Exercise Apple: Tax Dodgers or Smart Management? Apple may have surpassed Levi's Jeans as the most globally recognizable American brand. Its products are everywhere. Its iconic logo is instantly recognized, as is the distinctively stylish design of its iPods, iPads, iPhones, MacBooks, and iMacs. After a period of struggle in the 1990 s, Apple's founder, Steve Jobs, returned to head the company. It has since achieved incredible financial success. With a stock price of \\( \\$ 530 \\) in October of 2013 , its market capitalization was over \\( \\$ 480 \\) billion. In 2012 it surpassed ExxonMobil to become the most highly valued publicly traded company in history. Apple's profits in 2012 were \\( \\$ 41.7 \\) billion on sales of \\( \\$ 165.5 \\) billion. Earnings per share that year were \\( \\$ 44.15 \\). The company is headquartered in the United Sates, where it employs 52,000 of its approximately 80,000 worldwide workforce. Most of these workers, both in the US and globally, are not involved in the actual manufacture of Apple products. Apple has outsourced the manufacture and assembly of much of its production, notably to Chinese factories. (The Foxconn facility in China has been the subject of ongoing complaints about labor practices, especially involving work hours and production schedules.) While products are often developed in Apple's US facilities, they have primarily been produced elsewhere since the late 1990s. Most of Apple's engineers, technical specialists, and designers are employees of Apple in California and almost all of Apple's research and development occur in the United States. Since the 1980s, Apple has had a number of subsidiaries incorporated in Ireland. Apple created an arrangement where the Irish subsidiaries shate proportional costs for product development but also proportionally split the revenue from the intellectual property rights derived from that product development. Locating subsidiaries in Ireland is attractive for US firms because of the relatively lower Irish corporate tax rate. Many US companies have taken advantage of this lower tax rate and the relatively educated Irish workforce. However, Apple's arrangement has been especially lucrative for the company. Apple successfully negotiated a tax rate of approximately \2 with the Irish government, well below the already low \12 nominal Irish corporate tax rate. Apple's Irish subsidiaries are responsible for sales of Apple products throughout the world, with the exception of the Americas. Those nonAmerican sales represent about \60 of Apple's worldwide sales. That means the Irish subsidiaries pay \60 of the development costs and reap \60 of the sales of Apple products. Apple products produced by third party manufacturers and assemblers in China are 'sold' to either Apple in the US or Apple Sales International in Ireland. Apple Sales International takes only legal title, not physical possession of the products. It 'sells' those products to Apple distributers across the globe for a premium on what was paid to the manufacturer and then distributes its profit to its ultimate Irish parent, Apple Operations International. In the four years from 2009 to 2012, Apple Sales International registered income of \\( \\$ 74 \\) billion, almost twice the amount of the US business. Apple Operations International, in turn, accounts for about \30 of Apple's worldwide profits. Interestingly, both Apple Operations International and Apple Sales International are skeletal operations. Apple Operations International has no employees. Its two directors and one corporate officer are employees of other Apple firms. Apple Sales International only recently acquired employees of its own. Its workforce now totals about 250. Even more interesting is the fact that the Irish subsidiaries are not residents of any country for tax purposes. US law taxes businesses based on their country of incorporation. Irish law, on the other hand, taxes businesses based on the location of management and control. This effectively means that \60 of Apples sales are credited to subsidiaries that have next to no tax liability in any country because the Irish companies are incorporated in Ireland but their operations are managed from California. Apple Operations International paid no tax to any government during the period 2009-2011. Its Irish subsidiary, Apple Sales International, reported paying \\( \\$ 21 \\) million in taxes on sales of \\( \\$ 3 \\). billion for an effective tax rate of \0.06. In 2011 alone, Apple received \\( \\$ 22 \\) billion in pre-tax income from its Irish operations. Had that income been recorded in the US and taxed at the nominal US corporate tax rate of \35. Apple would have incurred mote than an additional \\( \\$ 7 \\) billion in tax liability. (Of course, many US corpo. rations pay effective tax rates much lower than the nominal \35 rateA study by the Wall Street Journal reported that American corporations paid an average tax rate of \12.1 in FY 2011.) As a result of its structuring of subsidiaries in Ireland, Apple has been able to attribute significant amounts of its sales and profits to organizations that have no or few employees, that have minor roles in the development of Apple Products, and that manufacture exceedingly small percentages of Apple products. It is no wonder, then, that the US Senate initiated hearings in the spring of 2013 into whether Apple was inappropriately structuring operations in order to avoid paying US taxes. In a rare show of bipartisanship, Senators Carl Levin and John McCain chastised Apple CEO Tim Cook for establishing offshore operations that had no apparent business purpose other than tax avoidance. While the Senate hearings were an uncomfortable experience for Apple, it received good news from the SEC in October of 2013. The SEC ruled that Apple's strategy was perfectly acceptable under the law.21 The Apple tax saga is ongoing. A 2016 ruling by the European Competition Commission ordered Apple to pay back taxes. \\( { }^{22} \\) Both Ireland and Apple were expected to appeal. In 2018 Apple announced plans to repatriate overseas funds in light of the tax reform in the United States. \\( { }^{23} \\) 1. Apple's tax strategy is legal according to the SEC. Is it sometimes the case that legal actions fail to live up to moral obligations? When and why? 2. What responsibility, if any, do you believe a corporation has to support the communities in which it operates and from which it derives benefits? 3. Should businesses be required to establish a clear business purpose, other than tax avoidance, before the law permits a subsidiary structure such as Apple employs? Are Apple's executive strategists merely exhibiting an intelligent approach to maximizing profits? Or is this a case where the goal of maximizing profits has crossed a line of corporate responsibility