Fallout from Apple could be serious for Ireland

Over the duration of roughly two hours that Apple executives testified before a Senate hearing on Tuesday about its aggressive tax structures, “Ireland” was mentioned 37 times and “Irish” 29 times.

“Tax haven” was mentioned just three times during that panel discussion, but at a high profile hearing like this – attended by the chief of a $415 billion company whose iPhones, iPads and Mac computers are among the world’s most popular consumer products – Ireland’s reputation took a major hit.

Prior to the arrival of Apple chief executive Tim Cook and his fellow executives at the hearing room in the Dirksen building on Capitol Hill, the chairman of the Senate panel Carl Levin did not hold back.

He used the term “tax haven” more than a dozen times during a session with tax experts, outlining how Apple had used three Irish subsidiaries to shelter $74 billion in international profits from US taxes over the past four years and house a cash hoard of $102 billion that is also exempt from US taxes.

The unwelcome spotlight was on how Ireland allowed Apple, a company with operations in the country since 1980, to avoid paying billions of dollars in US taxes. Levin estimated that it was $9 billion in 2012 alone.

The Democrat from Michigan turned the knife for political purposes, pointing out that Apple’s “offshore tax gimmicks” were taking place at a time when US government budgets were being cut, American children were going uneducated and “needy” elderly people were going without meals.

The spotlight shone on Tuesday presented Ireland in an unquestionably ugly light. The timing was also terrible for Ireland, falling as European leaders meet to discuss tax evasion and ahead of the G8 summit of the eight richest countries at which British prime minister David Cameron plans to raise the tax practices of multinationals as a topic of discussion.

Tax loopholes
Should America tighten the rules on how US companies operate overseas, be they tax-based laws or otherwise, the expectation is that the ramifications would be felt very strongly in Ireland.

The real threat to Ireland from this week’s Senate hearing is not specifically from the closure of tax loopholes that Apple is funnelling tens of billions of dollars in worldwide profits through at an Irish rate of 2 per cent or less.

It could come from radical changes to America’s antiquated, costly and overcomplicated tax code that is out of kilter with the competitive forces of international business.

Unapologetic over Apple’s sharp tax-slashing strategies, Cook told lawmakers on Tuesday that US tax laws had failed to keep up with the digital age. The tax code had to be dramatically simplified, corporate taxes had to be lowered and a “reasonable” tax had to be introduced – a single-digit figure as opposed to the existing rate of 35 per cent – on money repatriated back from places such as Ireland.

Apple’s tax strategy had a big fan in Republican Senator Rand Paul from Kentucky, a favourite of the far-right Tea Party movement. The problem was not with what Apple was doing but that legislators were constraining US businesses from competing internation- ally by setting US taxes too high.

Permanent changes
"Look in the mirror and let's make the tax code better, fairer and more competitive worldwide," he said. "Money goes where it's welcome. Currently, our tax code makes money not welcome in this country."

Money was made welcome again in the US under then president George W Bush when he allowed American firms repatriate profits from overseas at a once-off low rate of 5 per cent, rather than 35 per cent in 2005 and 2006. That had little or no evident material impact on the Irish operations of US multinationals.

But Apple wants permanent changes. “It’s very important for business to be predictable, and a permanent change to me is materially better than a short-term tax holiday,” said Cook.

It is not clear what effect a radical change in US tax laws would have on American corporate outposts in Ireland or on the level of money pumped into Irish operations by American multinationals.

US investment in Ireland is significant. About 600 companies employ around 100,000 people in the country, including Apple’s workforce of almost 4,000 in Cork. US companies have invested $188 billion in foreign direct investment in Ireland, representing 8 per cent of all US investment in the EU and more than all the US money invested directly in the growth markets of Brazil, Russia, India and China.

Sweeping changes
One saving grace for Ireland is that Apple said Ireland was more than just a location to base a holding company to shield tens of billions of dollars in profits. The company's Irish staff in Cork had built up a significant skill base of people who "really understand deeply the European market".

Growing deeper roots in Ireland is the same story for many US multinationals who have established more than just treasury units in the country and this, more than anything else, could protect American-owned Irish operations from any sweeping changes to tax laws that may come back in Washington.

The latest revelations about the use of Ireland for aggressive tax-slashing US multinationals are unlikely to prove a tipping point for foreign direct investment into Ireland. But the Senate hearing should force Ireland to make its case more strongly that it is much more than just a tax shelter.