Wednesday, May 22, 2013

A special rate for Apple?

Much of the focus here on the tax arbitrage strategy of Apple concerns the issue of whether Apple has negotiated a special 2% corporate tax rate in Ireland.  The case study on Apple in the report for Senators Levin and McCain begins:

“The Apple case study examines how Apple Inc., a U.S. corporation, has used a variety of offshore structures, arrangements, and transactions to shift billions of dollars in profits away from the United States and into Ireland, where Apple has negotiated a special corporate tax rate of less than 2%.”

This is based on information provided by Apple to the US Congress Permanent Subcommittee on Investigations.  The information is made available as part of the exhibits for yesterday’s hearing.  The following is on page 65 (of the pdf) based on an exploratory question put to the company by the committee.

4. What factors contribute to Apple's 4% effective tax rate in Ireland?

Due to Ireland’s  overall attractive business environment, Apple has operated in Cork, Ireland since the 1980’s and continues to use Ireland as its principal base of operations in Europe, including for some manufacturing and logistics; sales, accounting and finance; after sales support; and other functions. Apple has grown its operations in Ireland to include approximately 2,700 employees and recently announced Apple's intention t0 add 500 new jobs to the Cork facility and expand Apple's campus with an additional owned building.

Since the early 1990's, the Government of Ireland has calculated Apple's taxable income in such a way as to produce an effective rate in the low single digits, and this is the primary factor that contributed to Apple's rate. The rate has varied from year to year, but since 2003 has been 2% or less. This result is similar to incentives made available by many U.S. states and other countries to entice investment in their jurisdictions.

Nothing about a special rate only a reference to how Apple’s taxable income is calculated.  Nothing about a deal when Apple first came to Ireland in 1980 though the following is an exchange from yesterday’s committee hearing (3:21:20 in the video here).

Sen. McCaskill (D): Let’s assume we simplify this.  Ireland gave you a two percent rate which was negotiated for your company. Correct?

Tim Cook (Apple): We went to Ireland in 1980 and they were very much, I believe, recruiting technology companies at that time.  Apple was a small hundred-million-dollar business that had no operations in Europe. And so as a  part of recruiting us the Irish did give us a tax incentive agreement to enter there and since then we have built up a sizable operation there, nearly 4,000 people; we’re building a new site; we’re continuing to grow…

So there was a “tax incentive agreement” in 1980 but it is not clear what this was.  Back in 1980 Ireland had a dual rate of corporation tax.  That is, there was the standard rate of the tax which at the time was 45%,  but there was also the 10% reduced rate that applied to “manufacturing sectors” (and later some financial services through the creation of the IFSC). 

It is not clear but the application of the lower rate could be the “tax incentive agreement” referred to by Cook.  The lower rate was later abolished following a European Commission ruling that it was a “favourable exemption”. This required a moved to a single rate of corporation tax and the standardisation at the 12.5% rate which only happened in 2003.

Cook does not answer the direct question about the special 2% rate supposedly negotiated for Apple but it is unlikely that such a deal was struck. 

There was, it seems, a change in the early 1990s in how taxable income is calculated but such provisions apply to all companies.   That is not to say that Apple and other companies did not lobby for such a change.  They probably did.  But the implication has been that the “special” rate implies something unique for Apple.  Ireland is not a discriminatory low-tax, business friendly economy.  We’ll be equally business-friendly to any company.  Maybe it is Apple itself that needs to feel “special”.

Anyway, here are the only two construction cranes in Cork.

2013-05-21 10.01.47


  1. Thanks Seamus. Do you think the Irish tax regime is sustainable? And if not, what then?

    1. Hi Patrick,

      Nothing lasts forever. But in saying that I do not expect significant changes for a decade or more. The US may try to make it easier for their companies to repatriate global profits but even with recent noises from the Senate I cannot see that happening before the end of the current administration.

      The US doesn't really want to change the low- or no-tax outcomes that the tax arbitrage strategies of companies like Apple achieve. They want to maintain that but find some way of encouraging/forcing the repatriation of the profits so the 35% US corporate tax rate can be levied.

      At present the companies are (indefinitely) deferring this by keeping the money offshore - though I do question the legitimacy of Apple claiming their holding companies are tax resident nowhere. Something could be done to tighten up on that quickly.

      When people talk of Apple using this scheme to avoid €X billion of tax it should be noted that it is US tax that is being referred to and that the tax liability is being deferred rather than avoided. Apple has a massive deferred tax liability with the US. There is no way of avoiding that on their global profits. What they are avoiding is paying by keeping the money offshore.

      It is the US tax code that allows this deferral but even if this "same country exception" for what is known as Subpart F income (passive income such as patent royalties) is removed it is hard to know what the implications will be for Ireland?

      Will companies still want to route their global profits to no-tax environments such as Bermuda and the Cayman Islands? Possibly. It may make low-tax countries with some substance more attractive for their international facilities, then again the consequence could be that they would favour moving their international facilities to high-tax countries. It really is impossible to tell.

      There is no doubt there are significant risks/threats and I'm sure the Dept. of Finance will be watching the US Treasury for any hint of changes coming down the track. For the moment no substantive policy proposals have been made. The Senate hearing might shake something out but it is still likely that it will be years before anything significant comes about.