An Inquiry Into Tech Giants’ Tax Strategies Nears an End

The Senate Permanent Subcommittee on Investigations inquiry now drawing to a close began more than a year ago and involves at least a half dozen technology companies, according to people with firsthand knowledge of it, who declined to be identified.

Those people said the subcommittee had subpoenaed or otherwise asked the companies to explain methods they used to avoid domestic taxes. They said Apple had become a focus of the inquiry and was cooperating with the subcommittee, which is expected to issue wide-ranging recommendations that are likely to play a significant role in Congressional tax code negotiations.

Apple’s domestic tax bill has drawn the interest of corporate tax experts and policy makers because although the majority of Apple’s executives, product designers, marketers, employees, research and development operations and retail stores are in the United States, in the past Apple’s accountants have found legal ways to allocate about 70 percent of the company’s profits overseas, where tax rates are often much lower, according to corporate filings.

Apple, in a statement on Thursday, said the company was “one of the top corporate income taxpayers in the country, if not the largest.” The statement said the company “conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules.”

It is unclear how broadly Senate investigators are looking into the technology industry, if any laws are thought to have been broken and how many companies are involved. The subcommittee is also known to be looking at Google, Hewlett-Packard, Microsoft and firms in such fields as biotechnology.

The subcommittee, which is overseen by Senator Carl Levin, a Michigan Democrat, has been interested in the impact on the budget deficit of offshore tax strategies. Representatives from Microsoft and Hewlett-Packard testified at a subcommittee hearing on the subject in September. Both companies were criticized sharply by Senator Levin for using accounting rules to allocate revenue to other nations to avoid paying taxes in the United States.

“This subcommittee has demonstrated in hearings and comprehensive reports how various schemes have helped shift income to offshore tax havens and avoid U.S. taxes,” Senator Levin said at that hearing. “The resulting loss of revenue is one significant cause of the budget deficit, and adds to the tax burden that ordinary Americans bear.”Apple has long been a pioneer in developing innovative tax strategies that lessen its domestic taxes. At the September hearing, Senator Levin said the investigation indicated that Apple had deferred taxes on over $35.4 billion in offshore income between 2009 and 2011.

Tech companies are able to easily shift “intellectual property, and the profit that goes along with it, to tax havens,” said a former Treasury Department economist, Martin A. Sullivan. “Apple went out of its way to try and ensure that its tax savings didn’t attract too much public attention, because tax avoidance of that magnitude — even though it’s legal and permissible — isn’t in keeping with the image of a socially progressive company.”

In its statement, Apple said it paid “an enormous amount of taxes” to local, state and federal governments. “In fiscal 2012 we paid $6 billion in federal corporate income taxes, which is 1 out of every 40 dollars in corporate income taxes collected by the U.S. government,” it said. In the 1980s, Apple was a pioneer of an accounting technique known as the “Double Irish With a Dutch Sandwich,” which reduces taxes by routing profits through Irish subsidiaries and the Netherlands and then to the Caribbean. Today, that tactic is used by hundreds of other corporations — some of which directly imitated Apple’s methods, say accountants at those companies. More recently, Apple has moved revenue to states like Nevada and overseas nations where the company pays less, or in some cases no, taxes.

Almost every major corporation tries to minimize its taxes. However, technology companies are particularly well positioned to take advantage of tax codes written for an industrial age and ill-suited to today’s digital economy.

Some profits at companies like Apple, Google, Amazon, Hewlett-Packard and Microsoft emerge from royalties on intellectual property, like the patents on software. At other times, products are digital, such as downloaded songs or movies. It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers.

Although technology is now one of the nation’s largest and most highly valued industries, many tech companies are among the least taxed, according to government and corporate data. Over the last two years, the 71 technology companies in the Standard & Poor’s 500-stock index — including Apple, Google, Yahoo and Dell — reported paying worldwide cash taxes at a rate that, on average, was a third less than other S.& P. companies’, according to a New York Times analysis. (Cash taxes may include payments for multiple years.)

