THE GIST
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Apple's profits have been taking a longer route around the world before they get home. The company reported that it saved $2.7 billion by booking profits via Singapore, over Ireland. Apple is here for Singapore's handsome tax benefit, and Singapore is here for the economic clout.
WHAT HAPPENED
Singapore helped Apple reduce its tax bill by approximately $2.67 billion this year, dethroning Ireland, Apple's traditional European tax base. The company reported $27 billion in total corporation taxes for the year. Had all its global profits been taxed at the U.S. federal corporate rate of 21%, its tax bill would have been $33 billion. And Singapore accounted for as much as $50 billion in pretax profits, compared to $40 billion reported by Apple's Singapore subsidiaries last year.
This is how it works: The Apple subsidiaries allocate profits amongst themselves. Apple's Singapore operations sell products and services to other Apple entities overseas, booking the profits in Singapore before products are shipped elsewhere.
Singapore's headline corporate tax rate is 17%, compared with the U.S. federal rate of 21%. But the city-state sweetens the pot with more concessions for companies it believes are economically valuable, including research, intellectual property development and such. That means Apple's effective tax rate in Singapore has been 10% over the past couple of years.
WHY IT MATTERS
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This matters because more than 140 countries agreed to a global minimum corporate tax of 15% for large multinational companies such as Apple. Known as Pillar Two, the agreement was designed to prevent exactly the plum position Apple is in now. It aims to limit companies from shifting profits into jurisdictions offering exceptionally low tax rates. Countries could impose additional taxes when multinational subsidiaries paid less than the agreed minimum.
Singapore is one of the countries that signed the agreement, but the 15% minimum is not necessarily a straightforward tax on every dollar of profit. If a company can negotiate tax incentives, credits and adjustments etc. it can bring down its effective tax rate. So Singapore can after all remain attractive even after collecting additional taxes to meet its international obligations.
Before Singapore, Apple's preferred tax routing destination was Ireland. But then in 2016, the European Commission ordered Ireland to recover €13 billion in allegedly illegal tax benefits the country granted to Apple.
Singapore comes with other advantages: it has a skilled workforce, sophisticated financial infrastructure, political stability and it's a gateway to Southeast Asian markets.
WHAT'S NEXT
Apple's Irish tax arrangements became a global controversy in 2016, and a decade later the underlying issue remains unresolved. Multinational companies continue to exploit differences between national tax systems, because governments want their business. After governments agreed to introduce a global minimum corporate tax, companies are more aggressive about tax savings and governments are just creating more room for that.
