iTax - Apple's International Tax Structure and the Double Non-Taxation Issue

Abstract

Apple, famous for its innovative products, has proved to be equally creative in its tax structure. From 2009 to 2012, it successfully sheltered US $44 billion from taxation anywhere in the world. An unusual feature of its tax structure is the relative simplicity: it does not rely on the Double Irish Dutch Sandwich structure that has been commonly used by other US multinationals. A recent parliamentary hearing in the US revealed detailed information about Apple’s tax structure, which is difficult, if not impossible, to discern from its financial statements. At the same time, interesting information and issues of tax avoidance by multinational enterprises from the perspective of source countries were also revealed in parliamentary committee hearings in the UK. The aim of this paper is twofold. First, it analyses the international tax structure of Apple and investigates how it achieved the double non-taxation of US $44 billion. The analysis reveals that the US government has knowingly facilitated its MNEs to avoid foreign income tax, thus creating double non-taxation. It also highlights the structural issues of domestic and international tax rules that enable the creation of the double non-taxed income. Second, the paper reviews the possible responses of both the residence and source countries to Apple’s tax avoidance structure, and argues that two issues are important in the design of effective solutions to the problem. First, the application of enterprise doctrine – under which a corporate group under the common control of a parent company is treated as one single entity – is more likely to produce effective measures to tackle MNEs’ tax avoidance transactions. Second, the increase in transparency, in particular a properly designed country-by-country reporting regime, would be a much needed weapon for tax authorities which at present suffer from information asymmetry in the tax avoidance battle with MNEs.

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