Sure, they create innovative products. But these companies outdo their competitors in another, very important way.
Apple may be the most successful company in the world. At one point last year Apple had $76.2 billion in cash on hand, more than the U.S. government's $73.8 billion. And Apple is the most valuable company on the planet, with a market cap of nearly $529 billion dollars (last time I checked).
Apple's current market cap is more than the gross domestic products of Iraq, North Korea, Vietnam, Puerto Rico, and New Zealand - combined.
But according to Bill Zumwalt, CPA, developing innovative products and creating successful marketing strategies isn't the only thing Apple and Google do well; both companies also excel at devising and implementing complicated tax strategies that allow them to earn billions yet pay less than 10% of their taxable income in tax.
How do Apple and Google do it? Largely by keeping the money they earn outside the United States.How it works
Apple owns subsidiaries in tax havens like Ireland, the Netherlands, Luxembourg, and the British Virgin islands. They helped pioneer the "Double Irish" and "Dutch Sandwich" strategies that hundreds of other multinational companies have imitated.
Google does the same thing. Here's how it works for Google:
- Google licenses the rights to intellectual properties to a company called Google Irish Holdings, headquartered in tax-free Bermuda.
- Google Irish Holdings owns a subsidiary called Google Ireland Limited, a 2,000-employee company located in Dublin that sells advertising.
- Google Ireland Limited earns billions in revenues, subject to Ireland's 12.5% corporate tax rate. That's certainly better than the 35% tax rate in the U.S., but Google sends most of those earnings back to Google Irish Holdings.
- The result: The Double Irish lets Google's Irish subsidiary eat the expenses while the income gets shifted to Bermuda.
Of course you might assume Ireland imposes withholding taxes on transfers outside of Ireland, but that's where the Dutch Sandwich comes in. Payments from Google Ireland Limited get sent through Google Netherlands Holdings, a firm based in Amsterdam with no employees that takes advantage of European Union rules to avoid Irish withholding.The savings
By detouring funds through Amsterdam, Google saves approximately $1 billion in taxes every year.
Apple uses similar strategies, and maintains a subsidiary in tax-free Nevada called Braeburn Capital to manage their revenues without paying tax in its home state of California.
In gross dollars, Apple still pays a lot of tax: In 2011 the company paid a worldwide tax of $3.3 billion on $34.2 billion in profits. But one study concludes that Apple would have paid $2.4 billion more without these rules. Google actually pays 22% in taxes in the U.S., and overseas pays only 2.4%, even though it operates in countries with average corporate tax rates over 20%.
All of which, of course, is fine. Esoteric tax strategies aren't new and they certainly aren't illegal. Lots of companies—including Oracle, Microsoft, Pfizer, and Eli Lilly—use the Double Irish.
So if the thought of billion dollar companies paying a lower percentage of taxes than you do is upsetting, don't hate the players. Hate the game.The takeaway
Smart companies don't just know how to make money. They know how to keep it, too.
Maybe the real rock stars at Google and Apple aren't the coders and designers. The real rock stars might just be the guys and gals in accounting.
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