billions in taxes narayan mahon for the new …...apple has done something cen-tral to its corporate...

VOL. CLXI . . No. 55,756 © 2012 The New York Times NEW YORK, SUNDAY, APRIL 29, 2012

Today, sun with a few lingeringclouds, milder, high 63. Tonight,clear, low 40. Tomorrow, sunny,fewer breezes, high 65. Weathermap and details are on Page 24.

$6 beyond the greater New York metropolitan area. $5.00

Late Edition

By ANDREW JACOBS

BEIJING — For months, ChenGuangcheng, one of China’s best-known dissidents, played a cat-and-mouse game with the pha-lanx of guards encircling hishome. He dug a tunnel to try toescape, a friend says, but wasfound out. And he sneaked out avideo that alerted his supportersto the smothering confinementhe said he and his wife enduredat the hands of the men who keptthem virtual prisoners in theirrural farmhouse.

Then last Sunday night, in animprobable escape, Mr. Chen,who is blind and reportedly weakfrom months of mistreatment,scaled the wall that had beenbuilt around his house, slippedpast his security detail and madea desperate sprint to apparentsafety in Beijing. The daring rushfor freedom could not have beenpossible without a small networkof activists who risked detentionto help him and who, supporterswith knowledge of the escapesaid, used coded messages to

communicate and elude a sur-veillance apparatus that is one ofthe world’s most pervasive.

By Saturday, three activistswho had either helped him or hadbeen advocates in the past haddisappeared, including the wom-an who drove Mr. Chen morethan 300 miles to Beijing and aman who admitted to meeting thedissident as he was shuttled be-tween safe houses in the capital.The man’s wife said he was takenaway by the police.

Friends of Mr. Chen, along withpeople in the Chinese govern-ment, say he is now inside theAmerican Embassy in Beijing. Iftrue, that creates diplomaticheadaches for the United Statesjust days before Secretary ofState Hillary Rodham Clintonand other American officials ar-rive for annual talks. [Page 8.]

That the underground networkof activists was able to help Mr.Chen evade his captors and move

Chinese Activist’s Flight AidedBy a Daring Circle Now at Risk

CHINA AID VIA EUROPEAN PRESSPHOTO AGENCY

An undated photo of Chen Guangcheng with his family. The es-cape of the activist, who is blind, was months in the planning.

Continued on Page 8

U(D5E71D)x+=!:!_!#!$Thomas L. Friedman PAGE 1

OPINION IN SUNDAY REVIEW

By SUZANNE DALEYand NICHOLAS KULISH

SCHWÄBISCH HALL, Germa-ny — While much of southern Eu-rope is struggling with soaringunemployment rates, a robustGermany is desperate for educat-ed workers, and it has begun tolook south for the solution.

In the last 18 months, it has re-cruited thousands of the Conti-nent’s best and brightest to this

postcard-perfect town and manyothers like it, a migration of high-ly qualified young job-seekersthat could set back Europe’sstragglers even more, while giv-ing Germany a further leg up.

One of those helping forge thenew era is Cristina Fernández-Aparicio Ruiz, 36, a newly arrivedengineer from Spain, where un-employment just hit a depres-sion-level 24.4 percent. She isworking at an industrial compa-ny near here, trying to find a way

to make a new elevator partmesh with older components.

Her German is spotty. But thecompany, Ziehl-Abegg, assignedher a mentor who made sure shehad someone to sit with at lunch.And if she needed help finding adoctor or going to the supermar-ket, the company was ready tohelp with that, too.

“They are very nice here,” saidMs. Fernández-Aparicio, fromMadrid. “And at the momentthere are no jobs in Spain.”

The free movement of laborwas one of the founding princi-ples of the European Union, acentral part of the effort to createa single, unified market. But inmore prosperous times, fewworkers outside of Eastern Eu-rope felt compelled to leavehome.

That is changing under thepressures of the euro crisis and aharsh recession, and employers,governments and the migrants

Brain Drain Feared as German Jobs Lure Southern Europeans

Continued on 2

By KIM SEVERSON

GREENSBORO, N.C. — Forhour after grueling hour, AndrewYoung sat on the witness stand in asmall federal courtroom here lastweek and stared straight ahead,never once facing the man he hadonce looked upon as a father.

John Edwards, the formerDemocratic senator who is facing30 years in prison, leaned for-ward and watched. Much of hisdefense rests on proving that Mr.Young, the man who had held hisdeepest secret, is a liar.

The charges in this trial, whichis expected to stretch well intoMay, concern whether nearly amillion dollars that Mr. Edwardsand Mr. Young secretly solicitedfrom two wealthy donors to helphide an affair was a conspiracy to

violate campaign finance lawsduring Mr. Edwards’s run for the2008 presidential nomination.

But the trial also tells a painfulstory of family and love and bro-ken relationships.

Mr. Young, 46, became enam-ored with Mr. Edwards when heand his wife, Cheri, heard himspeak at a resort during Mr. Ed-wards’s 1998 campaign for theSenate.

“He was really on that day,”testified Mr. Young, who recalledsitting in the back of the room inbeach clothes. Mr. Edwardswalked by and touched his leftshoulder. “He looked at me likehe’d known me forever.”

A law school graduate who wasContinued on Page 4

REPORTER’S NOTEBOOK

For Edwards and Former Aide,Another Story of a Lost Love

NARAYAN MAHON FOR THE NEW YORK TIMES

At a phone bank in Madison, Wis., ahead of a recall vote. Unions seek to remove the governor.

By JIM RUTENBERGand STEVEN GREENHOUSE

GREEN BAY, Wis. — “RecallWalker” bumper stickers dottedthe workers’ parking lot at theGeorgia Pacific paper mill on DayStreet here one recent afternoon,proof of their union’s role in theeffort to oust Gov. Scott Walkerfrom office early for his legisla-tion limiting public employees’bargaining rights.

But among the largest donorsto Mr. Walker and his cause arethe plant’s owners, the billionaireindustrialists Charles G. and Da-vid H. Koch, the latter of whomhas said of the recall election tobe held in June, “If the unionswin the recall, there will be nostopping union power.”

The recall vote here has beenbilled as a critical test of labormuscle versus corporate money.But it is only a warm-up for a con-frontation that will play out dur-ing the presidential election,which both sides view as the big-gest political showdown in atleast 30 years between pro- andanti-union forces — a labor-man-agement fight writ large.

The same national groupsflooding the streets and the air-waves in Wisconsin — the Koch-supported group Americans forProsperity on the right, the

Continued on Page 21

Recall ElectionTests Strategies

For November

By CHARLES DUHIGG and DAVID KOCIENIEWSKI

RENO, Nev. — Apple, theworld’s most profitable technol-ogy company, doesn’t designiPhones here. It doesn’t runAppleCare customer servicefrom this city. And it doesn’tmanufacture MacBooks or iPadsanywhere nearby.

Yet, with a handful of employ-ees in a small office here in Reno,Apple has done something cen-tral to its corporate strategy: ithas avoided millions of dollars intaxes in California and 20 otherstates.

Apple’s headquarters are inCupertino, Calif. By putting an of-fice in Reno, just 200 miles away,to collect and invest the compa-ny’s profits, Apple sidesteps stateincome taxes on some of thosegains.

California’s corporate tax rateis 8.84 percent. Nevada’s? Zero.

Setting up an office in Reno isjust one of many legal methodsApple uses to reduce its world-wide tax bill by billions of dollarseach year. As it has in Nevada,Apple has created subsidiaries inlow-tax places like Ireland, theNetherlands, Luxembourg andthe British Virgin Islands —

some little more than a letterboxor an anonymous office — thathelp cut the taxes it pays aroundthe world.

Almost every major corpora-tion tries to minimize its taxes, ofcourse. For Apple, the savingsare especially alluring becausethe company’s profits are sohigh. Wall Street analysts predictApple could earn up to $45.6 bil-lion in its current fiscal year —which would be a record for anyAmerican business.

