The Irish loophole behind Apple's low tax bill
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 tax head Phillip Bullock told the Senate Permanent Subcommittee on Investigations on Tuesday that one of those companies, Apple Operations International (AOI), though it was functionally managed in the United States, had not submitted a tax return anywhere for five years.
It is not clear if the tax status of AOI was part of the negotiations with the Irish government through which Bullock told the committee that, "under the agreement we have with Ireland", Apple paid a maximum tax rate of 2 percent or less.
Apple's annual reports show that over the past three years, Apple paid taxes worth 2 percent of its $74 billion in overseas income.
AOI, along with 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, Apple told the Senate subcommittee.
Apple designated the entities as unlimited companies, which means under Irish law that it does not have to publish annual accounts, so the subcommittee report was the first time the 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 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.
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 the system over 20 years ago, to stop tax avoidance, said Penelope Tuck, Associate Professor of Public Finance and Policy at the University of Warwick.
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 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," Walsh said.
Walsh said other jurisdictions also offered similar tax advantages.
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, 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.