Add one more bullet to the list of reasons wireless companies will pay billions for patent portfolios. Clever accounting can protect these profits from federal taxes, as pointed out this weekend by a New York Times article that has already elicited responses from network television and from Apple (AAPL), the subject of the article.
Patent royalties, as well as revenue from digital goods like songs, can be recognized almost anywhere, allowing Apple to book these revenues in states and countries with favorable tax laws. The New York Times article gave examples of this, and also explained how sales of goods in countries with higher tax rates can be made “on behalf of” subsidiaries in other countries with lower tax rates.
While the article stated that Apple paid just $3.3 billion in taxes on profits of $34.2 billion last year, critics were quick to point out that those were Apple’s estimated tax payments, based on 2010 profits. And Apple itself said in a response that “in the first half of fiscal year 2012 our U.S. operations have generated almost $5 billion in federal and state income taxes, including income taxes withheld on employee stock gains, making us among the top payers of U.S. income tax.” But the basic premise that profits on digital sales are easier to protect than profits on sales of physical goods and services is much harder to dismiss.
Major wireless carriers who are feeling the burden of Apple’s hefty iPhone subsidies may find the company’s profit protection offensive, but they are not likely to speak up too loudly since they have recently avoided billions in federal taxes. During the recession, Verizon received $12.3 billion in federal tax subsidies and AT&T benefitted from $14.5 billion worth of tax breaks, according to Citizens for Tax Justice and the Institute on Taxation and Economic Policy.
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