The headquarters of Apple are located in Cupertino, California, where the corporate income tax is 8,84%. This company has several branches in the world: in Ireland, Luxembourg and especially in the Caribbean. According to the Wall Street analysts, the profits generated by Apple might reach 45,6 milliard dollars during the 2012-2013 fiscal period. The main part of these profits (70%) has been generated outside the USA.
It should be emphasized that Apple profits result mainly from the intellectual property rights (royalties, licensing fees …) and the sales of intangible products (Itunes, Appstore, softwares …). Being based on the intangibles, these profits can be transferred easily to other jurisdictions with beneficial tax conditions.
Ensuring Fiscal Planning and Optimization for Apple
During the 2011-2012 fiscal period, Apple was obliged to pay taxes in the amount of 3 milliard dollars on a profit of 34,2 milliard dollars in the United States. Martin A. Sullivan, the former U.S. Treasury economist, confirms that without the international fiscal planning and optimization, the company would have had to pay an increased tax of 2,4 milliard dollars.
In fact, in order to benefit from a tax relief, Apple has realized different fiscal optimization solutions. They allow to:
- Reduce the tax rate in the United States (1),
- Reduce the profits made in the United States and maximize the profits overseas (2),
- Combine the profits in one jurisdiction with a more beneficial tax rate (3).
Lowering the tax rate in the United States:
In order to reduce the tax charged in California where having established their headquarters, Apple decided to create „Braeburn”, a branch based in Reno, Arizona. This branch deals with the collection, management and the investment of profits generated by the company.
In contrast to the companies that have been established in California, corporate income tax is imposed on the companies created in Nevada.
Since the creation of de Braeburn, Apple has generated 2,5 milliard dollars. With this branch, Apple also reduces its tax rate in other states such as Florida and New Jersey… In fact, these jurisdictions allow a tax reduction if the company is governed and controlled by another state.
Reducing the profits generated in the United States: a global strategy:
Apple has also branches based outside the United States (Luxembourg, the Caribbean, Ireland …). These branches allow first of all to lower the profits generated in the United States. Thus, Apple will be able to reduce the tax rates in the United States and especially benefit from more beneficial tax conditions.
Let’s take the case of Itunes SARL as an example. Located in Luxembourg, this Apple branch manages Itunes as well as the sales of the relevant songs. Composing 20% of the total Itunes sales in the world, the profits generated by this SARL reach more than 1 milliard dollars.
Luxembourg offers a fair number of appreciable advantages: a low tax rate, a large network of international tax agreements, and non-taxation of dividends and capital gains transferred from Luxembourg. Thus, Apple will be able to optimize extremely its profitability.
Profits in one jurisdiction with a favorable tax rate: the “Double Irish with a dutch sandwich”:
The « Double Irish with a Dutch sandwich » is a fiscal mortgage that allows to relocate the profits generated in the USA in the form of royalties in the first branch in Ireland. This branch holds some Apple patents developed in California (Apples Sales International). In Ireland, the product lose the rights to the patents developed in California.
Because of this fiscal planning, Apple will benefit from a low corporate income tax in Ireland (from 12,5%). Moreover, it will have the possibility to transfer the profits to the Caribbean (a jurisdiction with a preferential tax treatment) without additional taxes, i.e. without a withholding tax.
Furthermore, with the “Double Irish”, Apple will be able to relocate the profits generated outside the USA to a second Irish branch, then transfer them to the Netherlands in order to benefit from the international tax agreement network of this legislation. In addition, the Netherlands offer very beneficial tax conditions: a reduced or non-existent withholding tax, absence of tax on capital gains and distribution of dividends.
From the Netherlands, Apple will be able to transfer its profits to all the countries in the world and especially to its first Irish branch in order to relocate them later to the Caribbean.
In 2004, it was estimated that one third of the profits generated by Apple were located in Ireland. Experts have also confirmed that “Double Irish with a Dutch sandwich” has allowed the company to reduce considerably the tax rates on the profits generated outside the USA.
In fact, in 2010, instead of being charged with a tax rate of 3,2% , it benefited from a tax rate of 2,2%.