They say there is no such thing as bad publicity. Ireland may beg to differ, having been at the centre of a US Senate hearing on Apple’s tax accounting practices at a time when the EU is working hard to crack down on tax evasion
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Last week the Senate permanent subcommittee on investigations dug into Apple’s tax activities in gory detail. Its findings show Ireland has been at the heart of Apple’s success in tax avoidance.
Using information provided by Apple, the subcommittee found the company used subsidiaries in Ireland to funnel about $74 billion (R710bn) in worldwide income away from the US. The three units involved: Apple Sales International, Apple Operations Europe and Apple Operations International, were incorporated in Ireland but not tax resident anywhere.
The structure has allowed Apple to pay an effective tax rate on income of 2 percent or less since 2003, well below Ireland’s corporate tax rate of 12.5 percent.
Perhaps the most damning part for Ireland came in the explanation of the low rate in the subcommittee’s report: “Apple told the subcommittee that, for many years, Ireland has provided Apple affiliates with a special tax rate through negotiations with the Irish government.”
This is serious. It would be awkward to have the Irish government cutting special deals with large multinational firms while also, as the holder of the EU presidency, presiding over a push for greater transparency in corporate tax dealings.
Irish Prime Minister Enda Kenny immediately rebutted Apple’s version of events, insisting Ireland did not make special deals with companies.
Is there another explanation for why Apple pays such a low tax rate?
Seamus Coffey offers a convincing one on the IrishEconomy blog: “Apple benefited from a perfectly legal loophole in the way Ireland defines taxable income. The country’s 12.5 percent tax rate applies to income after subtracting expenses such as royalty payments for intellectual property licences. In Apple’s case, these payments are very large, significantly reducing taxable income.”
The royalties are paid to another Apple subsidiary in a different tax jurisdiction. This is sometimes referred to as a “Dutch sandwich”, because the payments are typically funnelled through the Netherlands to Bermuda, where there is no corporate tax. In Apple’s case, the subsidiaries are strangely not resident anywhere. This is indeed an issue for Apple, not for Ireland.
Whether or not Ireland is a tax haven, the perception could be just as damaging as the reality. The nations calling the shots in the EU (Germany) are not favourably disposed to countries that lure away their tax revenue. Ask Cyprus, which received little sympathy for its banking troubles.
Ireland will almost certainly succeed in exiting its bailout programme in the next year, but it may need assistance from its euro zone partners in the future.
Ireland should use the Apple drama as an opportunity to consider whether the benefits of an attractive tax regime are worth the costs. Many multinational corporations have set up headquarters in Ireland for access to the greater European market. The low corporate tax is clearly a draw, but so is the skilled, English-speaking talent pool.
Multinational companies have helped to keep Ireland’s exports buoyant throughout the crisis, with pharmaceuticals, chemicals and business services performing relatively well over the past few years. As of last year, multinational companies employed about 150 000 people in Ireland.
However, some analysts question how much Ireland really benefits from the presence of multinationals. Most of their profits flow back to shareholders outside the country. This is reflected in the difference of almost e30bn (R372bn) between gross national product and gross domestic product in Ireland. The latter includes exports by multinationals based in Dublin, while the former does not.
Without multinational companies, Ireland would have struggled to achieve the export-led growth it posted last year.
In the longer term, however, a sustainable growth model must involve Ireland weaning itself from exports and fostering domestic demand. Perhaps the Apple embarrassment will awaken Dublin to that reality.
Megan Greene is a Bloomberg columnist and chief economist at Maverick Intelligence. The opinions expressed are her own.