Apple Pioneered A Popular Tax Loophole Strategy And Saved Billions
Apple (NASDAQ: AAPL) is known for pioneering and perfecting new technology, but investors may not be aware that the company also pioneered a popular tax strategy.
"What they basically do is set up international corporations, particularly in Ireland, which is a lower tax country than the U.S.," John S. Kiernan, Senior Analyst at WalletHub.com, told Benzinga.
"They essentially put the patents and intellectual property in the international shell corporation, and so the U.S. entity pays royalties for using that technology throughout the year, so they incur losses, which not only knocks down their domestic tax basis but shifts most of it to the international entity, which is taxed at a lower rate."
WalletHub recently published a list of the world's largest corporations that pay the most and the least taxes. Apple had one of the lowest international tax rates (1.9 percent) in 2012, followed by eBay (3.0 percent), Google (5.3 percent) and Cisco (7.0 percent). By lowering their tax burden, these and other tech giants have saved billions of dollars.
"It's kind of a complicated thing, but it's a strategy of using payments to shift income from a higher tax country to a lower tax country," Kiernan explained.
"It's called the Double Irish Arrangement because you can set up these two Irish companies -- one in a tax haven like the Cayman Islands and one in Ireland. They kind of take advantage of this loophole in the laws to essentially lower their overall tax basis."
Kiernan said that this strategy was "kind of pioneered by Apple in the late '80s."
"They've gotten a lot of heat for it more recently, but it is something that we've seen in particular with these tech companies because they have so many patents and intellectual property and all that," he said.
Loopholes Make Shareholders Happy
Investors have very little to complain about when Apple and other tech giants find new ways to avoid taxes.
"When you think about it, shareholders are benefiting at the end of the day," said Kiernan. "If the company is doing better, which, you'd think if they're getting creative with their accounting and saving money that way, that would benefit shareholders."
Kiernan suspects that American taxpayers are much less impressed with this strategy.
"[They might] think these corporations aren't paying their fair share," said Kiernan. "When you look at things in absolute terms, they still are paying a lot of money to the government. It's just kind of the matter of leaving money on the table, and that's why there has been so much talk about tax reform."
Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.
© 2016 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.