LONDON May 21 Apple's ability to
shelter billions of dollars of income from tax has hinged on an
unusual loophole in the Irish tax code that helps the country
compete with other countries for investment and jobs.
A U.S. Senate investigation revealed on Monday that Apple,
maker of iPhones, iPads and Mac computers, had channelled
profits into Irish-incorporated subsidiaries that had "no
declared tax residency anywhere in the world".
Over the past three years, the American company paid a tax
rate of 2 percent on $74 billion in overseas income, its annual
Apple Operations International (AOI), Apple Sales
International (ASI) and Apple Operations Europe, through which
much of the group's overseas income flows, are all incorporated
in Ireland but are not deemed to be tax resident there, the
Senate's Permanent Subcommittee on Investigations said.
Apple designated the entities as unlimited companies, which
means it does not have to publish annual accounts, so the
subcommittee report was the first time the structure has been
Peter Vale, tax partner at accountants Grant Thornton in
Dublin, said it was unusual for companies incorporated in
Ireland not to be tax resident there, but legal.
It relies for its tax benefits on different approaches to
determining tax residence in Ireland and the United States.
Vale said that if a group has at least one trading Irish
subsidiary - as Apple does, in the form of units that employ
4,000 staff - it can establish a corporation that will not be
deemed tax resident providing this unit's "central management
control" is outside the country.
The subcommittee said AOI and ASI held board meetings in the
United States and most board members were based there. That
means the units would not be deemed to have Irish management
control, accountants said.
However, the fact board meetings occurred in California did
not create a U.S. tax residency because the United States
determines tax residence on the place of incorporation only,
said Lyn Oates, Professor of Tax and Accounting at the
University of Exeter Business School.
The United Kingdom also used to allow companies to be
incorporated in Britain without being tax resident here, but
changed the system over 20 years ago, to stop tax avoidance,
Penelope Tuck, Associate Professor of Public Finance & Policy at
the University of Warwick said.
Ireland didn't change its rules, likely because there was not
the same concern about the loss of tax revenues, said Professor
Eamonn Walsh, Professor of Accounting at the University College
Dublin's Graduate School of Business.
Ireland's small population means multinationals generate
relatively little by way of sales or profits there.
"From a policy point of view, people are more concerned with
the idea that high-paid jobs are being delivered to the local
economy," he said.
Walsh said other jurisdictions also offered similar tax
Online retailer Amazon.com Inc, for example, pays
low tax rates on its overseas income by channelling European
sales through a Luxembourg-based company that makes untaxed
payments worth hundreds of millions of euros each year to a
tax-exempt partnership, also resident in Luxembourg.
Web search giant Google pays low taxes by
channelling overseas sales through an Irish unit that pays most
of its income to an affiliate in Bermuda.
The schemes used by all three companies work by arranging
for the units that make sales to customers in Europe and
elsewhere to make tax-deductible payments to untaxed affiliates
for the use of intellectual property such as brands and business
The Group of 20 leading nations have asked the Organisation
for Economic Co-operation and Development think-tank to look at
corporate profit shifting, and one area it is examining closely
is such payments for intangible assets.
The companies say they follow the tax rules in all the
countries where they operate.