Easy Money

I barely understand it, and that should tell the story in itself.

Look, I’m of average intelligence—nah, come clean. I’m probably smarter than most people, due more to luck than anything I’ve ever done. By which I mean that I was born into an upper middle-class family in a good university town; the public schools were very good, I was expected to bring home good grades and I did.

So I was curious to know how John McCain—not known for fiery liberalism—came up with this statement.

“I have long advocated for modernizing our broken and uncompetitive tax code, but that cannot and must not be an excuse for turning a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America. The proper place for the bulk of Apple’s creative energy ought to go into its innovative products and services, not in its tax department.”

And just to show you that—remarkably—bipartisanship is not dead, here’s what Democrat Carl Levin had to say, as cited in the same source as above:

“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” said Sen. Levin. “Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere.

OK—all of the comments above were reported in May of this year. So why, trolling through Facebook, did I come across a link to an article, “Apple Under Investigation for Over 1 Billion in Tax Fraud?”

Let’s start at the beginning (I can hear you out there singing, “a very good place to begin….”) What Apple is doing is what many corporations, such as Microsoft and Hewlett-Packard, are doing, and it’s legal, if not right. Apple, yes, is based in Cupertino, California, and presumably much of the work—creatively, administratively—gets done there. 

So you get it into your head—hey, let’s buy the new iPad! It weighs less than a hummingbird, and is just as fast! Wow—retina display! Gazillions of apps!

You get the picture—you’re entranced with your toy (full disclosure—charging right next to me is a first generation iPad, a dinosaur that refuses to die, dammit, so that I can buy a new one….) And you probably know that the iPad was manufactured in China. But who thought up the idea in the first place?

Obviously, somebody in California. And that somebody was working for Apple, and his job was to think things up. This idea—known as intellectual property—is now owned by Apple.

Of course, Apple could contract directly with a manufacturer in China to make that iPad you are now holding in your hand. But that would mean that it would be slugged with a corporate tax rate of 35% in the United States. And guess what? They guys down in finance are howling, because that’s high, by international standards. So what do they do?

RobertW. Wood, writing in Forbes, explains the strategy:

Facebook sent $700 million to the Cayman Islands as part of a “Double Irish” tax reduction strategy. Google used the Double Irish and the Dutch Sandwich to save billions in U.S. taxes. The Double Irish involves forming a pair of Irish companies to turn payments for 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 market or promote the products in Europe.

Thus, all the European income—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. 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 license 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. 

Put it this way—Apple in Cupertino send its legal guys over to Ireland where, presumably, they work with the Irish guys. So the boys create an Irish company, which turns around and incorporate in Bermuda. That’s lovely—not for the pink sandy beaches or the hairy legs poking out from the famous shorts—but because there’s no income tax in Bermuda.

Now the guys in Apple California run off to Ireland again, and guess what they do? They set up a company in Ireland! We now have two companies: Bermuda / Irish and Irish / Irish.

Now then, people in Italy and France want iPads too, so how to get it into their hands? Well, the Irish company in Bermuda is given the rights to the plans for the iPad—the “recipe” or the intellectual property. So the Bermuda / Irish company allows to Irish / Irish company to make the product, market it, and sell it all over Europe.

Irish / Irish runs over to China and gets a whole bunch of people to work for nothing (or thereabouts) and produce the iPad. Of course, even with the market and distribution and manufacture, Irish / Irish is now sitting on a huge pot of money because guess what? Everybody in Europe has to have an iPad.

And that’s bad, because Ireland could now come after Irish / Irish. So that’s when Bermuda / Irish steps in, and asks for a huge royalty payment—very fair, they did give the right to Irish / Irish to produce and distribute their idea, right?

So after that big payment, Irish / Irish now has to pay very little money to the tax authorities in Ireland, and Bermuda / Irish is sitting on a huge sum. And as long as that money stays in Bermuda, it’s not taxable anywhere in the world.

There are several other things to consider. First, the Bermuda / Irish company has no employees and not even an office in Bermuda—everything is run out of the US, and the board meetings are in California (gee—I wonder where it could be!) Second, Apple went to the tax authorities in Ireland and negotiated a “sweetheart” deal with them—Apple pays just 2% taxes on its Irish / Irish company, not the (still low) 12.5%.

Third, the sum of money we’re talking about is huge; here’s what the Permanent Subcommittee on Investigations says:

Ireland asserts tax jurisdiction only over companies that are managed and controlled in Ireland, but the United States bases tax residency on where a company is incorporated. Exploiting the gap between the two nations’ tax laws, Apple Operations International has not filed an income tax return in either country, or any other country, for the past five years. From 2009 to 2012, it reported income totaling $30 billion.  

Lastly, what Apple is doing is nothing special, in the world of business. In 2011, The New York Times reported that GE paid no taxes in the US, despite making 5 billion bucks in their domestic market. Knowing the Times to be a hotbed of fire-breathing radicals, I turned to the more conservative Forbes for the answer. And here it is:

Its finance arm, GE Capital, lost a lot of money during the financial meltdown (roughly $30 billion) and it’s still carrying those losses forward and deducting them from current income. As GE spokesman Gary Sheffer wrote in his response to the Times story: “Without these financial crisis losses at GE Capital, GE’s tax rate would have been near the average of other multinational corporations.” He added, “In short, when you lose money, you don’t pay taxes.”

But that’s not all. Because according to the law, when you make money overseas, you don’t pay taxes (until the money comes in to the country). But when you have a loss overseas? That can be deducted from your US taxes. Here’s Forbes again:

Overseas profits stay overseas, beyond the arm of Uncle Sam. But when losses happen, like in the credit crunch, they can be netted against U.S. profits. Just another balancing act in the global marketplace.

Now then, all of this came out in a subcommittee hearing in May. So why was my friend publishing a link to a recent article?

Well, it turns out that the Italians—better known for amore / fashion / opera than high financial probity—are charging that Apple is tax avoiding them! Why? Because Apple Italy channeled all its profits to Apple Irish / Irish which had to pay enormous sums to Apple Bermuda / Irish which pays no taxes to Bermuda or to the United States but which is owned and operated by Apple / Cupertino / California.

There is a reader of this blog who has quite distinct views to my own. He honors me by reading and commenting, and I welcome his views. My intention—throwing him a bone—was to post the video below about the squatting going on in a 45-storey unfinished condominium in Caracas. I was going to point out that it is completely outrageous for people to expect the government to provide you housing, food, water, health care for free. Also, that it’s outrageous to squat—to assume that you have the right to move into a building just because you have nowhere to live.

I would also point out that in Puerto Rico we have a substantial core of people who don’t work, who are living on welfare; generations of people who have lived on what’s called the mantengo. It’s crazy and outrageous.

Those people are maintained by the handful of people who still have jobs, and who get a W-2 form at the end of the year. And come April 15, you’re pretty much stuck. As it happens, I don’t have a W-2 form, but I do have a good idea for a company. Here’s what I’m gonna do…

Start a company that will incorporate individuals that will be located in Ireland but will then be incorporated in Bermuda but will be operated and managed out of Viejo San Juan. Your employer will have to pay the company in Ireland, which will have to pay the company in Bermuda, which, come to think of it, I may have to move to.

Right—small price to pay for easy money!