Apple serves as a window onhow technology giants have tak-en advantage of tax codes writtenfor an industrial age and ill suitedto today’s digital economy. Someprofits at companies like Apple,Google, Amazon, Hewlett-Pack-ard and Microsoft derive notfrom physical goods but fromroyalties on intellectual property,like the patents on software thatmakes devices work. Othertimes, the products themselvesare digital, like downloadedsongs. It is much easier for busi-nesses with royalties and digitalproducts to move profits to low-tax countries than it is, say, forgrocery stores or automakers. Adownloaded application, unlike acar, can be sold from anywhere.

The growing digital economypresents a conundrum for law-makers overseeing corporatetaxation: although technology isnow one of the nation’s largestand most valued industries,many tech companies are amongthe least taxed, according to gov-ernment and corporate data.

How Apple SidestepsBillions in Taxes

Funneling Earnings to Low-Tax Regions

THE iECONOMY

Protecting Profits


Incomebefore taxes,worldwide:2011$34.2 billion

Apple’s profits have soared …

… but tax payments have risen much more slowly.

Cash paid forincome taxes,

worldwide:2011

$3.3 billion

’11’07 ’11’07

$5

$10

$15

$20

$25

$30

$35 billion

Source: company filings THE NEW YORK TIMES

In a growing chorus of criticism, the for-mer chief of Israel’s internal securityagency expressed “no faith” in leadersto handle Iran’s nuclear threat. PAGE 17

In Israel, Dim View of Leaders

By ANNIE LOWREY

WASHINGTON — The growthof health spending has slowedsubstantially in the last fewyears, surprising experts and of-fering some fuel for optimismabout the federal government’slong-term fiscal performance.

Much of the slowdown is be-cause of the recession, and thusnot unexpected, health expertssay. But some of it seems to be at-tributable to changing behaviorby consumers and providers ofhealth care — meaning that thelower rates of growth might per-sist even as the economy picksup.

Because Medicare and Medic-aid are two of the largest contrib-utors to the country’s long-termdebts, slower growth in healthcosts could reduce the pressurefor enormous spending cuts ortax increases.

In 2009 and 2010, total nation-wide health care spending grewless than 4 percent per year, theslowest annual pace in more thanfive decades, according to the lat-est numbers from the Centers forMedicaid and Medicare Services.After years of taking up a grow-ing share of economic activity,health spending held steady in2010, at 17.9 percent of the grossdomestic product.

The growth rate mostly slowedas millions of Americans lost in-surance coverage along withtheir jobs. Worried about job se-curity, others may have fearedtaking time off work for doctor’svisits or surgical procedures, orskipped nonurgent care whenmoney was tight.

Still, the slowdown was sharp-er than health economists ex-pected, and a broad, bipartisanrange of academics, hospital ad-ministrators and policy expertshas started to wonder if what hadseemed impossible might be hap-pening — if doctors and patientshave begun to change their be-havior in ways that bend the so-called cost curve.

If so, it was happening just asthe new health care law was com-

IN HOPEFUL SIGN, HEALTH SPENDINGIS FLATTENING OUT

SURPRISING THE EXPERTS

Recession and BehaviorAre Cited — FiscalStrain Could Ease


The most conservative Islamist group inEgypt endorsed a liberal Islamist forpresident, a move aimed at the MuslimBrotherhood. PAGE 16

INTERNATIONAL 6-17

Endorsement in Egypt RaceThe full version of a regulatory reportsuggests supervisors at Google knewabout the collection of personal datafrom unsuspecting households. PAGE 22

NATIONAL 18-25

New Details in Google InquiryThe Knicks were routed by Miami intheir playoff opener, but the Rangersbeat Washington in the first game oftheir second-round series. PAGE 1

SPORTSSUNDAY

Knicks Lose; Rangers Win

C M Y K Nxxx,2012-04-29,A,001,Bs-BK,E3

Reno, nev.

Apple, the world’s most profitable tech-nology company, doesn’t design iphones here. It doesn’t run AppleCare customer

service from this city. And it doesn’t manufac-ture MacBooks or ipads anywhere nearby.

Yet, with a handful of em-ployees in a small office here in Reno, Apple

has done something central to its corporate strategy: it has avoided millions of dollars in taxes in California and 20 other states.

Apple’s headquarters are in Cupertino, Ca-lif. By putting an office in Reno, just 200 miles away, to collect and invest the company’s prof-its, Apple sidesteps state income taxes on some of those gains.

California’s corporate tax rate is 8.84 per-cent. nevada’s? Zero.

Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year. As it has in nevada, Apple has created subsidiaries in low-tax places like Ireland, the netherlands, luxembourg and the British Vir-gin Islands — some little more than a letterbox or an anonymous office — that help cut the tax-es it pays around the world.

Almost every major corporation tries to minimize its taxes, of course. For Apple, the sav-ings are especially alluring because the com-pany’s profits are so high. Wall Street analysts predict Apple could earn up to $45.6 billion in its current fiscal year — which would be a record for any American business.

Apple serves as a window on how technology

giants have taken advantage of tax codes written for an industrial age and ill suited to today’s digital economy. Some profits at companies like Apple, Google, Amazon, Hewlett-packard and Microsoft derive not from physical goods but from royalties on intellectual property, like the patents on soft-ware that makes devices work. other times, the products themselves are digital, like downloaded songs. It is much easier for businesses with royal-ties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers. A downloaded application, unlike a car, can be sold from anywhere.

The growing digital economy presents a conundrum for lawmakers overseeing corpo-rate taxation: although technology is now one of the nation’s largest and most valued indus-tries, many tech companies are among the least taxed, according to government and corporate data. over the last two years, the 71 technology companies in the Standard & poor’s 500-stock index — including Apple, Google, Yahoo and Dell — reported paying worldwide cash taxes at a rate that, on average, was a third less than other S.& p. companies’. (Cash taxes may in-clude payments for multiple years.)

even among tech companies, Apple’s rates are low. And while the company has remade in-dustries, ignited economic growth and delighted customers, it has also devised corporate strate-gies that take advantage of gaps in the tax code, according to former executives who helped cre-ate those strategies.

Apple, for instance, was among the first tech companies to designate overseas sales-people in high-tax countries in a manner that allowed them to sell on behalf of low-tax subsid-iaries on other continents, sidestepping income





Late Edition

By ANDREW JACOBS










Continued on Page 8















By KIM SEVERSON




















For November













THE iECONOMY

Protecting Profits






worldwide:2011

$3.3 billion

’11’07 ’11’07

$5

$10

$15

$20

$25

$30

$35 billion




By ANNIE LOWREY













INTERNATIONAL 6-17


NATIONAL 18-25


SPORTSSUNDAY


C M Y K Nxxx,2012-04-29,A,001,Bs-BK,E3




Late Edition

By ANDREW JACOBS










Continued on Page 8















By KIM SEVERSON




















For November













THE iECONOMY

Protecting Profits






worldwide:2011

$3.3 billion

’11’07 ’11’07

$5

$10

$15

$20

$25

$30

$35 billion




By ANNIE LOWREY













INTERNATIONAL 6-17


NATIONAL 18-25


SPORTSSUNDAY


C M Y K Nxxx,2012-04-29,A,001,Bs-BK,E3




Late Edition

By ANDREW JACOBS










Continued on Page 8















By KIM SEVERSON




















For November













THE iECONOMY

Protecting Profits






worldwide:2011

$3.3 billion

’11’07 ’11’07

$5

$10

$15

$20

$25

$30

$35 billion




By ANNIE LOWREY













INTERNATIONAL 6-17


NATIONAL 18-25


SPORTSSUNDAY


C M Y K Nxxx,2012-04-29,A,001,Bs-BK,E3




Late Edition

By ANDREW JACOBS










Continued on Page 8















By KIM SEVERSON




















For November













THE iECONOMY

Protecting Profits






worldwide:2011

$3.3 billion

’11’07 ’11’07

$5

$10

$15

$20

$25

$30

$35 billion




By ANNIE LOWREY













INTERNATIONAL 6-17


NATIONAL 18-25


SPORTSSUNDAY


C M Y K Nxxx,2012-04-29,A,001,Bs-BK,E3

taxes, according to former execu-tives. Apple was a pioneer of an ac-counting technique known as the “Double Irish With a Dutch Sand-wich,” which reduces taxes by rout-ing profits through Irish subsidiar-ies and the netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corpora-tions — some of which directly imi-tated Apple’s methods, say accoun-tants at those companies.

Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 bil-lion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan. As it stands, the company paid cash taxes of $3.3 billion around the world on its reported profits of $34.2 billion last year, a tax rate of 9.8 percent. (Apple does not disclose what portion of those payments was in the United States, or what portion is assigned to previous or future years.)

By comparison, Wal-Mart last year paid worldwide cash taxes of $5.9 billion on its booked profits of $24.4 billion, a tax rate of 24 percent, which is about average for non-tech companies.

Apple’s domestic tax bill has piqued particular curiosity among corporate tax experts because al-though the company is based in the United States, its profits — on pa-per, at least — are largely foreign. While Apple contracts out much of the manufacturing and assembly of its products to other companies overseas, the majority of Apple’s executives, product designers, mar-keters, employees, research and de-velopment, and retail stores are in the United States. Tax experts say it is therefore reasonable to expect that most of Apple’s profits would be American as well. The nation’s tax code is based on the concept that a company “earns” income where value is created, rather than where products are sold.

However, Apple’s accountants have found legal ways to allocate about 70 percent of its profits over-seas, where tax rates are often much lower, according to corporate filings.

neither the government nor corporations make tax returns pub-lic, and a company’s taxable income often differs from the profits dis-closed in annual reports. Companies report their cash outlays for income taxes in their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to govern-ments. In Apple’s last annual disclo-sure, the company listed its world-wide taxes — which includes cash taxes paid as well as deferred taxes and other charges — at $8.3 billion, an effective tax rate of almost a quarter of profits.

However, tax analysts and scholars said that figure most likely overstated how much the company would hand to governments be-cause it included sums that might never be paid. “The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an econo-mist at Reed College who special-izes in multinational taxation. “But for tech companies it goes from fic-tion to farcical.”

Apple, in a statement, said it “has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules.” It added, “We are incredibly proud of all of Apple’s contributions.”

Apple “pays an enormous amount of taxes, which help our lo-cal, state and federal governments,” the statement also said. “In the first half of fiscal year 2012, our U.S. op-erations have generated almost $5 billion in federal and state income taxes, including income taxes with-held on employee stock gains, mak-ing us among the top payers of U.S. income tax.”

The statement did not specify how it arrived at $5 billion, nor did


Today, sun with a few lingeringclouds, milder, high 63. Tonight,clear, low 40. Tomorrow, sunny,fewer breezes, high 65. Weathermap and details are on 4.


Late Edition

By ANDREW JACOBS










Continued on Page 8















By KIM SEVERSON




















For November













THE iECONOMY

Protecting Profits






worldwide:2011

$3.3 billion

’11’07 ’11’07

$5

$10

$15

$20

$25

$30

$35 billion




By ANNIE LOWREY













INTERNATIONAL 6-17


NATIONAL 18-25


SPORTSSUNDAY


C M Y K Nxxx,2012-04-29,A,001,Bs-BK,E3

it address the issue of deferred taxes, which the company may pay in future years or decide to defer indefinitely. The $5 billion figure appears to include taxes ultimately owed by Apple em-ployees.

The sums paid by Apple and other tech cor-porations is a point of contention in the compa-ny’s backyard.

A mile and a half from Apple’s Cupertino headquarters is De Anza College, a commu-nity college that Steve Wozniak, one of Apple’s founders, attended from 1969 to 1974. Because of California’s state budget crisis, De Anza has cut more than a thousand courses and 8 percent of its faculty since 2008.

now, De Anza faces a budget gap so large that it is confronting a “death spiral,” the school’s president, Brian Murphy, wrote to the faculty in January. Apple, of course, is not responsible for the state’s financial shortfall, which has numer-ous causes. But the company’s tax policies are seen by officials like Mr. Murphy as symptom-atic of why the crisis exists.

“I just don’t understand it,” he said in an interview. “I’ll bet every person at Apple has

a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. They drive past it every day, for pete’s sake.

“But then they do everything they can to pay as few taxes as possible.”

Escaping State TaxesIn 2006, as Apple’s bank accounts and stock

price were rising, company executives came here to Reno and established a subsidiary named Braeburn Capital to manage and invest the company’s cash. Braeburn is a variety of apple that is simultaneously sweet and tart.

Today, Braeburn’s offices are down a nar-row hallway inside a bland building that sits across from an abandoned restaurant. Inside, there are posters of candy-colored ipods and a large Apple insignia, as well as a handful of desks and computer terminals.

When someone in the United States buys an iphone, ipad or other Apple product, a por-tion of the profits from that sale is often depos-ited into accounts controlled by Braeburn, and then invested in stocks, bonds or other financial instruments, say company executives. Then,

22 Ø N NATIONALTHE NEW YORK TIMES SUNDAY, APRIL 29, 2012

Over the last two years, the 71 technol-ogy companies in the Standard & Poor’s500-stock index — including Apple, Goo-gle, Yahoo and Dell — reported payingworldwide cash taxes at a rate that, onaverage, was a third less than otherS.& P. companies’. (Cash taxes may in-clude payments for multiple years.)

Even among tech companies, Apple’srates are low. And while the companyhas remade industries, ignited econom-ic growth and delighted customers, ithas also devised corporate strategiesthat take advantage of gaps in the taxcode, according to former executiveswho helped create those strategies.

Apple, for instance, was among thefirst tech companies to designate over-seas salespeople in high-tax countriesin a manner that allowed them to sell onbehalf of low-tax subsidiaries on othercontinents, sidestepping income taxes,according to former executives. Applewas a pioneer of an accounting tech-nique known as the “Double Irish Witha Dutch Sandwich,” which reduces tax-es by routing profits through Irish sub-sidiaries and the Netherlands and thento the Caribbean. Today, that tactic isused by hundreds of other corporations— some of which directly imitated Ap-ple’s methods, say accountants at thosecompanies.

Without such tactics, Apple’s federaltax bill in the United States most likelywould have been $2.4 billion higher lastyear, according to a recent study by aformer Treasury Department econo-mist, Martin A. Sullivan. As it stands,the company paid cash taxes of $3.3 bil-lion around the world on its reportedprofits of $34.2 billion last year, a taxrate of 9.8 percent. (Apple does not dis-close what portion of those paymentswas in the United States, or what por-tion is assigned to previous or futureyears.)

By comparison, Wal-Mart last yearpaid worldwide cash taxes of $5.9 billionon its booked profits of $24.4 billion, atax rate of 24 percent, which is about av-erage for non-tech companies.

Apple’s domestic tax bill has piquedparticular curiosity among corporatetax experts because although the com-pany is based in the United States, itsprofits — on paper, at least — are large-ly foreign. While Apple contracts outmuch of the manufacturing and assem-bly of its products to other companiesoverseas, the majority of Apple’s execu-tives, product designers, marketers,employees, research and development,and retail stores are in the UnitedStates. Tax experts say it is thereforereasonable to expect that most of Ap-ple’s profits would be American as well.The nation’s tax code is based on theconcept that a company “earns” incomewhere value is created, rather thanwhere products are sold.

However, Apple’s accountants havefound legal ways to allocate about 70percent of its profits overseas, wheretax rates are often much lower, ac-cording to corporate filings.

Neither the government nor corpora-tions make tax returns public, and acompany’s taxable income often differsfrom the profits disclosed in annual re-ports. Companies report their cash out-lays for income taxes in their annualForm 10-K, but it is impossible fromthose numbers to determine preciselyhow much, in total, corporations pay togovernments. In Apple’s last annual dis-closure, the company listed its world-wide taxes — which includes cash taxespaid as well as deferred taxes and othercharges — at $8.3 billion, an effectivetax rate of almost a quarter of profits.

However, tax analysts and scholarssaid that figure most likely overstatedhow much the company would hand togovernments because it included sumsthat might never be paid. “The informa-tion on 10-Ks is fiction for most compa-nies,” said Kimberly Clausing, an econo-mist at Reed College who specializes inmultinational taxation. “But for techcompanies it goes from fiction to farci-cal.”

