The Truth About Apple’s Taxes

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Apple's taxes due and tax rate for 2011 don't match reported numbers
Apple's taxes due and tax rate for 2011 don't match reported numbers

Earlier in this day, we reported on a New York Times piece in which the paper claimed that Apple was using a variety of measure to avoid paying U.S. income tax. It turns out that the Times based key pieces of its information on a study that had been discredited two weeks prior.

The data used by the Times included a report by the Greenlining Institute, which made errors in computing Apple’s supposed tax rate at 9.8% for the 2011. The data used by the report effectively compared Apple’s 2011 profit with taxes paid by the company for profits in 2010 and drew unfounded conclusions as a result.

The accounting error had to do with how corporations are required to pay estimated income taxes on a quarterly basis. As Forbes explained when it initially discredited the Greenlining report and again this morning, the IRS tells corporations to make those estimated payments based on either the current year’s expected profit or last year’s actual profit – whichever is lower.

Because Apple has seen tremendous growth over the past two years (much of it a result the iPad), the 2010 actual profits were the lower of the two by a pretty significant margin. That means that any estimated payments made during 2011 were being made based on Apple’s tax bill for 2010. At the end of the tax year, the company paid the difference between its estimated payments and the actual taxes owed.

What’s surprising is that the Times went ahead with numbers from Greenlining without double-checking them. Even something as simple as checking Apple’s 10K statement (PDF link) shows Apple’s estimate of its tax rate, which was 24.2% for 2011 (and 24.4% for 2010). That’s a good deal more than 9.8% – a discrepancy should have led to further investigative work and/or independent number crunching.

Of course, this means that the math and some basic data about Apple’s taxes was wrong, but it doesn’t overturn the primary assertion made by the Times – that Apple is stashing a sizable portion of its profits abroad. As I said earlier today, that’s an issue that goes beyond Apple as many multinational companies do the same thing – and, like Apple, are allowed to do so under U.S. laws.