Getting to the core of Apple’s tax strategy

How did Apple’s ASI unit in Cork manage an effective tax rate of less than 1 per cent on billions of dollars in annual sales?

 Minister for Finance Michael Noonan: announced in the last budget that he would close the taxation loophole as and from 2015.  Photograph: Eric Luke

Minister for Finance Michael Noonan: announced in the last budget that he would close the taxation loophole as and from 2015. Photograph: Eric Luke

Sat, Mar 8, 2014, 01:00

The Government and Apple have come under public pressure following the publication by this newspaper yesterday of figures illustrating the relatively tiny amount of corporation tax paid by the electronics giant’s Irish subsidiaries.

The easiest way to get to the core of how Ireland fits into Apple’s Byzantine tax strategy is to use a simple example of how the system works in practice.

A customer in a European or Asian country – let’s say Germany for argument’s sake – orders an iPhone from their network operator, who then relays the order to the local German Apple distributor.

The order eventually finds its way to the iPhone factory in China. The factory sells the phone on paper, not to the local distributor, but to Apple Sales International (ASI) in Cork.

ASI then resells the phone at a hefty mark-up to the German distributor. The phone is shipped from China to Germany without ever touching Irish soil. The German Apple distributor pays a high price for the phone, so makes little by way of profits to be taxed by the German exchequer.

ASI in Cork emerges from the transaction without ever having handled the merchandise, but it makes a much larger profit because it bought low and sold high. By exploiting quirks in both US and Irish corporate tax laws, ASI is not considered tax-resident anywhere, so it pays a pittance in corporate taxes on its hefty profit. All of this is perfectly legal.

Until now, ASI has managed to shield the true scale of its involvement in Apple’s corporate tax avoidance because it is an unlimited company. This means it does not have to file detailed accounts to the Companies Registration Office in Dublin.

When a US Senate subcommittee grilled Apple last May on its tax avoidance scheme, the subsequent report redacted the bulk of ASI’s financial performance at Apple’s request, due to commercial sensitivity.

But owing to another strange quirk of corporate law, this time in Australia, the mask slipped a little this week.

Australian Financial Review reported that over a decade Apple had shifted an estimated nine billion Australian dollars (€6 billion) of profits, derived from Apple products sold in that country, to ASI in Cork.

AFR based its estimate on financial statements for ASI that, seemingly unknown to anybody outside of Apple or Australia, were filed between 2000 and 2009 with the Australian Securities and Investments Commission. The requirement to file the Irish subsidiary’s accounts with the ASIC apparently arose because ASI does business in Australia with sister companies that are tax-resident there.

The Irish Times then obtained ASI’s accounts for several years up to 2009, the final year for which they were available. The figures lay bare the true extent of the free ride afforded to companies such as Apple by the myriad loopholes in corporate tax law.

In 2009, ASI, which at the time had no registered employees, made a profit of $4 billion. It paid the authorities in Ireland – its home country – about $3.6 million in corporation tax. That is an effective tax rate of less than one-tenth of a per cent. In 2008, it paid $14.9 million on profits of $3.1 billion. It is a similar story for each of the years for which this newspaper obtained accounts.

When it first emerged in the US last May that three of Apple’s Irish units, including ASI, were “stateless” for tax purposes, the Government was shamed into action. Minister for Finance Michael Noonan announced in the budget he was closing the loophole, starting from 2015.

Ostensibly, this should have thrown Apple’s international tax strategy into turmoil. The “stateless” rule has saved the company billions of dollars in taxes in recent years and has surely had a material impact on its financial performance.

It would not have been surprising if, given the apparent implications of Noonan’s actions, the company had at least issued a statement to its shareholders assuring them all is well, and it is looking at alternatives to protect profitability.

To date, there has been nothing from the company on that front, which raises the question as to whether Apple has any real concerns at all about the closing of the loophole. Interestingly, in ASI’s financial statements, the issue of the company’s stateless status is not even mentioned until 2009.

Mystery adjustment
In the previous years, it always based its corporation tax calculations on Ireland’s 12.5 per cent rate. It then applied an unexplained adjustment for “tax charged at lower rates”.

The Government has always strenuously denied there is a special tax rate in Ireland for Apple, even though the company said this to the US senate subcommittee. Apple declined to shed any light on the issue yesterday.

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