Apple, in a statement, said it “hasconducted all of its business with thehighest of ethical standards, complyingwith applicable laws and accountingrules.” It added, “We are incredibly

proud of all of Apple’s contributions.”Apple “pays an enormous amount of

taxes, which help our local, state andfederal governments,” the statementalso said. “In the first half of fiscal year2012, our U.S. operations have generat-ed almost $5 billion in federal and stateincome taxes, including income taxeswithheld on employee stock gains, mak-ing us among the top payers of U.S. in-come tax.”

The statement did not specify how itarrived at $5 billion, nor did it addressthe issue of deferred taxes, which the

company may pay in future years or de-cide to defer indefinitely. The $5 billionfigure appears to include taxes ulti-mately owed by Apple employees.

The sums paid by Apple and othertech corporations is a point of conten-tion in the company’s backyard.

A mile and a half from Apple’s Cuper-tino headquarters is De Anza College, acommunity college that Steve Wozniak,one of Apple’s founders, attended from1969 to 1974. Because of California’sstate budget crisis, De Anza has cutmore than a thousand courses and 8

percent of its faculty since 2008. Now, De Anza faces a budget gap so

large that it is confronting a “death spi-ral,” the school’s president, Brian Mur-phy, wrote to the faculty in January. Ap-ple, of course, is not responsible for thestate’s financial shortfall, which has nu-merous causes. But the company’s taxpolicies are seen by officials like Mr.Murphy as symptomatic of why the cri-sis exists.

“I just don’t understand it,” he said inan interview. “I’ll bet every person atApple has a connection to De Anza.

Their kids swim in our pool. Their cous-ins take classes here. They drive past itevery day, for Pete’s sake.

“But then they do everything theycan to pay as few taxes as possible.”

Escaping State TaxesIn 2006, as Apple’s bank accounts and

stock price were rising, company execu-tives came here to Reno and establisheda subsidiary named Braeburn Capital tomanage and invest the company’s cash.Braeburn is a variety of apple that is si-multaneously sweet and tart.

Today, Braeburn’s offices are down anarrow hallway inside a bland buildingthat sits across from an abandoned res-taurant. Inside, there are posters of can-dy-colored iPods and a large Apple in-signia, as well as a handful of desks andcomputer terminals.

When someone in the United Statesbuys an iPhone, iPad or other Appleproduct, a portion of the profits fromthat sale is often deposited into ac-counts controlled by Braeburn, andthen invested in stocks, bonds or otherfinancial instruments, say company ex-ecutives. Then, when those investmentsturn a profit, some of it is shielded fromtax authorities in California by virtue ofBraeburn’s Nevada address.

Since founding Braeburn, Apple hasearned more than $2.5 billion in interestand dividend income on its cash re-serves and investments around theglobe. If Braeburn were located in Cu-pertino, where Apple’s top executiveswork, a portion of the domestic incomewould be taxed at California’s 8.84 per-cent corporate income tax rate.

But in Nevada there is no state corpo-rate income tax and no capital gains tax.

What’s more, Braeburn allows Appleto lower its taxes in other states — in-cluding Florida, New Jersey and NewMexico — because many of those ju-risdictions use formulas that reducewhat is owed when a company’s finan-cial management occurs elsewhere. Ap-ple does not disclose what portion ofcash taxes is paid to states, but the com-pany reported that it owed $762 millionin state income taxes nationwide lastyear. That effective state tax rate ishigher than the rate of many other techcompanies, but as Ms. Clausing and oth-er tax analysts have noted, such figuresare often not reliable guides to what isactually paid.

Dozens of other companies, includingCisco, Harley-Davidson and Microsoft,have also set up Nevada subsidiariesthat bypass taxes in other states. Hun-dreds of other corporations reap similarsavings by locating offices in Delaware.

But some in California are unhappythat Apple and other California-basedcompanies have moved financial opera-tions to tax-free states — particularlysince lawmakers have offered them taxbreaks to keep them in the state.

In 1996, 1999 and 2000, for instance,the California Legislature increased thestate’s research and development taxcredit, permitting hundreds of compa-nies, including Apple, to avoid billions instate taxes, according to legislative ana-lysts. Apple has reported tax savings of$412 million from research and develop-ment credits of all sorts since 1996.

Then, in 2009, after an intense lobby-ing campaign led by Apple, Cisco, Ora-cle, Intel and other companies, the Cali-fornia Legislature reduced taxes forcorporations based in California but op-erating in other states or nations. Legis-lative analysts say the change will even-tually cost the state government about$1.5 billion a year.

Such lost revenue is one reason Cali-fornia now faces a budget crisis, with ashortfall of more than $9.2 billion in thecoming fiscal year alone. The state hascut some health care programs, signif-icantly raised tuition at state universi-ties, cut services to the disabled andproposed a $4.8 billion reduction inspending on kindergarten and othergrades.

Apple declined to comment on its Ne-vada operations. Privately, some execu-tives said it was unfair to criticize thecompany for reducing its tax bill whenthousands of other companies actedsimilarly. If Apple volunteered to paymore in taxes, it would put itself at acompetitive disadvantage, they argued,and do a disservice to its shareholders.

Indeed, Apple’s decisions have yield-ed benefits. After announcing one of thebest quarters in its history last week,the company said it had net profits of$24.7 billion on revenues of $85.5 billionin the first half of the fiscal year, and

How Apple Sidesteps Billions in Taxes Across the Globe

DAVID CALVERT FOR THE NEW YORK TIMES

Braeburn Capital, an Apple subsidiary in Reno, Nev., manages and invests the company’s cash. Nevada has a corpo-rate tax rate of zero, as opposed to the 8.84 percent levied in California, where Apple has its headquarters.

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Additional reporting was contributed byKeith Bradsher in Hong Kong, SiemEikelenboom in Amsterdam, Dean Gree-naway in the British Virgin Islands,Scott Sayare in Luxembourg and JasonWoodard in Singapore.

U.S. consumer

If the profits from the sale of a product stay in the United States, they would be subject to a federal tax of 35 percent. But if money is paid to an Irish subsidiary as royalties on patents the company owns, it can ultimately be taxed at far lower rates.

Overseasconsumer

When the same product is sold overseas, money from the sale is sent to a second Irish subsidiary.

Numerous companies take advantage of loopholes in international laws to move profits around the world, avoiding taxes. Many of these techniques rely on transferring profits on patent royalties to places like Ireland. Here is one technique typical of what Apple and others pioneered.

‘Double Irish WithA Dutch Sandwich’

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Caribbean orother tax haven

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At one time, a company would actually manufacture products in

Ireland. But today, it’s more likely to use factories in China, Brazil or India that ship directly to consumers.

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The profits can land in an overseas tax haven where they are stored, invisible to authorities, for years.

And because of Irish treaties that make some inter-European transfers tax-free, the company can avoid taxes by routing the profits through the Netherlands …

Netherlands

... and then back to the first Irish subsidiary, which sends the profits to the overseas tax haven.

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THE NEW YORK TIMES

Irishsubsidiary

Because of a quirk in Irish law, if the Irish subsidiary is controlled by managers elsewhere, like the Caribbean, then the profits can skip across the world tax-free.

By DAVID STREITFELD

SAN FRANCISCO — Google’sharvesting of e-mails, passwordsand other sensitive personal in-formation from unsuspectinghouseholds in the United Statesand around the world was neithera mistake nor the work of a rogueengineer, as the company longmaintained, but a program thatsupervisors knew about, accord-ing to new details from the fulltext of a regulatory report.

The report, prepared by theFederal Communications Com-mission after a 17-month investi-gation of Google’s Street Viewproject, was released, heavily re-dacted, two weeks ago. Althoughit found that Google had not vio-lated any laws, the agency saidGoogle had obstructed the inqui-ry and fined the company $25,000.

On Saturday, Google released aversion of the report with onlyemployees’ names redacted.

The full version draws a por-trait of a company where an engi-neer can easily embark on aproject to gather personal e-mails

and Web searches of potentiallyhundreds of millions of people aspart of his or her unscheduledwork time, and where privacyconcerns are shrugged off.

The so-called payload data wassecretly collected between 2007and 2010 as part of Street View, aproject to photograph street-scapes over much of the civilizedworld. When the program wasbeing designed, the report says,it included the following “to do”item: “Discuss privacy consider-ations with Product Counsel.”

