Accounts filed by one of Apple’s two main UK divisions, Apple Retail UK Ltd, showed the company made a pre-tax profit of £16m on sales of almost £1bn in the year to September 29.
Another subsidiary, Apple (UK) Ltd, made a pre-tax profit of £43.8m on sales of £93m, according to accounts filed at Companies House, while a third, Apple Europe, made a pre-tax profit of £8m.However, the company offset tax deductions relating to share schemes of £27.7m against its corporation tax liabilities in the UK. The move also enabled it to claim a tax credit of £3.8m to carry forward to future years.
There’s actually three things going on here with Apple’s accounts, practices and tax in the UK.
The first is that all of the iTunes sales are actually made in Luxembourg. This is because the VAT rate there is lower and one of the peculiarities of EU tax law is that “electronic services” pay VAT in the country they emanate from, not the country of delivery. For physical items it is the country of delivery’s rate that is applied. So, all of the revenue, all of the profits (whatever they might be) and of course all of the VAT end up in Luxembourg for e-books, software, songs and the like, even when the sale is to a UK resident. Of course, the tax savings from this go to the UK residents making the purchases: so it’s a little difficult to see this as tax dodging by Apple.
The second is the way that Apple structures its entire worldwide business. For all sales outside the US (or perhaps the “Americas” segment, which might include Canada) Apple buys the equipment from the manufacturers in China through an Irish company. This then sells the equipment on to either the dealers and distributors or to the Apple Stores themselves around the world. Prices are such that the stores don’t really make much money: the margins just about cover the actual fixed and variable costs of having stores and making sales. All of the real profit thus ends up in that Irish company and is taxed in Ireland. Or not, as actually happens, for Ireland only taxes corporate profits on economic activity that takes place in Ireland. So all those profits made by buying from China and selling in the UK aren’t taxed. It’s also true that Apple does not then take those profits back into the US, so there’s no US corporate income tax to pay. Largely, the business is untaxed then. But that’s the way the politicians wrote the system so it’s a bit odd to blame people for following the rules.
The final part is in those operating profits in the UK. The fact is that operating profits are not what are taxed: profits before tax are what are taxed. And issuing stock to the management is a part of doing business. It’s part of their pay, pay is indeed an allowable expense, so sure, of course they can deduct the costs of the stock schemes before they calculate the pre-tax profit upon which they then have to pay tax. There’s absolutely nothing at all dodgy about this last part: it’s the simple deduction of a cost of doing business before calculating the tax bill. Something that every company does each and every year: deducts the costs of paying the staff from income before declaring the profit.
The only difficult part about this structure though is that obviously, Apple wants to make a profit before the costs of paying the staff and a small loss (or a very small profit perhaps) after those costs, so as to minimise the tax bill. Which presumably requires considerable attention being paid to the prices at which the Irish company sells to the UK one. It would be quite a tight calculation trying to ensure that the final UK position is as close to zero as one can get. But then again, difficult as that task might seem we appear to have evidence that Apple are rather good at it.
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