Few companies can claim to have had the IDA create an award in their honour, and the Taoiseach and Minister for Finance join forces to present it to their boss. This is what happened at the National Concert Hall in Dublin on Monday, when Apple’s CEO Tim Cook received the inaugural special recognition award from Leo Varadkar after an introduction by Paschal Donohoe. 

Fewer companies can claim an Irish subsidiary reporting $156 billion in annual revenue and $14 billion in profit, or a corporate restructuring plan that forced a revision of Ireland’s national accounts after Apple onshored intellectual property licensing estimated to be worth in the region of €200 billion five years ago.

IDA chief executive Martin Shanahan said at the award ceremony that Apple’s 40 years in the country and its current 6,000-strong campus in Cork was “an exemplar” of what his agency is looking for among foreign investors.

Before an audience of business leaders, senior civil servants, tech entrepreneurs and Apple employees drawn from its Irish workforce, Cook took to his feet and did what top Silicon Valley executive do best: he delivered an impassioned keynote on technology’s ability to save the world – and, along the way, Cork and Ireland. By using 100 per cent renewable energy, Apple and its partners will “rewrite the future of climate change”. 

He added his hope to “one day, achieve a goal of no longer extracting materials from the earth” – a month after Apple was named along other battery-based manufacturers in a US class-action lawsuit by advocacy group International Rights Advocates highlighting child labour in cobalt mines in the Democratic Republic of Congo. The company’s volunteers in disadvantaged Cork schools are contributing to an “equalising world”.

While Donohoe stuck with a similar consensual script, Varadkar was less reluctant to address questions around the incentives for a group such as Apple to route so much of their financial flows through Ireland. “Some people are critical of the fact that we have so many multinational companies in Ireland, I totally disagree,” the Taoiseach said, estimating annual tax receipts from those companies at €8 to 10 billion. Of this, consolidated accounts for Apple’s Irish unit reported a current corporation tax charge of $1.8 billion for each of 2017 and 2018. “Those who criticise FDI and those who criticise multinational companies who invest in Ireland, employ so many people and pay so much in tax need to understand and tell us how they would replace that amount of money that comes in that effectively pays for our entire education system.”

Yet Shanahan did put the question to Cook, somewhat apologetically, during their subsequent fireside chat: “The elephant in the room, to some extent – no doubt people might expect me to ask about this – is the European Commission decision in relation to tax which suggests that Ireland should collect €13 billion from Apple at the time.”

With interest, the sum frozen in an escrow account while the EU’s General Court ponders the case exceeds €14 billion. Coincidentally, this is a near-exact match for the “deferred tax assets” booked by Apple in Ireland in its latest published accounts – an apparent match for the deductions the company plans to make in the coming years through capital allowances enabled by its 2015 corporate overhaul in this jurisdiction.

“I certainly would be the last person that would say that the current system or the past system was the perfect system.”

Tim Cook

Cook’s response was two-fold:

1. Defend the company’s past behaviour, starting with praise for taxes and the public services they fund: “We’re the largest taxpayer in the world and we do so willingly,” he said. “The situation with the Commission is that they have a different perspective on who we should pay them to.” In their court challenge to the Commission’s decision, Apple and Ireland argue that all tax arrangements were legal during the 2003-2014 period under scrutiny. Cook enlisted the US Government in support for this case, echoing views in Washington that the EU has been trying to appropriate tax ultimately due in the US. “We believe that law should not be retrofitted – that the law is the law, and the law can change going forward but it shouldn’t change going back. So that is at the heart of the case, to make it very simple,” Cook said.
2. Push for international agreement on the taxation of multinationals this year – not a new position for Cook to take, but a forcefully articulated one as OECD member states enter crunch talks on the issue. “I’m hopeful and optimistic that they will come to something,” Apple’s CEO said, “because I think they have to.” Multinationals may manufacture, service, sell, and do R&D in different countries. “Somebody has to decide how you apportion the profit and the tax payments. I think this is a really reasonable subject for people to debate,” Cook said. “The place for that to happen is at worldwide level, because you can bet that each country is going to have a different point of view and a company shouldn’t have anything to do with this – just follow the law. I think the OECD is the place for this.”
   He hoped the process would lay down common rules on profit sharing between the different functions of multinationals. “We desperately want it to be fair,” Cook said, adding: “I think logically, everybody knows it has to be rehauled. I certainly would be the last person that would say that the current system or the past system was the perfect system.”