“That never occurred,” the re-port says.

Google says the data collectionwas legal. But when regulatorsasked to see what had been col-lected, Google refused, the reportsays, saying it might break pri-vacy and wiretapping laws if itshared the material.

A Google spokeswoman saidSaturday that the company hadmuch stricter privacy controlsthan it used to, in part because ofthe Street View controversy. Sheexpressed the hope that with the

release of the full report, “we cannow put this matter behind us.”

Ever since information aboutthe secret data collection first be-gan to emerge two years ago,Google has portrayed it as themistakes of an unauthorized engi-neer operating on his own andstressed that the data was neverused in any Google product.

The report, quoting the engi-neer’s original proposal, gives asomewhat different impression.The data, the engineer wrote,would “be analyzed offline for usein other initiatives.” Google saysthis was never done.

The report, which was firstpublished in its unredacted formby The Los Angeles Times, alsostates that the engineer, who be-gan the project as part of his “20percent” time that Google givesemployees to do work on theirown initiative, “specifically toldtwo engineers working on theproject, including a senior man-ager, about collecting payloaddata.”

As early as 2007, the report

says, Street View engineers had“wide access” to the plan to col-lect payload data. Five engineerstested the Street View code, asixth reviewed it line by line, anda seventh also worked on it, thereport says.

Privacy advocates said the fullreport put Google in a bad light.

“Google’s rogue engineer sce-nario collapses in light of the factthat others were aware of theproject and did not object,” saidMarc Rotenberg, executive direc-tor of the Electronic Privacy In-formation Center. “This is whathappens in the absence of en-forcement and the absence ofregulation.”

The Street View program usedspecial cars outfitted with cam-eras. Google first said it was just

photographing streets and didnot disclose that it was collectingInternet communications calledpayload data, transmitted overWi-Fi networks, until May 2010,when it was confronted by Ger-man regulators.

Eventually, it was forced to re-veal that the information it hadcollected could include the fulltext of e-mails, sites visited andother data.

Even if a user was not workingon a computer at the moment theStreet View car slowly passed, ifthe device was on and the net-work was unencrypted, all sortsof information about what theuser had been doing could bescooped up, data experts say.

“So how did this happen? Quitesimply, it was a mistake,” a Goo-gle executive wrote on a compa-ny blog in 2010. “The project lead-ers did not want, and had no in-tention of using, payload data.”

But according to the report, theengineer suggested in his pro-posal that it was entirely inten-tional: “We are logging user traf-

fic along with sufficient data toprecisely triangulate their posi-tion at a given time, along with in-formation about what they weredoing.”

Attending to paperwork did notseem to be a high priority, howev-er. Managers of the Street Viewproject told F.C.C. investigatorsthat they never read the engi-neer’s proposal, called a designdocument. A senior manager ofStreet View said he “pre-approved” the document before itwas written.

More than a dozen countriesbegan investigations of StreetView in 2010. In the United States,the Justice Department, the Fed-eral Trade Commission, state at-torneys general and the F.C.C.looked into the matter.

The engineer at the center ofthe project cited the Fifth Amend-ment protection against self-in-crimination. Because F.C.C. in-vestigators could not interviewhim, they said there were still un-resolved questions about thecase.

Google Engineer Told Others of Data Collection, Full Version of F.C.C. Report RevealsAn inquiry suggests aplan wasn’t the workof a rogue employee.

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when those investments turn a profit, some of it is shielded from tax authorities in California by virtue of Braeburn’s nevada address.

Since founding Braeburn, Apple has earned more than $2.5 billion in interest and dividend in-come on its cash reserves and investments around the globe. If Braeburn were located in Cupertino, where Apple’s top executives work, a portion of the domestic income would be taxed at Califor-nia’s 8.84 percent corporate income tax rate.

But in nevada there is no state corporate

income tax and no capital gains tax.What’s more, Braeburn allows Apple to

lower its taxes in other states — including Flor-ida, new Jersey and new Mexico — because many of those jurisdictions use formulas that reduce what is owed when a company’s finan-cial management occurs elsewhere. Apple does not disclose what portion of cash taxes is paid to states, but the company reported that it owed $762 million in state income taxes nationwide last year. That effective state tax rate is higher








































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than the rate of many other tech companies, but as Ms. Clausing and other tax analysts have noted, such figures are often not reliable guides to what is actually paid.

Dozens of other companies, including Cisco, Harley-Davidson and Microsoft, have also set up nevada subsidiaries that bypass taxes in oth-er states. Hundreds of other corporations reap similar savings by locating offices in Delaware.

But some in California are unhappy that Ap-ple and other California-based companies have moved financial operations to tax-free states — particularly since lawmakers have offered them

tax breaks to keep them in the state.In 1996, 1999 and 2000, for instance, the

California legislature increased the state’s re-search and development tax credit, permitting hundreds of companies, including Apple, to avoid billions in state taxes, according to legis-lative analysts. Apple has reported tax savings of $412 million from research and development credits of all sorts since 1996.

Then, in 2009, after an intense lobbying campaign led by Apple, Cisco, oracle, Intel and other companies, the California legislature re-duced taxes for corporations based in California

Ø Ø N 23NATIONALTHE NEW YORK TIMES SUNDAY, APRIL 29, 2012

more than $110 billion in the bank, ac-cording to company filings.

A Global Tax StrategyEvery second of every hour, millions

of times each day, in living rooms and atcash registers, consumers click the“Buy” button on iTunes or hand overpayment for an Apple product.

And with that, an international finan-cial engine kicks into gear, movingmoney across continents in the blink ofan eye. While Apple’s Reno office helpsthe company avoid state taxes, its in-ternational subsidiaries — particularlythe company’s assignment of sales andpatent royalties to other nations — helpreduce taxes owed to the American andother governments.

For instance, one of Apple’s subsid-iaries in Luxembourg, named iTunesS.à r.l., has just a few dozen employees,according to corporate documents filedin that nation and a current executive.The only indication of the subsidiary’spresence outside is a letterbox with alopsided slip of paper reading “ITUNESSARL.”

Luxembourg has just half a millionresidents. But when customers acrossEurope, Africa or the Middle East —and potentially elsewhere — downloada song, television show or app, the saleis recorded in this small country, ac-cording to current and former execu-tives. In 2011, iTunes S.à r.l.’s revenueexceeded $1 billion, according to an Ap-ple executive, representing roughly 20percent of iTunes’s worldwide sales.

The advantages of Luxembourg aresimple, say Apple executives. The coun-try has promised to tax the paymentscollected by Apple and numerous othertech corporations at low rates if theyroute transactions through Luxem-bourg. Taxes that would have otherwisegone to the governments of Britain,France, the United States and dozens ofother nations go to Luxembourg in-stead, at discounted rates.

“We set up in Luxembourg because ofthe favorable taxes,” said Robert Hatta,who helped oversee Apple’s iTunes re-tail marketing and sales for Europeanmarkets until 2007. “Downloads are dif-ferent from tractors or steel becausethere’s nothing you can touch, so itdoesn’t matter if your computer is inFrance or England. If you’re buyingfrom Luxembourg, it’s a relationshipwith Luxembourg.”

An Apple spokesman declined tocomment on the Luxembourg opera-tions.

Downloadable goods illustrate howmodern tax systems have become in-creasingly ill equipped for an economydominated by electronic commerce. Ap-ple, say former executives, has beenparticularly talented at identifying legaltax loopholes and hiring accountantswho, as much as iPhone designers, areknown for their innovation. In the 1980s,for instance, Apple was among the firstmajor corporations to designate over-seas distributors as “commissionaires,”rather than retailers, said MichaelRashkin, Apple’s first director of taxpolicy, who helped set up the system be-fore leaving in 1999.

To customers the designation was vir-tually unnoticeable. But because com-missionaires never technically take pos-session of inventory — which would re-quire them to recognize taxes — thestructure allowed a salesman in high-tax Germany, for example, to sell com-puters on behalf of a subsidiary in low-tax Singapore. Hence, most of thoseprofits would be taxed at Singaporean,rather than German, rates.

