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Phantom Taxes – How Apple Hides Billions in Profit

Phantom Taxes – How Apple Hides Billions in Profit

Apple is set to report its financial results for the second quarter Tuesday, and analysts are expecting net income of $9.8 billion. No matter what figure Apple reports, it won’t be their true profit, as it hides some of it with an unusual tax maneuver.


Apple Inc., already the world’s most valuable company, understates its profits compared with other multinationals. It’s building up an overlooked asset in the form of billions of dollars, tucked away for tax bills it may never pay.

According to tax experts, the company could eliminate these phantom tax obligations. If they did, The Associated Press estimates it would boost Apple’s profits by as much as $10.5 billion.

Investors might throw a party of Apple suddenly added $10.5 billion to its profits, but erasing a massive U.S. tax obligation like that could harm its reputation as a responsible payer of U.S. taxes. The company is instead lobbying to change U.S. tax law to allow it to erase the liability in a less conspicuous fashion.

Like many other companies, Apple keeps profits on overseas sales in overseas accounts. When a customer buys an Apple product in London, or China, for example, that profit stays outside the U.S.

Apple pays some corporate income taxes on the profit to the country where it sells the iPad, but minimizes it by using accounting slight-of-hand to shift profits to countries with low tax rates.

Robert Willens, an independent accounting expert says that when it comes to using creative tax techniques, Apple is no different from other multinational corporations.

If Apple brought the cash home it would pay federal income taxes on the money. So, just like other corporations, it leaves the cash overseas. Apple’s overseas accounts have grown to a gargantuan $74 billion. The money is sitting there because Apple is counting on lower U.S. tax rates in the future.

Apple does “think different” where these overseas profits are concerned. Unlike other companies, they set aside a portion of the overseas profits, marking them as subject to U.S. taxes in the future.

Since Apple doesn’t bring the money into its U.S. accounts it doesn’t pay the taxes. Instead, it records a tax liability. So, when Apple reports quarterly financials, it subtracts these liabilities from the profits, even though it hasn’t actually paid the taxes.

Apple has clearly stated that it has no intention of bringing its profits from overseas home at the current U.S. tax rate.‘‘We do not want to incur the tax cost to repatriate the foreign cash at this time,’’ Chief Financial Officer Peter Oppenheimer told investors in March.

Apple could erase its liabilities by reporting the profits as ‘‘permanently reinvested’’ overseas, basically admitting that they will never be brought home. The tax liability would disappear, but it could make Apple look like a less responsible corporate citizen.

The company is advocating changes in U.S. tax law. It is a member of “Working to Invest Now in America”, or “WinAmerica”. The coalition is lobbying for two bills that would temporarily reduce the tax rate on such earnings to 5.25 percent. The group says that would encourage the repatriation of some of the $1.4 trillion in cash that U.S. companies have sitting in overseas accounts.

Google Inc., Oracle Corp., Microsoft Corp. and Cisco Systems Inc. are also members of WinAmerica.