Companies report their cash outlays for income taxes in their annual Form 10-K, but it is impossible from those numbers to determine precisely how much, in total, corporations pay to governments.

This article has been revised to reflect the following correction:

Correction: January 3, 2013

An earlier version of this article included outdated information on Apple’s tax payments. The company paid $6 billion in federal corporate income taxes in fiscal year 2012, according to a company statement on Thursday; it did not pay $3.3 billion “last year.” (That was the amount of cash taxes the company paid in fiscal year 2011.)

Strategies: A Holiday Shopping Stampede, but Maybe No Economic Jolt

THE holiday shopping season started early, and with a roar. Whether that will help the sagging economy is another matter.

“Spending may well be strong, and that could help us get through another Christmas,” said William R. Emmons, an economist at the Federal Reserve Bank of St. Louis. “But the economy is unbalanced and we’re still in an enormous crisis.”

So, despite the early crowds at shopping malls, it’s worth noting that much of the consumption is being financed indirectly — through the expansive monetary policies of the Fed, and through deficit spending that has created an enormous budget gap. “At some point, we can’t go on like this,” Mr. Emmons said.

For now, the nation’s retailers are doing their best to infuse the holidays with the spirit of consuming. “Door-busting” bargains began on Thanksgiving Day instead of on Black Friday, as had been the custom. Online discounts started weeks ago, and Cyber Monday, formerly a one-day event, is morphing into a consumption extravaganza unbound by space or time.

“We’re keeping the Cyber Monday party going all week long,” Amazon.com said on its site on Thursday afternoon. Walmart declared that its site was “the only place to go” for Cyber Week. “Shop now while supplies last,” it said. And Target offered rapture: “Get online-only deals all week. Oh joy!”

Over all, the efforts have yielded a mixed harvest. Some reports suggest that the early shopping has been robust, if not extraordinary. A survey for the National Retail Federation found that 247 million people did some shopping in the four days starting on Thanksgiving, up 9.2 percent from last year. Total spending reached $59.1 billion, up nearly 13 percent.

But a report on Thursday showed that overall sales at 16 retailers — including chains like Macy’s, Nordstrom, Kohl’s and Target — increased only 1.6 percent in November for stores open at least a year. Those figures included early holiday sales.

Furthermore, the financial crisis, the recession and the anemic recovery have constrained the appetites of many voracious consumers.

“History shows that people only have so much money to spend during the holidays,” said Paul Dales, an economist at Capital Economics, a private forecasting group. “And if they spend more of it on Black Friday, they’ll probably spend less of it later in the season.”

In other words, while the hoopla of early sales may offer hints about the competitive advantages of specific retailers — Amazon.com or Walmart, for example — it may not mean much about consumer spending as a whole.

Real income is stagnating, and consumer spending dropped 0.2 percent in October, the Commerce Department reported on Friday. Even so, consumer spending accounts for 70.6 percent of gross domestic product, Mr. Emmons said — a higher proportion than before the recession. That suggests a predicament for policy makers, he said, because high levels of consumer spending are associated with a relatively low pace of economic growth.

The economy needs more exports and investment, and less consumer spending, he said. “We really could use a consumption tax to help increase household saving,” he said. But with the economy as weak as it is, he acknowledged, such a tax would not be very popular in Washington.

Consumption during the holidays should be curbed for ecological, cultural and ethical reasons, said Kalle Lasn, co-founder of the Adbusters Media Foundation. He advocates transforming Black Friday into Buy Nothing Day — “a day to return to the roots of the holiday, to the frugality — to living lightly — which is really the essence of Christianity and of all great religions.” Mr. Lasn, who helped start the Occupy Wall Street movement, called overconsumption a cause of climate change and other ills. “It needs to stop,” he said, “before we destroy this planet.”

But efforts to curb consumer spending, especially in the holiday season, may run counter to deep habits and traditions. American holidays have been defined by an uneasy alliance among business, religion and politics, said Leigh Eric Schmidt, author of “Consumer Rites: The Buying and Selling of American Holidays.”

