Aug 30th, 2012 by Donagh
The Double Irish
In the late 1980s, Apple was among the pioneers in creating a tax structure — known as the Double Irish — that allowed the company to move profits into tax havens around the world, said Tim Jenkins, who helped set up the system as an Apple European finance manager until 1994.
Apple created two Irish subsidiaries — today named Apple Operations International and Apple Sales International — and built a glass-encased factory amid the green fields of Cork. The Irish government offered Apple tax breaks in exchange for jobs, according to former executives with knowledge of the relationship.
But the bigger advantage was that the arrangement allowed Apple to send royalties on patents developed in California to Ireland. The transfer was internal, and simply moved funds from one part of the company to a subsidiary overseas. But as a result, some profits were taxed at the Irish rate of approximately 12.5 percent, rather than at the American statutory rate of 35 percent. In 2004, Ireland, a nation of less than 5 million, was home to more than one-third of Apple’s worldwide revenues, according to company filings. (Apple has not released more recent estimates.)
Moreover, the second Irish subsidiary — the “Double” — allowed other profits to flow to tax-free companies in the Caribbean. Apple has assigned partial ownership of its Irish subsidiaries to Baldwin Holdings Unlimited in the British Virgin Islands, a tax haven, according to documents filed there and in Ireland. Baldwin Holdings has no listed offices or telephone number, and its only listed director is Peter Oppenheimer, Apple’s chief financial officer, who lives and works in Cupertino. Baldwin apples are known for their hardiness while traveling.
Finally, because of Ireland’s treaties with European nations, some of Apple’s profits could travel virtually tax-free through the Netherlands — the Dutch Sandwich — which made them essentially invisible to outside observers and tax authorities.
Robert Promm, Apple’s controller in the mid-1990s, called the strategy “the worst-kept secret in Europe.”
It is unclear precisely how Apple’s overseas finances now function. In 2006, the company reorganized its Irish divisions as unlimited corporations, which have few requirements to disclose financial information.
However, tax experts say that strategies like the Double Irish help explain how Apple has managed to keep its international taxes to 3.2 percent of foreign profits last year, to 2.2 percent in 2010, and in the single digits for the last half-decade, according to the company’s corporate filings.
Apple declined to comment on its operations in Ireland, the Netherlands and the British Virgin Islands.
Apple reported in its last annual disclosures that $24 billion — or 70 percent — of its total $34.2 billion in pretax profits were earned abroad, and 30 percent were earned in the United States. But Mr. Sullivan, the former Treasury Department economist who today writes for the trade publication Tax Analysts, said that “given that all of the marketing and products are designed here, and the patents were created in California, that number should probably be at least 50 percent.”
If profits were evenly divided between the United States and foreign countries, Apple’s federal tax bill would have increased by about $2.4 billion last year, he said, because a larger amount of its profits would have been subject to the United States’ higher corporate income tax rate.
“Apple, like many other multinationals, is using perfectly legal methods to keep a significant portion of their profits out of the hands of the I.R.S.,” Mr. Sullivan said. “And when America’s most profitable companies pay less, the general public has to pay more.”
Other tax experts, like Edward D. Kleinbard, former chief of staff of the Congressional Joint Committee on Taxation, have reached similar conclusions.
“This tax avoidance strategy used by Apple and other multinationals doesn’t just minimize the companies’ U.S. taxes,” said Mr. Kleinbard, now a professor of tax law at the University of Southern California. “It’s German tax and French tax and tax in the U.K. and elsewhere.”
One downside for companies using such strategies is that when money is sent overseas, it cannot be returned to the United States without incurring a new tax bill.
However, that might change. Apple, which holds $74 billion offshore, last year aligned itself with more than four dozen companies and organizations urging Congress for a “repatriation holiday” that would permit American businesses to bring money home without owing large taxes.
The US Tax Justice advocacy group Citizen’s For Tax Justice shows that according to Apple’s accounts 90% of this $74 billion cash pile is not taxed by any government. CTJ make the point that the loss of tax revenue not only means that the burden of taxation to pay for social needs falls on the rest of US citizens, it also means that the tax gap must also be filled in each of the countries where Apple operates by the citizens of those countries, including Ireland.
Nicholas Shaxson, in an interview with Ceasefire last year made this point very well.
We need to get away from this idea that tax is simply a cost. Tax is a distribution to society, out of profits. It is a payment in exchange for services provided that allow them to make those profits – the healthy and educated workforces, the infrastructure, the guarantee of contracts and the rule of law – and so on.
Those companies that engage in tax avoidance are engaging in economic free riding – they are taking the benefits from a country without paying for it. This is not only unfair, but it is economically harmful, undermines respect for the rule of law, and distorts markets.
But there is also something else going on in the case of Ireland. If we are not interested in collecting tax on the money that Apple funnels through Ireland - and we can’t be because the structure is put in place to ensure that we have absolutely no idea how much money passes through here, so its impossible to calculate what they are liable for - we have to ask why we do provide this amazingly generous facility which was originally designed by Apple and other large MNCs such as Microsoft who have been using Ireland in this way for years.
PRETAX PROFITS at Microsoft’s main Irish subsidiary fell by 58 per cent last year to €593 million despite an 18 per cent jump in revenues to €13.37 billion.
The increase in revenues was offset by MIOL’s cost of sales increasing from €770 million to €1.15 billion, while administrative expenses jumped from €9.13 billion to €11.61 billion.
Clearly the number of jobs that are created is also small, as Conor has highlighted on Dublin Opinion before. The Central Bank of Ireland also confirms this, as Sheila Killian pointed out recently while bringing attention to Mary Everett’s comment in the CBoI’s Quarterly Bulletin published in April 2012:
“While these types of companies have large balance sheets, their contribution to the local economy in terms of employment tends to be limited.”
Also, very little of the Corporation tax that is paid by MNC comes from economic activity that occurs in Ireland. However, those who are consistently benefiting - get paid - are those who advise these companies about Irish regulation and legislation and in many case actually draft it. Why else would Irish industrial policy consistently rely almost completely on the ‘unique’ qualities of Ireland’s taxation system, which despite the denials, is only real reason why FDI is attracted here. After all, it’s qualities are the worst kept secret in Europe. If that was not the case why, repeatedly, would Irish politicians insist that it’s really important to protect the stability of the tax regime (that is, one that remains free of any outside interference or to make it accountable) otherwise all that FDI would leave Ireland.