The latest insight into Apple’s use of capital allowances

At the start of 2015, Apple revised the structure through which the company’s sales to customers outside the Americas were organised.  This was responsible for the 26 per cent real GDP growth reported for that year.

We initially examined the revised structure here and in recent years have been tracking the consolidated outcomes for the group headed by Apple’s central international subsidiary, Apple Operations International (AOI). 

• AOI’s 2018 Accounts: Some insight into Apple’s use of capital allowances
• AOI’s 2019 Accounts: Further insight into Apple’s use of capital allowances

The recent publication of the AOI Group’s 2020 consolidated accounts gives us the latest insight into Apple’s use of capital allowances.  The two posts above contain details that are not repeated here.

We will start with the consolidated statements of operations and note that this covers the holding company AOI and around 80 subsidiaries operating beneath it, with the group as a whole having just over 50,000 employees.  Most, but not all of the amounts shown, arise in or pass through subsidiaries in Ireland.

Some pretty big numbers there.  As the accounts note:

The Group develops, manufactures and markets smartphone, personal computers, tablets, wearables, and accessories, and sells a variety of related services.

It certainly sells a lot.  For the four years shown, cumulative net sales were close to $600 billion.  And it is massively profitable.  Pre-tax income summed to $165 billion over the four years and the provision for income taxes was a chunky $25 billion.

But we should check a few things before we get excited about that tax figure.  A company making a provision for income taxes in its financial accounts is not the same as a company making a payment for those taxes in cash.  The balance sheet is a useful place to look next.

For our purposes we are interested in the line for Deferred tax asset.  We can see that the AOI Group had $25.6 billion of deferred tax assets at the end of its 2016 financial year.  These reduced each year and by the end of its latest financial year stood at $10.9 billion.

Thus, while there might been tax provisions averaging around $6 billion in the income statement for each of the past four years this was not resulting in an equivalent payment out of cash reserves but in the reduction in the deferred tax asset on the balance sheet.

[As we have pointed out before it is also worth noting what this balance sheet does not contain: a huge amount of intangible assets.  Ireland’s national accounts have recognised massive intangible assets yet the consolidated accounts of the group which contains the company with that asset does not. Anyway back to the tax payments.]

The difference between the provision for tax and the payments for tax is is confirmed by a supplemental item included with the consolidated statements of cash flows.

There might have been tax provisions of $6 billion each year but, as the final line above shows, cash payments for income taxes averaged $2 billion a year over the past four years.  And a variation of the following paragraphs are included a number of times in the accounts:

The corporate income taxes in the consolidated statements of operations, balance sheets and statement of cash flows do not include significant US-level corporate taxes borne by Apple Inc., the ultimate parent of the group.

US-level taxes are paid by Apple Inc. on investment income of the Group at the rate of 24.5% (35.0% in 2017) net of applicable foreign tax credits. In addition, under changes in US tax legislation that took effect in December 2017, Apple Inc. is subject to tax on previously deferred foreign income (at a rate of 15.5% on cash and certain other net assets and 8.0% on the remaining income), net of applicable foreign tax credits.  The new legislation also subjects certain current foreign earnings of the Group to a new minimum tax.

The posts linked above that went through AOI’s 2018 and 2019 accounts go into detail on how the provisions for income taxes were arrived at and show the reconciliation with Ireland’s 12.5 per cent headline rate.  The earlier posts also discuss how the deferred tax asset came about – capital allowances under Section 291A of the Taxes Consolidated Act. 

For now, we will just focus on the evolution of those deferred tax assets using a table from the note to the accounts on the provision for income taxes.

We are interested in the deferred tax asset that arises due to Intra Group Transactions.  This likely includes the purchase by a now Irish-resident subsidiary of the license to sell Apple products in all markets outside the Americas.  That outlay (which may have been around $240 billion) will be eligible as a tax deduction with this provided via capital allowances.

At Ireland’s 12.5 rate of corporate tax a $240 billion deduction would be worth $30 billion which is probably where the value of the group’s deferred tax asset from intra-group transactions was in January 2015.

As we can see from the above table tax was being charged against that deferred tax asset.  The utilisation was $4.4 billion in both 2017 and 2018, $3.2 billion in 2018 and $3.3 billion in 2020.  This meant there was $7.4 billion remaining and at the current rate of utilisation will be fully exhausted in the next two to two and a half years.

The utilisation of capital allowances at that scale means that something in and around €25 billion of gross profit is being offset by a deduction for capital allowances.  As the transaction occurred before October 2017 no cap applies and, if sufficient capital allowances are available, the company can fully offset its profit with capital allowances and this is was happened in 2015, 2016 and 2017.  A small amount of profit may have been subject to tax in 2018.  Any unused capital allowances in the earlier years are carried forward as losses but essentially remain as a deferred tax asset.

As before, the key question is the amount of profit that will be subject to tax when the deferred tax asset is fully exhausted.  If nothing changes at that point then somewhere in the region of €25 billion of gross profit will be added to the taxable income of the Irish-resident Apple subsidiary that currently holds the license to sell Apple products outside the Americas. 

This would see tax payments in Ireland rise by €3 billion or so and that Apple subsidiary would almost certainly become Ireland’s largest taxpayer.  If nothing changes.

We have already seen a number of major US ICT MNCs transfer their IP back to the US (from which it should never have been allowed leave in the first place).  Apple have the option to do the same and maybe this becomes more likely as the amount of capital allowances available nears exhaustion.

If Apple were to do so, this would reverse the GDP surge that occurred in 2015 and the value added would be rightfully recorded where it is generated – in the US.  Changes that add 0.2 per cent to US GDP won’t make headlines in the same way a 10 per cent reduction in Irish GDP would.  But they essentially involve the same thing.

And further it probably won’t significantly change the company’s tax payments  - not in Ireland at any rate.  With capital allowances the profit is not currently exposed to Ireland’s 12.5 per cent Corporation Tax.  As pointed out above the profit is subject to tax in the US under the minimum tax on foreign earnings introduced by the Tax Cuts and Jobs Act (TCJA). 

This is the tax on Global Intangible Low Taxed Income – GILTI.  The Biden administration are proposed to double this from 10.5 per cent to 21 per cent.  If Apple relocates their IP to the US and continues to use a licensing structure (they could also decide to simply sell the products from the US) then the income from that license would be taxes under the Foreign Derived Intangible Income (FDII) provisions also introduced by the TCJA.  The Biden administration are proposing to abolish FDII.

There is lots of uncertainty.  But as shown here there is no doubt that the amount of remaining capital allowances Apple has in Ireland is reducing.  What was probably around $30 billion in 2015 was down to $7.4 billion in September 2020.  We won’t get many more insights into Apple’s use of capital allowances – because soon enough they will be gone. 

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