Questions facing Ireland about Apple

In The Irish Times yesterday John McManus had a piece under the headline ‘Ireland faces questions on fruitful Apple tax deal’.  The three questions posed were:

• Is there a “special” two per cent rate in Ireland for Apple?
• Is there a “loophole” that allows Irish-incorporated companies to be non-resident here?
• Is there a deal in Ireland to allow for “income taxed at lower rates”?
• Should Apple have paid $890 million Irish corporate tax based on the 12.5 per cent rate instead of the $36 million paid?

At the time of the US Senate last May they was a lot of noise around a special 2 per cent tax rate that Apple had apparently negotiated with the Irish government.  There is no doubt that there were targeted and generous tax breaks given to MNCs who set up operations in Ireland in the 1970s and 1980s but there is no 2 per cent rate for Apple.

McManus calls it “the 2 per cent rate it told Congress that it had agreed with Ireland” and writes:

Apple have never withdrawn this assertion, but at the same time they have stood back and let the Government kick up as much dust as they can around the issue.

During the hearing it was the Senators who said there was a two per cent rate not the Apple executives.  Although put to them the Apple executives did not address it in the Senate hearing but around a week later, Apple CEO, Tim Cook, gave an interview (video here) where he said:

“I’ve seen something in the press that says that some people think that we have a deal with the Irish, a special deal with the Irish government, to pay two per cent flat tax rate.  We have no special deal with the Irish government that gives us a two per cent flat tax rate.  So let me just set that aside.”

So no special deals on rates.  Is there a special deal on something else?  McManus further adds:

The counter narrative advanced by the Government was that there is no special deal but Apple instead availed of a loophole in Irish law that allowed companies to be Irish registered but not Irish domiciled. This quirk of Irish tax law opened the door to low tax heaven we were told.

The loophole was closed in the Budget and the Government seems to have got the “no special deals” narrative back on track. Until last week that was.

Yes, Irish law does allow Irish registered companies to be non-resident.  There is nothing unusual or “quirky” about that.  The change announced in the Budget was not about making Irish-incorporated companies resident here.  The change was a minor one which did not change the residency rules. 

It merely said that if an Irish-incorporated company owned or controlled by foreign residents was not deemed to be resident in Ireland, under the test of management and control, that the company had to tell the Revenue Commissioners where they were resident.  There is no change in the ability to have non-Irish resident, Irish-incorporated companies it is just that such companies have to declare their tax residence and cannot be “stateless”.  These residency rules apply to all companies; not just Apple.

To conclude McManus goes back to rates with reference to “income taxed at lower rates” in ASI’s 2009 accounts.

Is this then the special deal that Apple told the US Congress existed but the Government denies? In the absence of any clarification it is a basis for legitimate suspicion and potentially a fatal hole in the “no special deals ” claim.

This puts them in a very difficult position because the EU and the European Commission – who seem to have bought the no special deal line – may be wondering quite rightly if they have been sold a pup. They no doubt would like to know what “income taxed at lower rates” means as should anyone else paying the full statutory rate of 12.5 per cent corporation tax.

The meaning of “income taxed at lower rates” is a legitimate question.  The answer is a tax rate of zero because the US allows Apple to defer the US taxes its owes on certain foreign-source income.

ASI will be taxed on the profits it generates from holding the global rights to Apple’s intellectual property in the country in which it is resident.  This could be in Cayman or Bermuda where there is no corporation tax or a corporation tax of zero.  Instead Apple set up a structure and chose to have ASI tax resident “no where”.  The corporate tax rate in “no where” is also zero.

Everything ASI does is in the US but because it is not incorporated there it is not deemed to be resident there.  ASI is incorporated in Ireland but it is a ‘relevant’ company to which the test of management and control is applied to determine residency.  ASI is not managed and controlled in Ireland.

The “income taxed at lower rates” is achieved by ASI because it is “stateless”.  The US does have the right to collect corporation tax on all the profits earned by ASI but this has been deferred until the profit is repatriated as dividends to the US.

The corporate tax liability on ASI’s profits is 35 per cent.  The corporate tax paid on ASI’s profits is almost nil.  The US does not want to see Apple pay corporation tax on this profit in another country as it will reduce the amount it can collect.  Ireland does not have any questions to answer on this.  It is a US decision to allow ASI to defer its US tax liability.

So,

• is there a “special” two per cent rate in Ireland for Apple?
• is there a “loophole” that allows Irish-incorporated companies to be non-resident here? 
• is there a deal in Ireland to allow for “income taxed at lower rates”?
• is Apple avoiding paying $850 million of Irish corporation tax?

These are all legitimate questions but the answers are known. 

• There is no “special” two per cent rate in Ireland. 
• There is nothing unusual about Ireland’s residency rules.
• The “income taxed at lower rates” is taxed at zero as allowed by the US.
• Apple is a US company so owes US taxes on its profits 

There is nothing Ireland can do that will result in more tax being paid in any other country.  Ireland can levy tax on profits that are sourced here by non-residents or earned anywhere by residents.  ASI does not source its profits here and is not resident here.  We could make ASI resident here by having all Irish-incorporated companies deemed Irish resident but what would happen then…

UPDATE: The Tánaiste, Eamon Gilmore, was asked these questions in the Dáil today by Joan Collins T.D.  The answer he provided is here. 

It deals with some of the issues but avoids others.  It is noticeable that the United States, US corporation tax or deferral provisions are not mentioned at all.  In the Senate hearing last May the US Senators were quick to heap blame on Ireland for outcomes caused by US tax laws – many that they had voted for.  On this side of the Atlantic we daren’t even say the name the country.