The Greenlining Institute has a report out claiming that Apple's tax rate in the financial year just past was an incredible 9.8%. This is a result of all sorts of what they think to be tax dodging, piling up the cash offshore outside the US tax system and in general all sorts of disreputable behaviour. The actual explanation is that the Greenlining Institute doesn't know how to read a set of accounts. They are comparing the tax paid on the previous year's profits with the profits made in this year.
Their end result is thus not that Apple has paid a very low tax rate, rather that Apple's profits are increasing very quickly, something that we actually already knew.
The report is here and this is their main point about Apple:
The tax rate paid by Apple, the world’s most valuable company with a stock valuation that passed $50 billion in March 2012, has dropped even more dramatically. With profits soaring past $34 billion last year, the company’s tax rate fell from 24.8 percent in 2009 to 14.7 percent in 2010 and 9.8 percent in 2011. Apple’s tax rate over the last
three years was less than that of middle-income Americans with average household incomes of $64,500 per year; its 2011 tax rate was lower than that of American households making an average of $42,500 per year.
That 9.8% rate really is a bit of a surprise. For Apple's own 10K filing shows that they think their tax rate was:
The Company’s effective tax rates were approximately 24.2%, 24.4% and 31.8% for 2011, 2010 and 2009, respectively. The Company’s
effective rates for these periods differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S.
Note well that that is already taking into account that potential indefinite deferral of profits made overseas from being captured by the US taxman.
So, how can we reconcile these two numbers? For there is quite a large difference between 9.8% and 24.2% as a tax rate, that's certainly true. The simplest explanation seems to be that the Greenlining Institute simply doesn't know what it's talking about.
The number they give (page 9 of their report) for Apple's taxes paid in 2011 is $3.3 billion or so. When compared with the $34 billion in profits for the year, sure, that's the right percentage then.
Yet Apple (page 43) says that it put aside $8.3 billion to pay taxes in 2011. It was the previous year, 2011, that it put aside $4.5 billion to pay income taxes. Just as a first intuition we might think that it's possible to fiddle down $4.5 billion to $3.3 billion actually paid, rather than from $8.3 billion to $3.3 billion.
And just as a second intuition we might want to ponder how corporate income taxes must be paid. Just as with our own income taxes, they must actually be paid, the cash handed over, after the end of the period for which the tax is being levied. For how can we work out how much tax is due on profit or income until we've gone past the end of the year in which we calculate profit or income? Quite, we cannot: taxes are paid a year in arrears. Sure, there might be some witholding as there is for those of us paid through paychecks, but the calculation of the total amount paid must come after the end of the tax year. Thus final payment must also come after the end of the tax year because if we don't do it this way we don't know what the income or the profits are to charge tax upon.
And that is indeed the mistake that the Greenlining Institute has made. As they explain it (page 19):
The third method, which this report uses, is what a company reports on its 10-K as “cash taxes paid.” This is how much a company actually paid in taxes in a given year. But that figure includes the company’s taxes paid everywhere, including taxes paid to states, the U.S. federal government, and to other countries. Some of that money could be paid for back taxes and some could eventually be refunded. While imperfect, this is the best estimate of how much a company actually pays in taxes in a given year. Until the government or the Financial Accounting Standards Board requires companies to report more, this is the best figure available.
They are counting the cash paid in taxes in 2011 as being the tax due for 2011. But as we know from the above that cannot be true. The cash taxes paid in 2011 relate to the profits made in 2010. Those in 2010 to profits made in 2009 and so on.
What they have done is divide the $3.3 billion paid in 2011 into the $34 billion profit in 2011 to get their 9.8% tax rate. However, what should in fact be done is to divide the $3.3 billion paid in 2011 by the profit in 2010 of $18 billion odd to give us a tax rate of 18%. And the previous year's $2.7 billion paid into the $12 billion made to give us a 22.5% rate, not the 14.7% rate that is reported.
Please note also that even if there is a system whereby a corporation has to pay estimated income taxes before the final profit is determined this estimation will be on the previous year's profits. So even under an estimate and pay in advance system, 2011 payments would still be based upon 2010's profits.
Now, it's worth pointing out here that there are indeed issues with corporations keeping profits offshore so that the US Treasury doesn't get a cut of them. Those are more of a political issue than anything else and so not part of my remit. Although it does seem slightly strange as a concept that something made in China and sold in, say, Germany, should be paying tax to Uncle Sam.
It's also worth pointing out that other things said in the report are true. Yes, corporate income tax has fallen as a percentage of the total federal tax take over the decades. We might ponder upon the way that federal taxation as a share of the entire economy has grown hugely over this period as well, meaning that what you can extract from corporations has fallen not because corporations are taxed any less but because others are taxed much more.
My point here though is to make a very different one. That the Greenlining Institute has reached that 9.8% tax rate on Apple's profits simply because they don't understand the tax system they are commenting upon. Corporate income taxes are paid a fiscal year in arrears, they must be, for we cannot work out what tax is due until we know what the profits are and we can only do that after the year end.
Using the Institute's method we would find that any fast growing company has a very low tax rate. For a company that is growing profits quickly will always have much higher profits this year than those of last year, the profits of last year being what they actually pay taxes on this year.
In effect, they've noted, with their 9.8% tax rate, that Apple has steeply rising profits. And yes, I think we knew that already.
As I've said, there might in fact be real reasons to worry about the amount of income tax that American corporations are paying. But it's probably worth our getting our information from people other than the Greenlining Institute. You know, from people who grasp the basic principles of the tax system they are commenting upon? Maybe?