The key question here is when profit-sharing becomes profit-shifting to avoid tax, as the increasingly immaterial nature of assets and money flows allows companies to book billions anywhere in the world. Ironically Apple, one of the multinational with the most tangible products in the tech sector (such as Mac computers and iPhones), attracted the record EU penalty.

“Up to 2014 the company that held the licence was stateless – not resident in Ireland – and its management and activities took place in the US”

Seamus Coffey

This debate forms the background of any analysis of Apple’s Irish corporate structure and accounts, which can be divided into two eras – before and after the well-documented “leprechaun economics” episode of 2015, when the licence to use patents and trademarks from which the company’s value is derived outside the Americas was located in Ireland.

“Up to 2014 the company that held the licence was stateless – not resident in Ireland – and its management and activities took place in the US,” UCC economist Seamus Coffey told The Currency. This applied to two subsidiaries registered in Ireland, Apple Sales International (ASI) and Apple Operations Europe (AOE), which were at the core of the European Commission’s investigation.

In the old structure, ASI and AOE were registered in Ireland but, under Irish law, their head office was not deemed to be taxable in Ireland because they were managed out of the US. Meanwhile, US authorities did not regard them as taxable because they were registered in Ireland. As a result, Apple paid Irish corporation tax only on the activities conducted by their Irish branches in Cork.

Licenses to use Apple’s intellectual property (IP) outside the Americas were located in the head offices of ASI and AOE, and their profits weren’t subjected to Irish corporation tax.

US legislation at the time taxed US corporations on their worldwide income, but allowed them to defer payment until they repatriated profits. Apple has argued that profits accumulated by its Irish non-resident subsidiaries would ultimately be taxed in the US.

“It is the company as a whole, made up of the various parts of that company, which holds those IP licenses.”

European Commission

The European Commission’s 2016 decision declared illegal two successive tax rulings by Ireland’s Revenue Commissioners in 1991 and 2007, which had rubberstamped Apple’s arrangement. It found that ASI and AOE’s head offices had no employees beyond board members, who had only a limited say in IP licensing matters late in the period under investigation. “In each case it is the company as a whole, made up of the various parts of that company, which holds those IP licenses,” the Commission found. “Given the lack of functions performed by the head offices and/or the functions performed by the Irish branches, the Apple IP licenses for the procurement, manufacturing, sales and distribution of Apple products outside of the Americas should have been allocated to the Irish branches for tax purposes.”

Even if the head offices of ASI and AOE could be regarded as separate, the European Commission rejected the profit allocation calculations accepted by the Revenue to determine Irish taxable income. For example, the 2007 tax ruling agreed that the Irish branches declare profit as their operating expenses plus a margin set between 10 and 15 per cent (the exact rate was redacted). AOE added an “IP return” of under 5 per cent to its taxable profits.

According to the Commission, this violated the arm’s length principle in transfer pricing within multinationals: “Those rulings endorse a taxable remuneration which the Irish branches would not have accepted, from the perspective of their own profitability, if they were separate and independent companies engaged in the same or similar activities under the same or similar conditions.”

The EU’s competition watchdog concluded that the resulting tax reductions over 10 years amounted to state aid conferring an illegal advantage to Apple and ordered Ireland to recover that amount. 

Corporate strategies

Apple’s latest US filings show that of the €13.1 billion placed in an escrow account following the 2016 decision, €12.9 billion remain frozen as the dispute moves through European Courts. “During the fourth quarter of 2019, the Irish Minister for Finance approved the Company’s request to reduce the recovery amount by €190 million due to taxes paid to other countries,” Apple reported. Another €1.2 billion in interest applies.

Since the start of the European Commission investigation in 2013, a lot has changed.

Ireland closed the loophole allowing Irish-resident companies to remain stateless for tax purposes, and Apple overhauled its corporate structure here in early 2015. 

“When Ireland changed its tax laws in 2015, Apple made changes to its corporate structure to comply,” the company said in a rare public statement on its tax affairs in 2017. “Since then, all of Apple’s Irish operations have been conducted through Irish resident companies. Apple pays tax at Ireland’s statutory 12.5 per cent.” 

The statement was in response to reporting on the leaked Paradise Papers, which showed that Apple had moved cash and investment reserves to a Jersey-based company. “As part of these changes, Apple’s subsidiary which holds overseas cash became resident in the UK Crown dependency of Jersey, specifically to ensure that tax obligations and payments to the US were not reduced. Since then Apple has paid billions of dollars in US tax on the investment income of this subsidiary. There was no tax benefit for Apple from this change and, importantly, this did not reduce Apple’s tax payments or tax liability in any country.”