The Double IrishIn the late 1980s, Apple was among

the pioneers in creating a tax structure— known as the Double Irish — that al-lowed the company to move profits intotax havens around the world, said TimJenkins, who helped set up the systemas an Apple European finance manageruntil 1994.

Apple created two Irish subsidiaries— today named Apple Operations In-

ternational and Apple Sales Interna-tional — and built a glass-encased fac-tory amid the green fields of Cork. TheIrish government offered Apple taxbreaks in exchange for jobs, accordingto former executives with knowledge ofthe relationship.

But the bigger advantage was thatthe arrangement allowed Apple to sendroyalties on patents developed in Cali-fornia to Ireland. The transfer was in-ternal, and simply moved funds fromone part of the company to a subsidiaryoverseas. But as a result, some profitswere taxed at the Irish rate of approxi-mately 12.5 percent, rather than at theAmerican statutory rate of 35 percent.In 2004, Ireland, a nation of less than 5million, was home to more than one-third of Apple’s worldwide revenues, ac-cording to company filings. (Apple hasnot released more recent estimates.)

Moreover, the second Irish subsidiary— the “Double” — allowed other profitsto flow to tax-free companies in the Ca-ribbean. Apple has assigned partialownership of its Irish subsidiaries toBaldwin Holdings Unlimited in the Brit-ish Virgin Islands, a tax haven, ac-cording to documents filed there and inIreland. Baldwin Holdings has no listedoffices or telephone number, and itsonly listed director is Peter Oppenheim-er, Apple’s chief financial officer, wholives and works in Cupertino. Baldwinapples are known for their hardinesswhile traveling.

Finally, because of Ireland’s treaties

with European nations, some of Apple’sprofits could travel virtually tax-freethrough the Netherlands — the DutchSandwich — which made them essen-tially invisible to outside observers andtax authorities.

Robert Promm, Apple’s controller inthe mid-1990s, called the strategy “theworst-kept secret in Europe.”

It is unclear precisely how Apple’soverseas finances now function. In 2006,the company reorganized its Irish divi-sions as unlimited corporations, whichhave few requirements to disclose fi-nancial information.

However, tax experts say that strat-egies like the Double Irish help explainhow Apple has managed to keep its in-ternational taxes to 3.2 percent of for-eign profits last year, to 2.2 percent in2010, and in the single digits for the lasthalf-decade, according to the company’scorporate filings.

Apple declined to comment on its op-erations in Ireland, the Netherlands andthe British Virgin Islands.

Apple reported in its last annual dis-closures that $24 billion — or 70 percent— of its total $34.2 billion in pretax prof-its were earned abroad, and 30 percentwere earned in the United States. ButMr. Sullivan, the former Treasury De-partment economist who today writesfor the trade publication Tax Analysts,said that “given that all of the market-ing and products are designed here, andthe patents were created in California,that number should probably be at least

50 percent.” If profits were evenly divided be-

tween the United States and foreigncountries, Apple’s federal tax bill wouldhave increased by about $2.4 billion lastyear, he said, because a larger amountof its profits would have been subject tothe United States’ higher corporate in-come tax rate.

“Apple, like many other multination-als, is using perfectly legal methods tokeep a significant portion of their profitsout of the hands of the I.R.S.,” Mr. Sulli-van said. “And when America’s mostprofitable companies pay less, the gen-eral public has to pay more.”

Other tax experts, like Edward D.Kleinbard, former chief of staff of theCongressional Joint Committee on Tax-ation, have reached similar conclusions.

“This tax avoidance strategy used byApple and other multinationals doesn’tjust minimize the companies’ U.S. tax-es,” said Mr. Kleinbard, now a professorof tax law at the University of SouthernCalifornia. “It’s German tax and Frenchtax and tax in the U.K. and elsewhere.”

One downside for companies usingsuch strategies is that when money issent overseas, it cannot be returned tothe United States without incurring anew tax bill.

However, that might change. Apple,which holds $74 billion offshore, lastyear aligned itself with more than fourdozen companies and organizationsurging Congress for a “repatriation holi-day” that would permit American busi-nesses to bring money home withoutowing large taxes. The coalition, whichincludes Google, Microsoft and Pfizer,has hired dozens of lobbyists to push forthe measure, which has not yet come upfor vote. The tax break would cost thefederal government $79 billion over thenext decade, according to a Congres-sional report.

Fallout in CaliforniaIn one of his last public appearances

before his death, Steven P. Jobs, Apple’schief executive, addressed Cupertino’sCity Council last June, seeking approvalto build a new headquarters.

Most of the Council was effusive in itspraise of the proposal. But one council-woman, Kris Wang, had questions.

How will residents benefit? sheasked. Perhaps Apple could providefree wireless Internet to Cupertino, shesuggested, something Google had donein neighboring Mountain View.

“See, I’m a simpleton; I’ve alwayshad this view that we pay taxes, and thecity should do those things,” Mr. Jobs

replied, according to a video of themeeting. “That’s why we pay taxes.Now, if we can get out of paying taxes,I’ll be glad to put up Wi-Fi.”

He suggested that, if the City Councilwere unhappy, perhaps Apple couldmove. The company is Cupertino’s larg-est taxpayer, with more than $8 millionin property taxes assessed by local offi-cials last year.

Ms. Wang dropped her suggestion. Cupertino, Ms. Wang said in an in-

terview, has real financial problems.“We’re proud to have Apple here,” saidMs. Wang, who has since left the Coun-cil. “But how do you get them to feelmore connected?”

Other residents argue that Appledoes enough as Cupertino’s largest em-ployer and that tech companies, in gen-eral, have buoyed California’s economy.Apple’s workers eat in local restaurants,serve on local boards and donate to lo-cal causes. Silicon Valley’s many mil-lionaires pay personal state income tax-es. In its statement, Apple said its “in-ternational growth is creating jobs do-mestically, since we oversee most of ouroperations from California.”

“The vast majority of our global workforce remains in the U.S.,” the statementcontinued, “with more than 47,000 full-time employees in all 50 states.”

Moreover, Apple has given nearbyStanford University more than $50 mil-lion in the last two years. The companyhas also donated $50 million to an Afri-can aid organization. In its statement,Apple said: “We have contributed tomany charitable causes but have neversought publicity for doing so. Our focushas been on doing the right thing, notgetting credit for it. In 2011, we dramati-cally expanded the number of deservingorganizations we support by initiating amatching gift program for our employ-ees.”

Still, some, including De Anza Col-lege’s president, Mr. Murphy, say thephilanthropy and job creation do not off-set Apple’s and other companies’ deci-sions to circumvent taxes. Within 20minutes of the financially ailing schoolare the global headquarters of Google,Facebook, Intel, Hewlett-Packard andCisco.

“When it comes time for all thesecompanies — Google and Apple andFacebook and the rest — to pay theirfair share, there’s a knee-jerk resist-ance,” Mr. Murphy said. “They’re philo-sophically antitax, and it’s decimatingthe state.”

“But I’m not complaining,” he added.“We can’t afford to upset these guys.We need every dollar we can get.”

CITY OF CUPERTINO, VIA ASSOCIATED PRESS

APPLE, VIA ASSOCIATED PRESS

Last June, Steven P. Jobs, then the chief of Apple, top, introduced plans for anew corporate campus, above, to the City Council of Cupertino, Calif. Resi-dents disagree on whether the company pays its fair share.

PETER DaSILVA FOR THE NEW YORK TIMES

Brian Murphy, center, head of De Anza College in Cupertino, Calif., says thebig tech firms are “philosophically antitax, and it’s decimating the state.”

’77 ’80 ’85 ’90 ’95 ’00 ’05 ’10 ’77 ’80 ’85 ’90 ’95 ’00 ’05 ’10

0.5

1.0

1.5

$2.0 trillion

Total United States corporate profits

10

20

30

40

50%

The reported effectivecorporate tax rate

Adjusted forinflation

Corporate profits are far bigger now than they were in 1977, the year Apple was incorporated ...

... and corporate tax rates have fallen.

Some tax experts say that Apple moves more profits offshore than appears justified by its operations, which are largely in the United States. And overseas, technology companies pay particularly low taxes.

