iTunes profits outside Nth America are largely untaxed

A leak of Luxembourg tax documents from 2011 has provided an insight into how Apple accounts for its earnings from digital content.

It has been revealed that more than two-thirds of Apple’s iTunes profits made outside of North America flow through the company’s Luxembourg holding company iTunes Sàrl, where they’re non-taxable.

According to AFR, an investigation led by the International Consortium of Investigative Journalists uncovered the accounts that show Luxembourg has been more effective in extracting tax from iTunes than Ireland has with much larger Apple sales.
This is despite the fact that Apple pays less that one per cent tax in Ireland on sales of its products.

The period between 2009 and 2013 saw the turnover for iTunes Sàrl explode from €353 million ($508 million) to €2.05 billion. Secret appendices to the 2011 accounts break down some of Apple’s costs, demonstrating that it takes a third of iTunes’ revenues as its gross profit margin. The 2011 numbers showed that a flat 50 per cent of this gross profit was paid in intercompany charges.

iTunes Sàrl reported in 2009 that it had “entered into a marketing services agreement with an affiliated company” that was separate from the marketing costs paid to third parties by iTunes.

These party related charges represent 66% of the earnings of iTunes Sàrl. The holding firm earned €90 million of taxable income in 2011, and paid €26.6 million tax to Luxembourg. By 2013 however, tax dropped to €20 million even though sales doubled.

Even with the amount of information discovered, the iTunes accounts do not disclose other revenue from Apple digital content, which would see the real tax rate reduced even further. Ireland has announcement that it will end the “Double Irish” tax loophole which allowed Apple to report US$16 billion ($18.5 billion) non-US profits virtually tax free in 2013, but a six-year grandfathering clause (where old rules apply to some existing situations, while a new rule will apply to all future cases) given to the company could still keep $US96 billion in earnings tax free.