Apple Sidestepping Taxes and Pursuing Excellence in Tax Avoidance

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 In this story from the New York Times it is reported (or really whined about) how little Apple pays in taxes. The story starts off by talking about how Apple put an office in Reno to side step paying higher California taxes. Technology companies in general can move their headquarters to different states or around the world more easily than manufacturing companies due to the fact that making software, applications, or intellectual property doesn't require billions of dollars of capital investment in property, plant, and equipment.

Apple paid $3.3 billion and had a profit of a little more than $34 billion which makes their effective tax rate less than 10%. One technique that Apple uses to reduce their taxes is what is known as the double Irish arrangement. This is part of a tax avoidance by placing intellectual property outside the United States and without paying U.S. taxes. The money from the intellectual property is licensed from an outside company from Apple that is located in Ireland, and licenses the rights to a second company also owned by Apple that is also located in Ireland. The second company gets income and taxed at a low rate and avoids being taxed at high U.S. rates. It important to know that tax avoidance is perfectly legal and different from tax evasion which is where someone purposely goes out of their way not to report income, defraud the IRS, or essentially never intending to pay their taxes. Apple should be commended on such accounting excellence. Also Apple is not the only company that takes advantage of this. Eli Lilly, Google, Microsoft, and even Pfizer use the same strategy to lower their taxes. I would also point out that hiring the people to find these strategies is not cheap. Tax ninjas are not only expensive, but are not easy to come by. The true cost is adding in what it cost in time and money for the services of the tax ninjas.

I love how the New York Times tries to vilify Apple for not only pay their taxes but to suggest that companies like Apple are the reason why states of California are now facing a financial crisis. California is in crisis because of generous benefits to state employees, overspending, and high tax rates which lead not only companies but people out of the state. If California simply lived within their means and lowered state rates you would see people starting to move back.

The tax system is not only complicated at the personal level but also at the corporate level. GE filed a 57,000 page tax return. This seems ridiculous. How many hours and money was spent simply on the return? The tax code needs to be revamped at both the personal and corporate level. My suggestion would be to have a progressive tax rate at the personal level without any deductions. At the corporate level I would propose a flat 15% level. You might say “This will deprive the government of revenue!” The problem is government spends whatever it can get its hands on. I would argue that lower corporate rates would bring business back into the United States which would increase revenue which actually would be a problem since Congress would spend it. At the same time I would propose a balanced budget act. My balance budget act would be a little different. If Congress was not able to balance the budget everyone in Congress would be fired. This would make for interesting politics and ensure some accountability.  Until any of this happens companies will use all possible deductions, credits, schemes, and sandwiches to keep more of their money. 

Apple Steve Cook Highest Executive in 2011?

Apparently, Tim Cook could be the highest paid person in 2011. The Associated Press is reporting that Tim Cook could stand to receive $378 million in compensation. It should be pointed out that $376 million of this is in the form of restricted stock. Companies give employees restricted stock in order to reward long term productivity from employees. The shares usually can’t be sold for a number of years. The earliest Mr. Cook can sell these shares is August 2016. Not only does he have to wait five years to sell these shares but he can only sell half of the shares receives at that time. He will be able to sell the other half in August 2021. In essence, the idea of restricted stock is to incentivize employees (usually executives) into creating shareholder wealth. If employees are highly productive and make decisions that create wealth for the company it will usually be reflected in the share price. I say usually only because in the short term the market can gyrate for various reasons but the long run is a good measure of a company’s true value. Profits are created by fixing problems.

People complained that executives were getting paid too much of a salary so then corporations began giving executives (and regular employees) options. Even to this day people complain when executives receive large amounts of compensation because of stock options. If you look at Tim Cook 99.4% of his compensation will be based on how well Apple stock does. True his options today are worth $376 million however if Apple takes an iTumble in the market Cook could stand to lose lots of money depending on the stock price in 2016. In 2016, when Cook has the right to buy the stock he will pay ordinary income of that money. Assuming he is in the highest tax bracket, tax laws don’t change, and Apple stock is around $500 per share cook would pay around $78 million in taxes when he has the right to exercise (buy the stock). Not only will Cook pay ordinary income but also pays capital gains when he ultimately sells the stock.

Executive compensation is a hot topic. Often people who have never paid or been a CEO seem to know how much a CEO is worth. What people seem to fail to realize is how much of net worth any executive has tied up in stock options. True the executives get a salary but often used to pay their taxes from exercising options. If anything these executives have much more to lose than the average employee so much of their net worth relies upon how well the company does.

Hopefully, Tim Cook will lead Apple to create insanely great products that satisfy millions of people. With Steve Jobs now gone we can now test to see how “innovative” Jobs really was. If Cook is successful the value of his stock options will rise. Of course he won’t be able to cash out his stock options until 2016.

Steve Jobs: Why I Never Owned Apple Stock

Just a few hours ago Steve Jobs resigned as CEO of Apple. I have never invested in Apple because of this reason (also the company hasn’t had a long history of paying out dividends). At any rate, tomorrow the market will decide how much this will affect the value of Apple through their stock price. Jobs is leaving a company that is worth $349 billion in market value. Time will tell whether this increases or not.

People are asking why Jobs is not running the day to day operations of the company and I think the answer is pretty obvious. Steve Jobs has had significant health issues over the years. Usually CEOs are very reluctant to give up the reigns of their company. One can only speculate the health issues Steve Jobs is going through. I honesty wonder how long Jobs will be alive given he has pancreatic cancer which is usually a death sentence.

I find it a little bizarre that people act as if Steve Jobs as some saint. If anyone did any type of research they would realize he heavily micromanages his employees and somewhat of an egomaniac. However despite this, I would say that we all have benefitted from this. Steve Jobs takes only $1 salary which is of course symbolic. If you look at the actual amount Steve Jobs makes in just stock options it is over $14 million which is well above the average of $8 million paid to a CEO of any S&P 500 company. Jobs also did get a $90 million Gulfstream V jet in 1999 as a bonus. So if you include all the perks and extra that jobs get it is well over $1. The problem I have is people actually might believe that Jobs is living off very little and not greedy. I don’t believe a CEO or owner of a company wakes up to just make money. The main reason I believe a CEO or owner gets up is to create something new, to solve problems, or to more importantly make progress. Money of course does give people an incentive. Steve Jobs has made many people better off including himself. However, people are now saying Jobs is the best CEO of all time. I enjoy when people make statements but have no data or evidence to back it up. If you look at the performance of Apple stock and compare it to Oracle or even Microsoft since the 1980s, Apple has underperformed both stocks. A CEO’s job is to create value. So Steve Jobs may have taken his $1 symbolic pay, but compared to other companies Steve Jobs is not increasing shareholder value at the same rate as other companies within the same industry.

Part of the reason I never owned Apple is because of Steve Jobs. If Steve Jobs ever left or walked away it would be hard and maybe even difficult to recreate what he brought to the company. Warren Buffet points out that you shouldn’t need a rock star to run a business. Only time will tell if Jobs leaving will make a large impact.