Warning: This is an old writeup from 5th grade, so it might be cheesy and not very well written but it was still really fun and something I was into back then.
The Apple Money Problem
Apple makes $1444 of profit ever second and that is equal to Alphabet, Facebook, and Microsoft combined. Its more country than company with a 285 GDP at near 285 billion dollars in the bank and net worth of 2 trillion dollars. Every company has to pay taxes and apple loves keeping their money overseas and loves to give money to countries but countries refuse. This is how Apple’s strange finance story made them so successful.
Companies pay taxes for where it’s sold. So let's say an iPhone was made by and designed in California, manufactured in US but sold in India, the taxes apply their in India not what happens in US. And different taxes across the US means different prices. For example John bought say an iPhone 12 in India which was 1068 in India. But there is always exception in a rule which is almost always America. Companies pay taxes where profit is made. America is the only company where tax is based on citizenship and that means that American companies pay the highest taxes from profits made anywhere. So say the American tax rate is 35% - 18% of India which is cheaper at 17% but Apple goes…ummm…I think we should store our money out here at India. This is something like US acting like an insurance company. Apple has subsidiary accounts that its a legally different company but just a foreign bank account. They store the money in countries like Ireland because of its incredibly low tax code. Their worldwide effective tax rate is 24.6%. Because Apple has more sales overseas they store their money out of US. Ireland runs not because its the Apple tax shelter but because of them. When Ireland looses in taxes, they get back from the jobs that come from the 6,000 employees that work with this sales distribution activity. And the other 12,000 jobs are coming out too. So when the European Union says time to pay your dues to Ireland, Ireland doesn’t want Apple to do it because they will have to pay more in taxes. Ireland and Apple have a fair deal where Apple makes from taxes and Ireland’s entire economy runs on the fact that they get more jobs from these big companies. This basically means Ireland will pass on 5% of the GDP or Gross Domestic Product in their business investment category. Apple does pay their taxes occasionally and paid near 35 billion in corporate income taxes over the last 3 years. And yes, this plan does work. Apple gets 21% of their earnings from foreign earnings. Ireland has the lowest tax rate of all at 12.5% and they will wait for US tax rates to come down because taking the money back to their main operating international account will cost taxes. As Apple puts it this is for economical growth and creating new jobs.
How profit can escape it's country
We have covered the 70% of the revenue that happens outside of US but what about the 30% revenue in the US. Paying less taxes means that you have to make money. So here it comes again, the Sales Operational Bank account or the foreign account where they store there money in Ireland. So coming back again, how will Apple make less money. Well the profit they gain is all based on patents. Patents unlike a product, person, or place has no specified value. Its more like a bargain that started as $0. So they give them to the Ireland Subsidiary who rents the patents for a fee. So then when Apple gets profit in US or make money from that iPhone 12 they will look at the Irish Subsidiary and give them the money for the patents because its just not their money. This is how profit escapes its country. So basically, Ireland is taxing that money if it stays in the country or goes out. This means that Ireland taxes it bye its lower 12.5% rate even if it goes out of the country. So that profit goes to Ireland and briefly flashes there on the foreign bank account or subsidiary of a non existent company with no legal employee to check that box and the tax rate is charged by that 12.5%. A handy loophole returns it back to New Jersey where they keep all their money all without the 35% tax rate. This is how US made profits are not charged by 35% but rather lower than India, and other countries.
If this is confusing, here is a simpler way to explain it:
Jack bought an iPhone 12 for $799 in America. The price for the phone is 100% made up of patents, which include the design, software features, and more.
Now, assume that Ireland contains 50% of those patents in the Ireland subsidiary, owned by no legal company or person. So when Apple gets their money:
- They give
$400to Ireland because it isn’t their money. - They pay the
35%US tax on the remaining$400, which is$140in taxes, leaving$260(no trickery there). - The other
$400is sent to the Ireland bank, which charges$50in taxes (at Ireland's lower rate).
So, of the $800 that Jack paid:
$190was company taxes ($140US +$50Ireland).- The profit Apple actually gained was
$710.
Now, Apple probably pays a lot more, and they don’t give the money straight away. Instead, they store it in the subsidiaries until US taxes come down, so they can get even more profit.