How Ireland may have helped Apple cut its tax bill a second time

The tax residency of the three Irish-incorporated Apple subsidiaries that have led to Ireland’s €13 billion State aid dispute with the European Commission can now be revealed for the first time.

Documents in the Paradise Papers show that two of the subsidiaries took up residency in Jersey in December 2014, and an informed source has confirmed to The Irish Times that the third of the controversial subsidiaries is now tax resident in the Republic.

Between them these companies accounted for the bulk of Apple’s sales outside of the Americas. They had the rights to use the corporation’s intellectual property (IP) in Europe, Africa, Asia, India, the Middle East and the Pacific. The value of those rights is understood to be in the region of $200 billion (€172 billion).

Since hearings held in Washington DC in 2013 it has been known that while Apple Inc was responsible for Apple sales in the Americas, a company based in Cork called Apple Sales International (ASI) was responsible for sales in Europe, the Middle East, Africa, India, Asia and the Pacific.

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While Apple Inc was the sole owner of the tech giant’s IP, ASI and its immediate corporate parent, Apple Operations Europe (AOE), also based in Cork, had the economic rights to the IP outside the Americas.

Stateless

In 2013 ASI was owned by AOE, which was in turn owned by Apple Operations International (AOI), a holding company which was also an Irish incorporated company with the same Cork address as the other two. Bizarrely, these three companies were “stateless” when it came to tax residency.

Over the period 2009 to 2012, ASI made profits of $74 billion, but paid little or no tax. It sent some of this money by way of dividend to its parent, AOE, which also had no tax residency. AOI, which made a profit of $30 billion between 2009 and 2012, also paid no tax to any government.

As a result of its extraordinary global sales and IP structure, the richest and most profitable company in the world was stashing unimaginable amounts of cash in bank accounts which, as long as it was nominally not returned to the United States, would remain untaxed. As of last week, this cash stash stood at $252 billion. Much of this money has travelled via Hollyhill Industrial Estate, Cork.

Ireland’s tax arrangements with AOE and ASI are now the subject of a state aid dispute with the European Commission, which wants Apple to pay back taxes of €13 billion, plus interest to the Irish Government. Meanwhile, as of January 1st, 2015, no Irish incorporated company can be stateless in the way the Apple ones were. Notice that this change was coming was given by the then minister for finance, Michael Noonan, in October 2013.

Leaked data from the Appleby offshore law firm, sourced by Süddeutsche Zeitung and shared with the International Consortium of Investigative Journalists, of which The Irish Times is a member, contains new information as to what has happened to the once "stateless" Apple subsidiaries since Noonan's announcement.

In March 2014, US lawyers Baker & McKenzie in San Francisco asked Appleby to tell it what the requirements were for registering Irish-incorporated companies in a number of offshore locations. By December, the leaked files show, formerly stateless ASI and AOI had been registered as foreign companies in Jersey. The Irish Times has learned that AOE, meanwhile, took up tax residency in Ireland.

According to a source with knowledge of Apple’s new structures, AOI, the now Jersey-resident holding company, earns interest on its cash pile. This interest is subject to US tax on a current or ongoing basis.

ASI, which was responsible for selling Apple products across the world outside the Americas, has been a dormant company since the end of its 2014 financial year (late September 2014), and is being kept alive only for the purposes of fighting the European Commission’s state aid allegations.

AOE has become tax resident in Ireland. All Apple’s Irish operations are now conducted through Irish-resident companies, according to the source.

Unlimited companies

Apple’s main Irish companies are all unlimited, which means they do not have to file accounts for public inspection.

Therefore it is not clear whether the massive sales and profit flows that used to travel through Apple’s Cork subsidiaries still do. However, it is obvious the profit flows through Ireland remain substantial.

A spokesman for Apple has told The Irish Times that the corporation paid $1.5 billion [€1.27 billion] in corporation tax here in the years 2014 to 2017. But as it is already known that the Irish operations paid $400 million in Irish corporation tax in 2014, when the Irish subsidiaries' "stateless" tax residency was still in force, that $1.5 billion figure does not indicate a quantum leap in taxable Irish profits in the period from January 1st, 2015.

Another issue that is not clear is who has the hugely valuable rights to the IP once held by now-dormant ASI, along with its one-time parent, AOE. (ASI is now owned directly by AOI.)

What is clear is that multinational IP generally has been flooding into the Republic. Changes in the global environment in relation to multinational taxation have seen billions of euro of multinational IP migrating from offshore to Ireland, causing a huge growth in the value of our national stock statistics (and significantly increasing Ireland’s annual contribution to the EU’s budget, which is determined by the size of our economy).

We don’t know if the Apple IP is part of that bulge. The Apple spokesman declined to comment when asked. But experts who have closely monitored Apple, and who were briefed on the new information on the tax residency of the three formerly stateless Irish subsidiaries, believe it is probable that the IP formerly held by these companies now resides in Ireland, most likely with AOE.

Companies can get credits against tax for certain types of capital expenditure even when the expenditure involves buying IP or other qualifying assets from a company within the same group.

Theoretically, if one Apple company pays another €100 billion for IP, then the one doing the selling gets a tax bill, and the one doing the buying gets a capital allowance, and so they balance out.

But if the company selling the IP is based in zero-tax Jersey, and the one doing the buying is based in Ireland, then a massive tax allowance can be created, at zero cost.

Capital allowances

Furthermore, changes made to Ireland’s capital allowances regime in 2014 mean multinationals can use these allowances to greater effect than hitherto.

Capital allowances work in the following way: if you pay €100 for a bicycle which you then use to make a profit of €10 a year, you can write off the cost of the bicycle against your annual profits, for the purpose of your tax bill.

Up to 2014, you could write off only 80 per cent of your profit using capital allowances. So, in the bicycle example, you could use the allowances against only €8 of your profit, and you had to pay tax on the remaining €2. This cap on the amount of profit that could be used in any year for capital allowances purposes meant the State got some tax from you each year, and it took longer for you to use up your capital allowance.

In 2014, Noonan, announced that he was going to increase the amount of profit against which capital allowances could be used each year, to 100 per cent. The removal of the 80 per cent cap meant the bicycle owner would not have to pay any tax on the annual €10 profit, and the €100 in capital allowances would be used up in 10 years rather than 12½.

Earlier this year, following a report on the matter by economist Seamus Coffey, Minister for Finance Paschal Donohoe reversed Noonan’s move, and reintroduced the 80 per cent cap. However, he decided that the restored cap would apply only to new expenditure, after midnight, October 11th, 2017 – budget day. So the cap does not apply to expenditure prior to that date.

Therefore if Apple, as many suspect, moved its IP to Ireland in late 2014/early 2015, it can use its capital allowances to ensure that its formerly “stateless” profits remain entirely untaxed.

If what many suspect has happened is indeed the case then, once again Ireland has helped one of the most profitable corporations in the world maintain its global tax bill at extraordinarily low levels.

The Apple spokesman did not respond when invited to comment on the above-outlined scenario.