This week, Tim Cook (Apple CEO), Peter Oppenheimer (Apple CFO), and Phillip Bullock (Apple head of tax operations) testified before the Senate subcommittee on Investigations to account for their tax practices regarding profits remaining overseas. In 1980, Apple Inc. (NASDAQ:AAPL) brilliantly set up three companies in Ireland to handle the intellectual property rights for all of its products that would be sold in Europe and Asia.
It set up Apple Operations International or AOI as a holding company to hold and invest profits from overseas sales and operations. According to Tim Cook's testimony before a senate subcommittee, Apple pays US taxes only on the interest from investments that AOI makes.
It also set up Apple Sales International or ASI and Apple Operations Europe or AOE as the holder of the intellectual property rights for all sales overseas.
Because of great tax planning, a large portion of Apple's profits are not taxed in the United States at 35%, but instead are only taxed at a negotiated 2% at their subsidiaries based in Ireland.
There seems to have been an outrage that the leadership at Apple would use these strategies to avoid paying taxes in the US for the benefit of its shareholders. How dare the company put its shareholders above the United States of America! It may appear that the company is protecting the rich shareholders at the expense of their home country, but I contend that every American benefits from Apple's tax strategies in one way or another.
Most Americans are shareholders of Apple whether they know it or not. Many living in the US have some sort of investments for retirement in 401(k) plans with their employers, or have IRAs set up. According to Morningstar, there are a combined 7,795 total institutional and fund investors in Apple. Chances are that anyone with an S&P 500 index fund in those accounts, mutual funds, and now bond funds are getting the benefits of higher profit margins due to its tax plan.
Is it so bad to have a company that protects its profits and still follows the law? Apple has consistently paid an effective tax rate of over 24%. It was the largest corporate tax payer in the US, not to mention all of the income tax that it generates by its US employment. If Apple is testifying, I am wondering when the subcommittee is going to call in the companies with real questionable tax rates like Verizon Communications (NYSE:VZ), Boeing (NYSE:BA), General Electric (NYSE:GE), and various energy companies with negative effective tax rates? I choose to be grateful that Apple's leadership believes wholeheartedly in what they have been doing for the shareholders, and American people.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.