Computer andelectronic product

manufacturing

FinanceServices

AgricultureChemical mfg.

ApparelOverall

Wood productsReal estate

UtilitiesPrinting and related

ConstructionRetail trade

Food manufacturingTextilesMining

vs.

Share of employees

Number of retail stores

Long-term assets

Sales

Apple’s allocation of profits

72%

68%

54%

39%

30%

28%

32%

46%

61%

70%

Appledomestic

Appleforeign

32.024.423.422.521.518.417.216.816.715.614.613.112.211.711.3

8.7

%

What American industries pay in taxes abroad

THE NEW YORK TIMESSources: Bureau of Economic Analysis; company reports; American Tax Policy Institute

Shrinking Corporate Tax Rates

Reported corporate

taxes

$1.8trillion

23%

2011

2006

The iEconomyArticles in this series are examining

challenges posed by increasingly global-ized high-tech industries.

Protecting Profits

ONLINE: A statement from Apple onits tax practices, its financial

documents from various nations andprevious articles in the series.

nytimes.com/ieconomy

April 28, 2012

Midday New York Numbers— 741; Lucky Sum — 12Midday New York Win 4 —9422; Lucky Sum — 17New York Numbers — 953;Lucky Sum — 17New York Win 4 — 2341;Lucky Sum — 10New York Pick 10 — 5, 10, 13,14, 27, 29, 32, 38, 40, 48, 56, 66,67, 69, 72, 73, 74, 76, 77, 78Midday New Jersey Pick 3 —692Midday New Jersey Pick 4 —8972

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Lottery Numbers

By PETER BAKER

WASHINGTON — PresidentObama poked fun at himself, Con-gress, the Secret Service, the me-dia and particularly his rival MittRomney on Saturday night,mocking his Republican oppo-nent as a fuddy-duddy rich guywho travels with his dog in a cagestrapped to the roof of the familycar.

Delivering the traditionallycomic remarks at the annualWhite House Correspondents’Association dinner, the presidentseemed to enjoy needling Mr.Romney just days after the gen-eral election contest effectivelygot underway. The highlight wasa spoof Romney ad showing theformer governor at the door ofAir Force One with a dog cage ontop of the aircraft.

Families are off limits, Mr.Obama declared. “Dogs, howev-er, are apparently fair game,” hesaid.

Mr. Obama pointed out that hewas speaking in a cavernous ho-

tel ballroom, or “what Mitt Rom-ney would call a little fixer-up-per.” He noted that he and Mr.Romney both have degrees fromHarvard University, but the Re-publican has two. “What a snob,”Mr. Obama joked. And he said af-ter his own appearance on Jim-my Fallon’s show this week, Mr.Romney “asked if he could getsome equal time on ‘The MervGriffin Show.’”

Appearing before the officialentertainer of the evening, Jim-my Kimmel, Mr. Obama also tookaim at a couple of other Repub-lican critics. Noting the presenceof Newt Gingrich, who plans todrop out of the Republican racenext week, Mr. Obama called out,“Newt there’s still time, man!”

And he took aim at Sarah Palin,mocking her famous line from the2008 convention as well as Re-publican criticism of him for eat-ing dog meat while a boy in Indo-nesia. “What’s the difference be-tween a hockey mom and a pitbull?” Mr. Obama asked. “A pit

bull is delicious.” (Even MichelleObama looked askance at thatone.)

He took a jab at Congress,thanking lawmakers who “took abreak from their exhaustingschedule of not passing any lawsto be here tonight.” He teasedSecretary of State Hillary Rod-ham Clinton, who was photo-graphed dancing and drinking abeer at a club during a visit to Co-lombia. “She won’t stop drunk-texting me from Cartagena,” thepresident said.

And of course, he ribbed hisown security detail after theprostitution scandal involving theSecret Service on that same tripto Colombia, declaring that hehad to leave early because “Ihave to get the Secret Servicehome in time for their new cur-few.”

Mr. Kimmel also went after theSecret Service during his routine.“I have a lot of Secret Servicejokes,” he said. “I told them for$800 I wouldn’t tell them, but

they only offered 30.”The dinner has long since

morphed from a gathering ofjournalists and their sources intoa peculiar ritual marrying Wash-ington, New York and Hollywoodcultures and celebrities.

In addition to the president andthe usual array of cabinet secre-taries, senators, House membersand television pundits, boldfacednames spotted at this year’s din-ner included George Clooney,Lindsay Lohan, Goldie Hawn,Claire Danes, Kim Kardashian,Diane Keaton and others.

Just last year, the dinnerplayed a cameo role in the raidthat led to the death of Osama binLaden. When he showed up at thedinner, Mr. Obama had just giventhe order for the helicopter in-cursion into Pakistan to burstinto a compound where the AlQaeda leader was suspected ofliving. But he smiled and jokedhis way through the dinner, and aballroom full of journalists had noclue what was about to happen.

Much Fodder for Obama at White House Journalists’ Event

C M Y K Nxxx,2012-04-29,A,023,Bs-BK,E3

but operating in other states or nations. legisla-tive analysts say the change will eventually cost the state government about $1.5 billion a year.

Such lost revenue is one reason California now faces a budget crisis, with a shortfall of more than $9.2 billion in the coming fiscal year alone. The state has cut some health care pro-grams, significantly raised tuition at state uni-versities, cut services to the disabled and pro-posed a $4.8 billion reduction in spending on kindergarten and other grades.

Apple declined to comment on its nevada operations. privately, some executives said it was unfair to criticize the company for reduc-ing its tax bill when thousands of other compa-

nies acted similarly. If Apple volunteered to pay more in taxes, it would put itself at a competi-tive disadvantage, they argued, and do a disser-vice to its shareholders.

Indeed, Apple’s decisions have yielded benefits. After announcing one of the best quar-ters in its history last week, the company said it had net profits of $24.7 billion on revenues of $85.5 billion in the first half of the fiscal year, and more than $110 billion in the bank, accord-ing to company filings.

A Global Tax Strategyevery second of every hour, millions of

times each day, in living rooms and at cash reg-isters, consumers click the “Buy” button on iTunes or hand over pay-ment for an Apple product.

And with that, an international financial engine kicks into gear, moving money across continents in the blink of an eye. While Apple’s Reno office helps the company avoid state taxes, its international subsid-iaries — particularly the company’s assignment of sales and patent roy-alties to other nations — help reduce taxes owed to the American and oth-er governments.

For instance, one of Apple’s subsidiaries in luxembourg, named iTunes S.à r.l., has just a few dozen employees, according to corporate documents filed in that nation and a current executive. The only indi-cation of the subsidiary’s presence outside is a letterbox with a lopsid-ed slip of paper reading “ITUneS SARl.”

luxembourg has just half a mil-lion residents. But when customers across europe, Africa or the Middle east — and potentially elsewhere — download a song, television show or app, the sale is recorded in this small country, according to current and former executives. In 2011, iTunes S.à r.l.’s revenue exceeded $1 billion, according to an Apple executive, representing roughly 20 percent of iTunes’s worldwide sales.

The advantages of luxembourg





















































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Protecting Profits




April 28, 2012



April 27, 2012


Lottery Numbers

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are simple, say Apple executives. The country has promised to tax the payments collected by Apple and numerous other tech corporations at low rates if they route transactions through luxembourg. Taxes that would have otherwise gone to the governments of Britain, France, the United States and dozens of other nations go to luxembourg instead, at discounted rates.

“We set up in luxembourg because of the favorable taxes,” said Robert Hatta, who helped oversee Apple’s iTunes retail marketing and sales for european markets until 2007. “Down-loads are different from tractors or steel because there’s nothing you can touch, so it doesn’t mat-ter if your computer is in France or england. If you’re buying from luxembourg, it’s a relation-ship with luxembourg.”

An Apple spokesman declined to comment on the luxembourg operations.

Downloadable goods illustrate how mod-ern tax systems have become increasingly ill equipped for an economy dominated by elec-tronic commerce. Apple, say former execu-tives, has been particularly talented at identify-ing legal tax loopholes and hiring accountants who, as much as iphone designers, are known for their innovation. In the 1980s, for instance, Apple was among the first major corporations to designate overseas distributors as “commis-sionaires,” rather than retailers, said Michael Rashkin, Apple’s first director of tax policy, who helped set up the system before leaving in 1999.

