By taking advantage of lax U.S. transfer pricing rules, Apple Inc., the world's most valuable company, cut its federal tax bill by billions of dollars in 2011. Moreover, by taking advantage of flexible accounting rules, the company masked its tax avoidance by reporting a relatively high effective tax rate.
... [T]he company reports only 30 percent of its profits as being from the United States. By shifting large amounts of profits out of the United States, Apple is doing nothing illegal or out of line with the tax practices of other companies with lots of high-value intangibles. U.S. transfer pricing rules are a sieve.
There will never be a precise answer as to where profits are created. But if the corporate tax is a tax on income, it is reasonable to place profits where value is created. In Apple's case, can there be any doubt that most of its value is created inside the United States? If we assume, conservatively, that 50 percent of profits should be U.S. sourced, then Apple's federal taxes would have been $2.4 billion more in 2011. Given the pivotal importance to Apple's success of product design and other functions performed in the United States, one could reasonably expect U.S. profits to be 70 percent of the worldwide total. In this case, payments to the U.S. government would have been $4.8 billion more in 2011.
View TaxAnalysts'® Martin Sullivan's opinion in its entirety on TAX.com.
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