Leprechaun economics

Also in the first quarter of 2015, multiple metrics in Ireland’s national accounts exploded in a phenomenon dubbed “leprechaun economics” by US economist Paul Krugman. As data trickled through, Seamus Coffey pieced together the picture of what happened. In 2018, he linked the following unexplained increases reported for the first quarter of 2015 to Apple’s move: a €15 billion jump in the value of quarterly Irish exports; €250 billion extra foreign capital investment-related debt; and a €6 billion exansion in quarterly corporate depreciation.

“Such a rise in depreciation can only occur if there is a significant increase in the stock of assets. If Apple is responsible then it would be the case that the license to use Apple’s intellectual property outside the US was relocated to Ireland,” Coffey wrote at the time.

While other companies such as Google used the so-called double Irish, Apple anticipated that scheme’s demise and appears to have opted for a capital allowance for intangible asset (CAIA) instead.

Today, his view has not changed: “In 2015 there appears to have been an internal transaction with one entity buying the license or a sub-license as an intangible asset from another,” he told The Currency. “It was between what is now an Irish-resident entity and a non-resident entity so the impact is visible in the national accounts.”

While other companies such as Google used the so-called double Irish at the time to extract tax-free profits from intellectual property under the form of royalties, Apple anticipated that scheme’s demise and appears to have opted for a capital allowance for intangible asset (CAIA) instead. “That transaction in 2015 enables them to use capital allowances to offset the acquisition cost against profits but these allowances will soon run out,” said Coffey. “It will be interesting to see what they do when that happens.”

Those transactions cannot be verified through the filings of Apple’s Irish subsidiaries, many of which were unlimited companies until recently. Their first published accounts were for 2018, when only the group’s top Irish holding, Apple Operations International Ltd, released a consolidated statement covering more than 70 subsidiaries around the world. Acquisitions made by Apple over the years, such as Shazam and Beats, also sit under Apple Operations International.

“These changes don’t necessarily mean that they’ll pay more tax. It might change where the tax is paid.”

Seamus Coffey

It had $155 billion in consolidated sales, $40 billion in consolidated net income, but just $14 billion in ultimate profit. The Irish company booked a $6.7 billion tax provision, made up of a $2.2 billion in current income tax for 2018 (of which €1.4 billion was effectively paid that year) and $4.4bn in deferred tax. The consolidated nature of the accounts doesn’t allow the reader, for example, to determine the average salary it pays in Ireland.

Although the company’s balance sheet does not show intangible assets of the size that would match the transfer observed by Coffey in national accounts in 2015 (IP ownership remains in the US and Apple has not replied to queries from The Currency on details of its licencing to Irish subsidiaries), more deferred tax expected for the coming years is booked there as an asset worth $16.6 billion at the end of 2018. The UCC economist calculated that this would match capital allowances worth $180m at the end of 2016 and being depreciated annually under the scheme.

Comparing accounts filed by the Irish holding and its parent Apple, Inc in the US, such deferred tax assets appeared to evolve along parallel trends in the past two years – until Apple, Inc recharged this line with a $13 billion boost in accounts to the end of September 2019. It will be interesting to see how this is reflected in Apple Operations International’s filing for the same period later this year. 

One final change, this time in US tax law, has been showing in Apple’s accounts on this side of the Atlantic: since the Trump administration introduced a reduced tax rate on deferred profits held overseas at the end of 2017, the dividends paid by the Irish subsidiary to Apple, Inc has jumped from to $1.5 billion in 2017 $68 billion in 2018 and $61.8 billion in 2019. 

This treasury, however, was already held in US banks and offshored only on paper, Coffey said. Meanwhile, the company still had over $200 billion parked in securities such as corporate and government bonds at the end of 2018.

Overall, the US Tax Cuts and Jobs Act, which also cuts the federal rate of corporation tax from 35 per cent to 24.5 per cent in 2018 and 21 per cent from 2019, will do more for Apple in the long run than any Irish tax arrangement. The group’s reported effective tax rate fell from 24.6 per cent in 2017 to 15.9 per cent last year. It made an actual cash payment for tax of $15 billion, amounting to 23 per cent of its profit in 2019.

For Coffey, Cook’s call for common OECD tax rules makes sense. “These changes don’t necessarily mean that they’ll pay more tax. It might change where the tax is paid,” he said, expecting that the effective tax rate would remain under 23 per cent under any international agreement. 

“As a company, what you want is certainty. The current climate of changing rules creates uncertainty,” the economist added.

Read more from the Mapping the Multinationals series:

Unlocking Google’s €40bn Irish corporate empire