incorporated in Ireland, which makes it not a US resident for tax purposes. END OF STORY. If it’s not a US resident based on US law, then Senate has absolutely no business in worrying about another country’s tax laws.
In the case of Ireland, because the Apple holding company does not have a physical presence or employees in Ireland, it is treated as a non-resident, so it does not pay Irish tax. In short, Apple’s HoldCo is not a resident of the US or Ireland, or anywhere at all. And the US Government has no business interfering beyond a reasonable determination of whether or not Apple is abiding by US tax law. If they are (and they appear to be), then what Senate is doing appears to be casting an opinion on the legitimacy of Irish law. None of their damn business.
Watch this incredibly well scripted presentation by Senator Rand Paul :
(Disclosure: I’m an Apple shareholder)
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Hi, I'm Chris Umiastowski. I'm a 10-year veteran of sell side equity research and this is where I come to connect with friends on all things related to tech investing.