“Commerce and religion and patriotism are all part of what we have come to know as the holidays,” said Mr. Schmidt, a professor of humanities at Washington University in St. Louis.

“Consumption during the holiday season has come to have a kind of patriotic quality in the United States,” he said. In fact, extending the holiday season, and exhorting people to spend, has sometimes been a matter of public policy.

IN 1939, during the Great Depression, President Franklin D. Roosevelt called Thanksgiving “a perfectly movable feast” — and he moved up the holiday by one week, from its traditional date on the last Thursday of November. He thus proclaimed that Thanksgiving would be on Nov. 23 that year, not Nov. 30.

His agenda was transparent. The economy needed help. As an experiment, he said, he would try to give retailers a boost by extending the holiday season. But public opinion was no more unified then than it is now, and his policy was not universally welcomed.

The New York Times of Aug. 15, 1939, captured the mood: “Roosevelt to Move Thanksgiving; Retailers for It, Plymouth Is Not. Football Schedule Makers Also Get a Headache, With Season Set to End With Fifth Thursday in November.”

The president’s home state, New York, went along with the change, but Connecticut was among many that didn’t. Families were divided. Eleanor Lucy Blydenburgh, a student at the Pratt Institute in Brooklyn, said that while her school holiday would be Nov. 23, her parents would celebrate on Nov. 30. “Really, this situation makes my heart ache,” she wrote the president, in a letter held by the Franklin D. Roosevelt Presidential Library.

What’s more, as Roosevelt ruefully acknowledged in 1941, the extra days didn’t stimulate the economy. There was no net increase in sales. “The experiment had not worked,” The Times reported in May 1941. People shifted their shopping days but didn’t buy more.

Congress resolved the issue in time for Thanksgiving in 1942. It legislated that the holiday would henceforth be on November’s fourth Thursday, which isn’t always the last one.

That’s why Thanksgiving this year was on Nov. 22, not last Thursday. So, once again, there are extra shopping days, as well as endless consumption opportunities online — and reason to doubt that they will mean much for the economy.

Strategies: From the Fed and Apple, a Possible Economic Lift

HELP for the beleaguered economy came last week from two powerhouses: the Federal Reserve and ... Apple.

The Fed, believe it or not, was probably the more innovative of the two.

Maybe that shouldn’t be so surprising. These are the post-Steve Jobs years at Apple, after all, a time of big profits and seamless execution. At the Fed, these are the Ben S. Bernanke years, a period of ceaseless experimentation.

The Fed’s latest plan may be the most ambitious of all, but Mr. Bernanke has been coming up with inventive solutions since the onset of the financial crisis in 2007. His previous ventures have been limited in scope — like cutting interest rates or buying bonds, with a clear goal in sight.

Now the Fed is taking on an open-ended commitment to bolster growth and reduce unemployment. The goal is to return the economy and the job market to something resembling a normal state. “We’re looking for ongoing, sustained improvement in the labor market,” Mr. Bernanke, the Fed chairman, said in a news conference on Thursday. “There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.”

In other words, if the Fed’s current spate of bond-buying doesn’t work, it will improvise until it finds something that does. Mr. Bernanke embarked on this effort under considerable pressure, all but assured in this political campaign season that he would be harshly criticized.

Apple, by contrast, is operating from a position of strength; it has the highest market value of any company in the nation. But it isn’t taking big risks. With the fanfare of a carmaker back in Detroit’s halcyon days, Apple proclaimed on Wednesday that it was time — yet again — to sell the newest version of its flagship product. The gleaming object of its promotional efforts is, of course, the iPhone 5, “the thinnest, lightest and best iPhone we have ever shipped,” in the words of Timothy D. Cook, Apple’s chief executive.

Not to be outdone, Philip W. Schiller, Apple’s global marketing chief, was, if anything, even more enraptured. “It is an absolute jewel,” Mr. Schiller told a carefully assembled crowd in San Francisco. “It is the most incredible product we’ve ever made, bar none.”

