Income taxIt might be helpful if people who allegedly reveal the manner in which Apple dodges taxes all over the world understood the methods Apple deploys to dodge taxes carefully manage its global tax exposure.

The latest to fall foul of this simple request are researchers in Australia, insisting that Apple has left the Oz taxman $9 billion short of his rightful share. That the Oz taxman himself doesn’t seem to share this view should give us some indication that they’ve not quite got their research correct.

The revelation is here:

US tech giant Apple has shifted an estimated $8.9 billion in untaxed profits from its Australian operations to a tax haven structure in Ireland in the last decade, an investigation by The Australian Financial Review has found.

Last year Apple reported pretax earnings in Australia of only $88.5 million after it sent an estimated $2 billion of income from its Australian sales to Ireland via Singapore, where Apple negotiated a secret tax deal in 2009.

The Financial Review has obtained 10 years worth of financial accounts for Apple Sales International, the secretive Irish company at the heart of Apple’s international tax arrangements, which reveal the mark-up Apple charges for intellectual property on its products around the world.

The basic argument they’re making is really quite simple. Apple sells lots of iShiny gear in Oz, Apple makes good profits by doing so, therefore they must be dodging taxes if they’re not paying lots of tax in Oz. That really is their argument and it’s wrong. For corporation tax does not operate on the basis of where sales are: it operates on the basis of where the economic activity is and this is usually defined as where the company itself is.

Here’s what actually happens within the Apple empire, the part that isn’t based in North America. There are a couple companies in Ireland that purchase all the parts that get sent to Foxconn to be assembled into iShiny. They buy the screens from Taiwan and Japan, the processors from the Samsung plant in Texas, and so on. They also pay Foxconn for assembling the finished products. Then they, not unnaturally, own the iShiny that has been made. This is then sold on to the various Apple regional and country based companies. Apple UK, Apple Germany, Apple Oz and so on.

Sales from the Apple.ie companies to those local corporations are priced keenly, very keenly indeed, usually to make sure the local companies barely cover their expenses of marketing that iKit. Meaning there’s little profit to be taxed in each of those distribution companies/countries. There’s nothing either wrong or illegal about this, which is why the various tax authorities don’t get upset about it. Politicians might as they see gelt passing out of their control but politicians should be aware of the laws they have written, even if they’re not at times.

The net effect is that profits do indeed pile up in Apple.ie. But then this is where the economic activity is taking place too: they’re the people doing all of the organising of the making of the iShiny. There’s absolutely no reason why the profit from doing that should be taxed in Australia, nor anywhere else that the sales take place — for the sales are not the economic activity that corporation taxes hit.

At which point the complaints don’t hold up to scrutiny: the complainants simply are not aware of the manner that the tax system is supposed to work.

There is one more point to be made. Which is that those profits that pile up in Ireland seem to be taxed nowhere. In Ireland because the country operates a territorial taxation system. That is, profits made in Ireland, from activity in Ireland, get taxed there, profits made in foreign lands do not.

This is not an unusual structure for a tax system. But the ultimate non-taxation reason is to do with the US tax system, not that of any other country. If an American domiciled corporation makes foreign profits then US tax is due on those profits, minus any foreign taxes already paid. But this is only true of those foreign profits are brought back into the US or if they soon will be. If it is declared that those profits will remain outside the US then Uncle Sam does not demand his 35 percent slice.

That’s where these profits go untaxed. For all of the whining from Oz or the arrangements in Ireland if those profits are brought into the US (to pay dividends, or fund stock buybacks, making money for shareholders being the actual point of a company) they will indeed be taxed at the full and normal rates. Which is exactly how the international tax system works: profits are taxed where the company itself is based because that’s the assumption about where the economic activity that created those profits is.

In fact, Apple hasn’t even dodged these taxes. It’s simply delayed the day when they’re due. And that delay is purely and simply because it isn’t bringing them back into the US as yet.

I will agree that there are interesting little complications. Like the idea of a profits repatriation tax holiday, or the Bermuda company not actually domiciled anywhere for tax purposes, But the above is the simple explanation of what is going on here.

Corporation tax is, by design, supposed to be paid where the company itself is based, not where the company’s sales take place. Oz has no claim on those profits in Ireland. Uncle Sam does at some possible future date. And the only reason it’s some possible future date rather than this year is because that’s what US tax law says.