To customers the designation was virtual-ly unnoticeable. But because commissionaires never technically take possession of inventory — which would require them to recognize taxes — the structure allowed a salesman in high-tax Germany, for example, to sell computers on be-half of a subsidiary in low-tax Singapore. Hence, most of those profits would be taxed at Singa-porean, rather than German, rates.

The Double IrishIn the late 1980s, Apple was among the pio-

neers in creating a tax structure — known as the Double Irish — that allowed the company to move profits into tax havens around the world, said Tim Jenkins, who helped set up the system as an Ap-ple european finance manager until 1994.

Apple created two Irish subsidiaries — to-day named Apple operations International and Apple Sales International — and built a glass-

encased factory amid the green fields of Cork. The Irish government offered Apple tax breaks in exchange for jobs, according to former execu-tives with knowledge of the relationship.

But the bigger advantage was that the ar-rangement allowed Apple to send royalties on patents developed in California to Ireland. The transfer was internal, and simply moved funds from one part of the company to a subsidiary overseas. But as a result, some profits were taxed at the Irish rate of approximately 12.5 per-cent, rather than at the American statutory rate of 35 percent. In 2004, Ireland, a nation of less than 5 million, was home to more than one-third of Apple’s worldwide revenues, according to company filings. (Apple has not released more recent estimates.)

Moreover, the second Irish subsidiary — the “Double” — allowed other profits to flow to tax-free companies in the Caribbean. Apple has assigned partial ownership of its Irish sub-sidiaries to Baldwin Holdings Unlimited in the British Virgin Islands, a tax haven, according to documents filed there and in Ireland. Bald-win Holdings has no listed offices or telephone number, and its only listed director is peter op-penheimer, Apple’s chief financial officer, who lives and works in Cupertino. Baldwin apples are known for their hardiness while traveling.

Finally, because of Ireland’s treaties with european nations, some of Apple’s profits could travel virtually tax-free through the nether-lands — the Dutch Sandwich — which made them essentially invisible to outside observers and tax authorities.

Robert promm, Apple’s controller in the mid-1990s, called the strategy “the worst-kept secret in europe.”

It is unclear precisely how Apple’s overseas finances now function. In 2006, the company reorganized its Irish divisions as unlimited cor-porations, which have few requirements to dis-close financial information.

However, tax experts say that strategies like the Double Irish help explain how Apple has man-aged to keep its international taxes to 3.2 percent of foreign profits last year, to 2.2 percent in 2010, and in the single digits for the last half-decade, according to the company’s corporate filings.

Apple declined to comment on its operations in Ireland, the netherlands and the British Vir-gin Islands.

Apple reported in its last annual disclo-sures that $24 billion — or 70 percent — of its total $34.2 billion in pretax profits were earned abroad, and 30 percent were earned in the Unit-ed States. But Mr. Sullivan, the former Treasury Department economist who today writes for the trade publication Tax Analysts, said that “given that all of the marketing and products are de-signed here, and the patents were created in California, that number should probably be at least 50 percent.”

If profits were evenly divided between the United States and foreign countries, Apple’s federal tax bill would have increased by about $2.4 billion last year, he said, because a larger amount of its profits would have been subject to the United States’ higher corporate income tax rate.

“Apple, like many other multinationals, is us-ing perfectly legal methods to keep a significant portion of their profits out of the hands of the I.R.S.,” Mr. Sullivan said. “And when America’s most profitable companies pay less, the general public has to pay more.”

other tax experts, like edward D. Kleinbard, former chief of staff of the Congressional Joint Committee on Taxation, have reached similar conclusions.

“This tax avoidance strategy used by Apple and other multinationals doesn’t just minimize the companies’ U.S. taxes,” said Mr. Kleinbard,

now a professor of tax law at the University of Southern California. “It’s German tax and French tax and tax in the U.K. and elsewhere.”

one downside for companies using such strategies is that when money is sent overseas, it cannot be returned to the United States without incurring a new tax bill.

However, that might change. Apple, which holds $74 billion offshore, last year aligned itself with more than four dozen companies and or-ganizations urging Congress for a “repatriation holiday” that would permit American businesses to bring money home without owing large taxes. The coalition, which includes Google, Microsoft and pfizer, has hired dozens of lobbyists to push for the measure, which has not yet come up for vote. The tax break would cost the federal gov-ernment $79 billion over the next decade, accord-ing to a Congressional report.

Fallout in CaliforniaIn one of his last public appearances before

his death, Steven p. Jobs, Apple’s chief executive, addressed Cupertino’s City Council last June, seeking approval to build a new headquarters.

Most of the Council was effusive in its praise of the proposal. But one councilwoman, Kris Wang, had questions.

How will residents benefit? she asked. per-haps Apple could provide free wireless Internet to Cupertino, she suggested, something Google





















































’77 ’80 ’85 ’90 ’95 ’00 ’05 ’10 ’77 ’80 ’85 ’90 ’95 ’00 ’05 ’10

0.5

1.0

1.5

$2.0 trillion


10

20

30

40

50%







manufacturing

FinanceServices


ApparelOverall





vs.

Share of employees


Long-term assets

Sales


72%

68%

54%

39%

30%

28%

32%

46%

61%

70%

Appledomestic

Appleforeign

32.024.423.422.521.518.417.216.816.715.614.613.112.211.711.3

8.7

%




Reported corporate

taxes

$1.8trillion

23%

2011

2006



Protecting Profits




April 28, 2012



April 27, 2012


Lottery Numbers

By PETER BAKER

















C M Y K Nxxx,2012-04-29,A,023,Bs-BK,E3

had done in neighboring Mountain View.“See, I’m a simpleton; I’ve always had this

view that we pay taxes, and the city should do those things,” Mr. Jobs replied, according to a video of the meeting. “That’s why we pay taxes. now, if we can get out of paying taxes, I’ll be glad to put up Wi-Fi.”

He suggested that, if the City Council were unhappy, perhaps Apple could move. The com-pany is Cupertino’s largest taxpayer, with more than $8 million in property taxes assessed by lo-cal officials last year.

Ms. Wang dropped her suggestion.Cupertino, Ms. Wang said in an interview,

has real financial problems. “We’re proud to have Apple here,” said Ms. Wang, who has since left the Council. “But how do you get them to feel more connected?”

other residents argue that Apple does enough as Cupertino’s largest employer and that tech companies, in general, have buoyed Cali-fornia’s economy. Apple’s workers eat in local restaurants, serve on local boards and donate to local causes. Silicon Valley’s many millionaires pay personal state income taxes. In its state-ment, Apple said its “international growth is cre-

ating jobs domestically, since we oversee most of our operations from California.”

“The vast majority of our global work force remains in the U.S.,” the statement continued, “with more than 47,000 full-time employees in all 50 states.”

Moreover, Apple has given nearby Stanford University more than $50 million in the last two years. The company has also donated $50 million to an African aid organization. In its statement, Apple said: “We have contributed to many chari-table causes but have never sought publicity for doing so. our focus has been on doing the right thing, not getting credit for it. In 2011, we dramat-ically expanded the number of deserving organi-zations we support by initiating a matching gift program for our employees.”

Still, some, including De Anza College’s pres-ident, Mr. Murphy, say the philanthropy and job creation do not offset Apple’s and other compa-nies’ decisions to circumvent taxes. Within 20 minutes of the financially ailing school are the global headquarters of Google, Facebook, Intel, Hewlett-packard and Cisco.

“When it comes time for all these companies — Google and Apple and Facebook and the rest — to pay their fair share, there’s a knee-jerk re-sistance,” Mr. Murphy said. “They’re philosophi-cally antitax, and it’s decimating the state.”

“But I’m not complaining,” he added. “We can’t afford to upset these guys. We need every dollar we can get.” n

Additional reporting was contributed by Keith Bradsher in Hong Kong, Siem Eikelenboom in Amsterdam, Dean Greenaway in the British Virgin Islands, Scott Sayare in Luxembourg and Jason Woodard in Singapore.

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