Monday, May 12, 2014

Apple, Beats, Google and how it is still possible to have a ‘stateless’ Irish company

The announcement of an Apple takeover of Beats Electronics throws up some issues in relation to corporate tax residence. Ireland’s residency rules for companies are relatively straightforward: all companies managed and controlled are deemed resident in Ireland and all companies incorporated in Ireland are resident in Ireland with two exceptions - the 'trading' exception, which applies to some foreign-owned companies which have a trading presence here, and the 'treaty' exemption, if applicable.

Beats Electronics has Irish-incorporated companies in its international structure including a holding company which seems to accumulate most of the non-US profits though it is not clear that Beats has any intellectual property apart from the brand. Regardless, the holding company is tax resident in Jersey rather than Ireland. This cannot be achieved using the trading exemption as Beats Electronics has no tangible presence in Ireland so has to be achieved using the treaty exemption.

And it seems it is. The corporate tax residency rule for companies in Jersey is:

"A company is resident in Jersey if it is incorporated in Jersey or if its business if managed and controlled in Jersey."

So there is a clash. Under Irish law, the profitable Beats Electronics holding company is resident here because it is incorporated here (and isn't eligible to be considered under the trading exemption). And under Jersey law the company is resident there because it is managed and controlled there. But a company can only be resident in one country.

The clash is resolved by the Ireland-Jersey tax agreement which in Article 4(3) states:

"Where by reason of paragraph 1 a person other than an individual is a resident of both Parties, then it shall be deemed to be a resident only of the Party in which its place of effective management is situated."

There is nothing hugely interesting about this. It is possibly worth noting that there is nothing Ireland can do to make the Beats Electronics holding company resident in Ireland absent a change to the Ireland-Jersey tax agreement. It is not a formal tax treaty but it is enough to trigger to 'treaty' exemption.

Residence also plays a role in the tax strategy used by Google. Google has an Irish-incorporated holding company which is eligible for the 'trading' exemption to the test of incorporation because of Google’s presence here. In these cases only the test of central management and controlled is applied to determine residency because Google’s holding company is not managed and controlled in Ireland is not deemed to be tax resident in Ireland.

So where is Google’s holding company tax resident? We know it is not tax resident in Ireland but that doesn't mean it has to be tax resident somewhere else. This situation was highlighted in the US Senate in their May 2012 investigation into Apple’s tax structure and the use "stateless income" in companies that were not tax resident anywhere.

Bermuda has a corporate tax of 0 per cent and the residence rule is:

"A corporation establishes residence when it is incorporated in Bermuda".

Google Ireland Holdings (GIH) is not resident in Ireland because it is not managed and controlled in Ireland. However, nor can GIH be resident in Bermuda because it is not incorporated there. GIH is "stateless" but instead of doing it in Cupertino, California as Apple did with Apple Sales International, Google is doing it in Hamilton, Bermuda. In reality, Google is doing it in Mountain View, California but unlike Apple goes to the limited effort of having a brass-plate operation in Bermuda and maybe the odd board meeting and AGM there. Apple may now have to do likewise.

Perhaps this is where the changes in the Finance Act 2013 come in apparently addressed the issue of Irish-incorporated companies being "stateless". This is what was promised in the 2014 Budget speech delivered by Michael Noonan last October:

Let me be crystal clear. Ireland wants to be part of the solution to this global tax challenge, not part of the problem. That is why today I am publishing a new international tax strategy statement which sets out Ireland’s objectives and commitments in relation to these issues. I will also be bringing forward a change in the Finance Bill to ensure that Irish registered companies cannot be ‘stateless’ in terms of their place of tax residency.

According to the general commentary on the changes this is what was achieved: Irish-incorporated companies that are not deemed to be tax resident in Ireland must show their tax residency otherwise they will be deemed tax resident in Ireland. But the relevant extract from the Act is:

“(5) Notwithstanding subsection (3)—

(a) where a company—
(i) is incorporated in the State and, by virtue of the law of a relevant territory other than the State, would be resident in that relevant territory for the purposes of tax if it were incorporated in that relevant territory but would not otherwise be resident for tax purposes in that relevant territory, and
(ii) is managed and controlled in that relevant territory and, by virtue of the law of the State, would be resident for the purposes of tax in the State if it were so managed and controlled in the State but would not otherwise be resident for tax purposes in the State, and

(b) accordingly, the company would not, apart from this subsection, be regarded, by virtue of the law of any territory, as resident in that territory for the purposes of tax, that company shall be regarded for the purposes of the Tax Acts and the Capital Gains Tax Acts as resident in the State.”

Part (a) of that makes a number of references to a "relevant territory". In this case a relevant territory is "an EU Member State other than Ireland or in a country with which Ireland has a Double Taxation Agreement". Ireland does not have a tax treaty with Bermuda thus Bermuda is not a "relevant territory" so companies managed and controlled in Bermuda do not come under the remit of the provision.

Under Bermudan law Google Ireland Holdings is not tax resident there because it is not incorporated there. Under Irish law GIH is not tax resident here because it is not managed and controlled here and comes under the trading exemption. And, because GIH is not managed and controlled in a "relevant territory" it does not come under the provision from the 2013 Finance Act. It is not clear why the provision in part (a) only applies to a “relevant territory” and not any territory. There may be legal reason for this but it appears to be a provision that could be applied to any territory. It seems like a choice was made to limit it to a “relevant territory”.

The Finance Act did not ensure that Irish registered companies cannot be stateless. The text of the provision means that as long as the Irish-registered non-resident (IRNR) company is managed and controlled outside of a relevant territory it can continue to be "stateless" as long as that country does not apply a test of management and control to determine residency. Bermuda doesn’t. Cayman doesn’t. And probably a few more. The promises of the Budget speech have not been delivered on.

Of course, under US law GIH is viewed as an Irish company and Google can use “check the box” and the “same-country exemption” from the US tax code to engineer a deferral of the US corporate income tax due.

In the scheme of things the “stateless” position of GIH does not get much attention because the rate of corporation tax in Bermuda is zero so regarding it as a resident of Bermuda makes no difference to the commonly-accepted narrative. It did matter in the case of Apple because the "stateless" companies were managed and controlled in the US even though those companies were equally creating a corporation tax of zero. Which in both cases is only prior to any possible formal repatriation of the profits the US parent when the federal US corporate income tax of 35 per cent would be applied as recently highlighted by Ebay.

The provision of the 2013 Finance Act is somewhat less vigorous then seems to be commonly accepted. It was only a limited move against “stateless” companies. Under the change, Irish-incorporated companies eligible to the ‘trading’ exemption from the test of incorporation could not remain stateless by being managed and controlled in a country that only applies the test of incorporation to determine residency. However, this limitation only applies if those companies are managed and controlled in a EU country or a country Ireland has a formal tax treaty with. It does not apply to companies that are managed and controlled in Bermuda, the Cayman Islands or similar territories.

It is still possible to have Irish-incorporated companies that are “stateless” for corporate income tax purposes. Just don’t do it in Cupertino, California and get the US Senate into a tizzy.  In reality Google do it in Mountain View, California but make the limited effort of having a “brass plate” in Hamilton, Bermuda and maybe hold the odd board meeting or AGM there.  It looks like the 2013 Finance Act means Apple will be heading there too.

2 comments:

  1. Has this loophole been closed up since? It seems quite a mistake to make! Unless it was intentional?

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  2. This comment has been removed by a blog administrator.

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