You'll probably recall the screams of indignation that greeted the calculation back a while that
Back when the calculation of the 9.8% tax rate was made I pointed out what was wrong with it. By and large the corporate income tax is paid in arrears: you've got to wait until the end of the year to see how much profit that you owe tax upon. Sure, there are prepayments and so on, but they are based upon the profits of the previous tax year. Thus, a company which is growing its profits very quickly will appear to have an absurdly low tax rate if we look at cash taxes paid. For the cash taxes paid in this trading period are derived from the profits made in the previous trading period. That's why we shouldn't look at cash taxes paid but rather at the provisions made for taxes due.
However, various people for various politial reasons decided to use the cash paid method of calculation. That got them their headline and well done to them for their political activism.
What interests me though is that of course, under such a system of taxation being paid in arrears, if a company then goes through a period of falling profits then obviously their tax rate will climb vertiginously. Because the cash tax paid in this trading period relates to the higher profits made in the previous trading period. Apple's profits are indeed falling year on year so if my explanation is correct then we shoud see Apple's tax rate rising. And we do indeed see this and therefore there's a good chance that my initial explanation was correct. Although, for obvious reasons, we can't expect those political activists to redo their calculations. They've had their headline and that's all they were interested in.
A quick glance at Apple's 8k then, which is here. Cash taxes paid rose in the 9 months of 2013 to $7,188 million from $5,901 in 2012. But profits fell from $45,000 million to $40,000 million. Apple is therefore handing over more cash in taxes from a smaller amount of profit: or, as I've been insisting all along, Apple is paying the tax in this period that was calculated on the profits in the last. That's why cash taxes paid are rising even as profits fall. Or, as again I insist, cash taxes paid in this trading period is simply not a good measure of how much tax a company will pay as a result of this trading period.
Anyway, it's easy enough to run through the numbers and see what the various possible measures of Apple's tax rate is. We've a cash taxes paid rate of around 18 %. We can also look at the provisions for taxes that will become due and that's around 25%. The difference between this and the 35% statutory rate is that those foreign profits stay offshore and thus don't pay US corporate income tax. Maybe you don't like that they do this: but these tax rates are indeed very different from that claimed 9.8% rate, aren't they?
Then there's one other way of looking at Apple's taxes. It's actually an absurd way to do it but fun all the same because the result becomes a rate of 44%. Here's how to reach that: we know very well that Apple doesn't bring in overseas profits because of the levy that Uncle Sam will make upon them. Thus the taxes paid (or the tax provision made) must be made up of foreign taxes on those foreign profits plus US taxes paid on profits made in the US. But we also know that, given the use of Ireland and other clever manouvers, that the foreign tax rate on those foreign profits is pretty close to zero. 2% was the last claim by Apple for their foreign tax rate. So, in fact, all of those taxes, to an acceptable level of accuracy, must be US corporate income tax on US derived profits.
Now we've got to try and work out what portion of profits are in fact US derived ones. One method would be to simply note that US sales (Americas, not US, but not a great difference) are 40% of total and thus the US is 40% of profits. Which gives us a figure of $16 billion in US derived profits upon which the company is paying $7,188 million in taxes which is a cash paid tax rate of 44%. Substantially higher than the statutory rate of 35%: I wonder why those political activists never point this out?
But this is an absurd method: it must be for it provides an absurd answer.
The real point I want to make though is that Apple's cash taxes paid rate is rising. It is doing so not because the tax laws have changed, or because they're doing less dodging, but simply because profits are now falling. Given that this period's tax paid is derived from profits in the last period this must be so. And thus I was indeed correct way back when to point out that Apple's very low cash tax paid rate was simply a matter of the timing of corporate income tax payments, not a real or realistic rate at which they were actually paying tax.
