By Tom Bergin
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 has revealed 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".
Apple revealed on Tuesday that the arrangements dated back
over 30 years and had been negotiated with Ireland's government,
which has long angered European peers such as France and Germany
by helping multinationals to avoid paying tax on sales its makes
to their citizens in their domestic markets.
Apple's annual reports show that over the past three years,
Apple paid taxes worth 2 percent of its $74 billion in overseas
Apple channels most of its overseas sales through three
companies which are incorporated in Ireland but tax resident in
no jurisdiction. U.S. rules that allow companies incorporated
abroad not to pay U.S. taxes complement that arrangement.
Apple tax head Phillip Bullock told the U.S. Senate
Permanent Subcommittee on Investigations on Tuesday that one of
these three subsidiaries, Apple Operations International (AOI),
had not submitted a tax return anywhere for five years.
All three were registered in Ireland in 1980 and
reregistered as unlimited companies in 2006, which means under
Irish law that they do not have to publish annual accounts, so
the subcommittee's report was the first time the current
structure had been publicly revealed.
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 it is legal.
Apple relies for its tax benefits on contrasting 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 in Ireland 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.
Apple told the subcommittee that AOI's assets are managed by
employees at an Apple subsidiary, Braeburn Capital, located in
Nevada, while its assets are held in bank accounts in New York,
and its primary accounting records are maintained at Apple's
U.S. shared service centre in Austin, Texas.
Despite this, AOI did not have tax residency in the United
States, because, said Lyn Oates, professor of tax and accounting
at the University of Exeter Business School, the United States
determines tax residence on the place of incorporation only.
Britain also used to allow companies to be incorporated
there without being tax resident, but changed its system over 20
years ago, to stop tax avoidance, said Penelope Tuck, Associate
Professor of Public Finance and Policy at the University of
Ireland did not change its rules, probably because there was
not the same concern about the loss of tax revenues, said
Professor Eamonn Walsh, Professor of Accounting at University
College Dublin's Graduate School of Business.
Ireland's small population of 4.6 million means
multinationals generate relatively little by way of sales or
"From a policy point of view, people are more concerned with
the idea that high-paid jobs are being delivered to the local
economy," Walsh said.
Apple's Chief Executive Tim Cook told a hearing of the
subcommittee on Tuesday in Washington that Apple was attracted
to Ireland in 1980 at a time when the country offered incentives
to technology companies as it tried to build an industrial base.
Over the years, the structures Apple uses have evolved but
it appears the support of the Irish government has continued.
"Since the early 1990s, the government of Ireland has
calculated Apple's taxable income in such a way as to produce an
effective rate in the low single digits," Apple tax chief
Bullock told the subcommittee in earlier testimony.
A Reuters analysis of Apple's annual reports shows that it
was in the late 1990s that Apple's overseas tax rate really
began to hit rock bottom, after the United States began to let
firms avoid U.S. tax on overseas earnings in what became known
as the "check-the-box" (CTB) loophole.
From 1993 to 1995, the three years before CTB emerged, Apple
had an effective overseas tax rate of 16 percent. After this the
rates plummeted and averaged 2 percent in the past three years.
One former official with the Irish Development Authority,
which had the task of enticing foreign companies to invest in
Ireland, said that after the introduction of CTB in the United
States firms began to demand lower tax deals in Ireland.
While the Senate subcommittee referred to Apple negotiating
tax rates of below 2 percent, Ireland usually facilitates low
tax payments not by undercutting its headline corporate tax rate
of 12.5 percent but by allowing companies to declare low taxable
profits - often by making deductions for payments to tax-exempt
affiliates, usually offshore.
Ireland said the low tax payment was not its fault and
blamed other countries' tax legislation.
Apple's exact arrangements in Ireland have changed over the
Up until 2004 or later, the three Apple companies were
assessed for taxation in Ireland, although the declared profits
were much lower then.
In 2004, ASI declared a profit of $325 million and paid
Irish tax of $21 million, its accounts from the time show.
In 2011, according to the subcommittee's report, ASI earned
$22 billion and paid just $10 million in "global taxes".
Apple's retail units in France, Germany and Britain purchase
goods from the Irish units. The prices are set at levels that
ensure these units in bigger states do not report much profit.
This means the company avoids tax on sales in its bigger
In 2011, the last year for which accounts are available,
Apple Retail UK Ltd reported profits of 31 million pounds on
sales of 860 million pounds and paid tax of 9 million pounds.
In the same year, Apple Retail France reported a loss of 21
million euros on sales of 346 million euros and paid income tax
of 7 million euros.
Apple Retail Germany reported a 4-million euro loss on sales
of 174 million euros and paid no income tax.
Other jurisdictions also offer tax advantages like Ireland.
Online retailer Amazon.com Inc, for example, pays
low taxes 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, or little
taxed, affiliates for the use of intellectual property such as
brands and business processes.
The Group of 20 leading nations has asked the Organisation
for Economic Co-operation and Development think-tank to look at
such 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.