Apple (AAPL) Still Hopes to Benefit from $1.1 Billion Tax Break
Apple was on the spotlight this week for alleged tax avoidance schemes with US Congress releasing reports involving Apple dodging income tax payments with the help of international subsidiaries. Although the maneuvers executed by Apple are perfectly legal, the company does not escape controversy.
After Apple CEO Tim Cook's appearance before the Senate subcommittee hearing, the company reveals that it was hoping to gain from tax breaks worth hundreds of millions of dollars. The tax breaks were more likely to be too aggressive to measure up to tax authorities. Unrecognized tax benefits of Apple now amount to $1.1 billion. It was $348 million only three years before.
In Apple's books, the figure is only part of the company's "gross unrecognized tax benefits" which has a total of $3.2 billion. Apple has claimed in deductions, credits and tax benefits in its income tax returns. The company takes an aggressive stance in tax but it has about 50% chance of surpassing an audit. Even so, Apple decides to push their tax position anyway.
The $1.1 billion amount is treated as worth of credits or deductions that will have a significant effect on Apple's tax rate according to Apple's recently released quarterly report. Apparently, the unrecognized tax benefits are the tax breaks that matter. This is according to accounting expert, Jack Ciesielski who has previously testified before the Senate in issues concerning offshore tax avoidance strategies of companies.
Accounting Treatment, a Win for Shareholders
The accounting treatment for Apple's tax maneuvers is conservative from the point of view of shareholders. The company assumes the aggressive maneuvers won't succeed because Apple does not include them when the effective tax rate is calculated. Based on the rules of accounting, Apple can file the tax benefits only when there is a great possibility that at least one of them will pass an audit. With big companies, accounting rules assume every transaction made has gone through an audit.
If Apple succeeds in getting tax breaks, shareholders stand to win. They also don't lose out on anything even if the company fails to claim tax breaks. The current level of Apple's effective tax rate is 26%. If an audit does not validate the company's tax breaks, the effective tax rate of the company will fall according to Donna Bobek Schmitt, a tax specialist and associate professor at the University of Central Florida.
Like other companies out there, Apple does not really confirm which tax benefits have zero chances of passing audit. Schmitt says that Apple is involved in transfer pricing. This includes the fees one subsidiary will charge to another in exchange for patent use or services. Tax authorities often debate on this matter.
Apple is not the only company to book unrecognized tax benefits. By the end of March, Google and General Electric reported $2.07 billion and $5.58 billion respectively.