How, Exactly, Did Apple Shelter $44B From Being Taxed?

Niraj Chokshi
National Journal

Apple was able to avoid paying taxes on $44 billion in offshore income between 2009 and 2012 thanks largely to a quirk in how the Internal Revenue Service thinks the company is structured. 

At its core, tax-evasion is simple: A company sets up a facility in a low-tax jurisdiction and passes transactions through that locale. Profits pile up, while taxes remain low. It’s an obvious tactic and one the U.S. tax code is set up to prevent—sort of. Apple exploited what’s known as the “check-the-box” loophole to get around it and avoid paying taxes on $44 billion. Here’s how:

The IRS tracks the transactions of American companies and their foreign subsidiaries, but it doesn't keep going down the food chain—in other words, it ignores transactions among the subsidiaries’ subsidiaries. At the same time, under check-the-box rules, the IRS gives corporations some say in how they map out their organizations. As a result, a company can tell the IRS that its foreign subsidiaries are actually all divisions of one foreign umbrella company—all by checking a box on a form. That’s what Apple did. The company simply said that its foreign subsidiaries—Apple Singapore, its European retail stores—were part of its low-tax Irish company. Just like that, transactions among those companies disappeared from the IRS’s gaze. 

All Apple had to do to avoid taxes on foreign income was to pass its products through its Irish facility. The best part? The products can “pass through” Ireland on paper. Here’s how it all played out, according a report out this week from the Senate Permanent Subcommittee on Investigations:

Apple products sold in Asia were not shipped to Ireland from the third-party manufacturer and then shipped back to Asia for sale. Rather, [Irish shell Apple Sales International] took title to the manufactured products while they were being shipped to Apple’s Asian distribution centers. When they arrived, ASI sold the products to Apple Singapore at a substantial profit. Apple Singapore then resold the products, in turn, to Apple retail entities or end customers.

As iPhones travel from manufacturer to distribution center, they "pass through" Ireland. When they arrive, the profits accumulate in—where else?—low-tax Ireland. Thanks to the check-the-box loophole, Apple avoided paying taxes on roughly $44 billion from 2009 to 2012.

The Senate committee mapped out how Apple was able to use the check-the-box loophole by arguing that its foreign subsidiaries were actually all part of its umbrella Irish arm—Apple Operations International—thus distancing their transactions from the IRS.