Hardly a week passes these days without Ireland featuring in a controversy about aggressive tax planning by one of the world’s biggest multinationals.
In most instances the companies concerned are 21st century technology companies, ones in which intellectual property (IP) plays a key role.
Because the US has one of the highest corporation tax rates in the world, companies like Google, Facebook, Apple and Microsoft have set up headquarter operations outside the US to oversee their sales in Europe, the Middle East, Africa, and Asia. Many have chosen Ireland for their non-US HQ, thereby creating thousands of jobs here and contributing hugely to Ireland's corporation tax take.
However, these companies have also set up structures to hold certain IP rights outside the US. The Dublin HQ operations are then charged by the companies that hold the IP rights for the right to sell the associated product. In this way the profits from non-US/Americas sales flow from the Irish HQ onwards to the IP holder. Because of its nature, the IP holder can be located just about anywhere.
An obvious place to locate the IP holder is a no-tax jurisdiction such as Bermuda or the Cayman Islands. However, multinationals dislike listing tax haven operations on their filings to the Security and Exchange Commission, according to one source with knowledge of the issue. What many have opted to do is to transfer the IP to an Irish subsidiary.
Irish tax law says a company is tax resident here if it is managed and controlled here. So an Irish IP holding company that has no management here and holds its board meetings in a tax haven provides a channel through which a multinational’s non-US profits can end up being banked, untaxed, offshore.
The aggressive tax policies being pursued by many of the world’s largest companies are creating pressure for action in the US. If in time some measure is introduced to prevent companies using offshore havens, then the next best place to have to pay tax on the IP income may well be Ireland, with its 12.5 per cent tax rate.
There is a third advantage to locating an IP holding company in Ireland. Because companies such as Google and Apple have real business operations here, employing thousands of people, the separate, tax-driven nature of the IP holding company gets partially camouflaged.
Finally, Ireland has developed a reputation as a safe and efficient place in which to base your IP holding company as part of a global tax structure.
The memorandum issued by the US Senate permanent subcommittee on investigations yesterday details how Apple transferred certain rights, including IP rights, to three Irish companies; Apple Sales International (ASI), Apple Operations Europe (AOE), and Apple Operations International (ASI), all of which have registered addresses in Cork but hold their board meetings in the US.
ASI buys finished product from a Chinese manufacturer and resells it at a profit to other Apple companies in jurisdictions outside the Americas without ever taking physical possession of the product. The resulting profit flow to Ireland in the 2009 to 2012 period was a phenomenal $74 billion. Because ASI is not managed and controlled in Ireland, it is not tax resident here. In fact, it is not tax resident anywhere. This is because the US taxes companies on the basis of where they are registered as against where they are managed from.
The committee says that "for many years" Ireland has "provided Apple affiliates with a special tax rate that is substantially below" Ireland's 12.5 per cent rate and that Apple executives told it the rate was "obtained through negotiations with the Irish government".
The Revenue Commissioners has said it does not agree special rates with any companies or individuals.
It is the case that multinationals and individuals can show to the Revenue schemes or structures they have put in place to manage their affairs, and receive an indication that Revenue believes they are legitimate. In this way the businesses can receive comfort that they will not be served with huge, unforeseen tax bills years down the line. Whether this is what the Apple executives are referring to remains unclear.