Is it, really? It’s too early to say. The iPhone 5 hasn’t yet hit the market. Tech mavens haven’t reviewed it carefully. But, blemishes and all, previous versions have sold extraordinarily well. There is no indication that this one will be different.

One reason is simply that the base of iPhone customers has become large and well conditioned. It is accustomed to upgrading phones, much as affluent Americans once upgraded to the next new Ford or Buick. “My dad bought a new Cadillac every year,” said Charles Wolf, senior analyst at Needham & Company. “A lot of Apple customers are like that.”

Another crucial factor is the expansion of Apple’s global reach to 250 carrier networks worldwide, Mr. Wolf said, assuring strong global sales. Raw numbers combine with Apple’s continuing finicky attention to quality and design. In his view, Apple’s surge in financial markets will continue unabated, at least for a while. (Its share price hit a record high of $696.98 on Friday.)

“I think there’s no question about that,” he said. “For the immediate future, Apple is extraordinarily well positioned.”

In fact, Apple’s commercial prowess is so well established that the effects of its new iPhone can be predicted and quantified, according to Michael E. Feroli, chief United States economist at JPMorgan Chase. In a research note early last week, he said the iPhone 5’s release could potentially add one-quarter to one-half a percentage point to fourth-quarter annualized growth in the gross domestic product.

In an interview on Thursday, Mr. Feroli said his calculations included only the direct effects of the expected surge in iPhone sales. They didn’t include productivity gains, if any, from use of the new technology, or possible trade-offs made by consumers who might be giving up, say, some nights at the movies to buy the phone. And, he said, he didn’t try to calibrate the iPhone’s impact on employment, which is complicated by the manufacture of much of the phone overseas.

“There are some jobs being created by these sales in the United States,” he said, “but it’s not clear how many.”

Fuzzy as these projections may be, it is much harder to calibrate the economic effects of the Fed’s latest stimulus effort. Mr. Feroli said Fed policy makers recognized that “long-run economic growth usually occurs because of technological developments like the iPhone,” so the Fed was merely “trying to get the economy back on a cyclical growth path, getting it to operate closer to its full potential.”

Viewing the Fed and Apple as dual agents of economic stimulus is probably irresistible, he said, but too literal of a comparison is “misguided.”

“The Fed isn’t trying to engineer the factors that lead to long-run sustained increases in standards of living,” he said. “It’s trying to get the economy working at full capacity again so more people are working and can enjoy the fruits of technical advances like those represented by the iPhone.”

Many commentators, however, couldn’t resist making the comparison.

Philip Swagel, a professor at the University of Maryland School of Public Policy, commented about it via Twitter. “QE3 like iPhone5: expected, not a game-changer,” he wrote, referring to the Fed’s latest round of quantitative easing — purchases of bonds aimed at lowering interest rates. “Fed responding to unemployment and fiscal inaction,” he added.

In an interview, Professor Swagel, who was assistant secretary for economic policy at the Treasury Department from December 2006 to January 2009, said: “It’s hard to second-guess someone as thoughtful as Chairman Bernanke. I understand why he’s doing what he’s doing, and I respect it. I just don’t expect a lot to come from it.”

He said the iPhone introduction was similar: “It’s probably a nice phone, and it’s probably going to produce some employment in retail stores. But it’s not going to change the landscape.”

NO doubt Mr. Bernanke would prefer to stop improvising, and merely preside over a growing economy, as he did all too briefly in 2006 and early 2007.

For Apple, the greatest risk is that, without Steve Jobs to stir things up, it may merely be executing a vision that is already in place. “Steve was an integral part of every one of Apple’s great innovations and disruptions,” Mr. Wolf said. Apple is in a groove, he said, and over the next few years, the company is likely to reap profits big enough to move the markets and the economy. “But you could argue that over the long term, Apple is going to need another big disruption,” he said. “The question I ask is, Who is going to do it with Steve gone?”

This article has been revised to reflect the following correction:

Correction: September 15, 2012

An earlier version of this column misspelled the surname of the co-founder and former chief executive of Apple. He is Steve Jobs, not Job.