Questioning Apple Inc. executives over the company’s use of Irish subsidiaries to lower its tax rates on global profits shows that U.S. legislators have their eyes off the ball, an Irish tax expert said in Atlanta.
Instead of Ireland, it’s the 35 percent U.S. corporate tax rate that should be under the microscope, Aidan Byrne said during a seminar May 22 at Habif, Arogeti & Wynne LLP.
“It’s the U.S. tax system that’s out of kilter with the rest of the world,” Mr. Byrne, a tax partner at Baker Tilly Ryan Glennon in Dublin, told Global Atlanta.
Ireland has a flat tax of 12.5 percent on corporate profits, thought it offers a variety of structures and credits that allow U.S. companies to lower their effective tax rates in the country. Many multinationals, particularly tech companies, have used subsidiaries in Ireland and elsewhere to stockpile profits earned outside the United States.
Apple CEO Tim Cook and other Apple executives on May 21 testified before a U.S. Senate subcommittee seeking to learn more about its tax structures overseas.
While a 40-page report released by the subcommittee alleged no illegal activity, it said that Ireland had “essentially functioned as a tax haven for Apple,” which it claimed skirted $10 billion a year in tax liability over the last four years by using subsidiaries based in Ireland that declared no tax residence, including Apple Operations International and Apple Sales International.
According to the report, that was partially achieved through the use of favorable transfer pricing, which allows companies to shift revenues earned in one jurisdiction to subsidiaries in another where the tax structures are more favorable.
Apple Inc. shares the economic rights to its intellectual property with AOI, which “facilitated the shift of $74 billion in worldwide sales income away from the United States to Ireland where Apple has negotiated a tax rate of less than 2 percent.”
Apple and the Irish government both denied that the company had received a special deal, noting that the corporate rate is a flat 12.5 percent.
Mr. Cook said Apple did not shift any money outside the United States, only that it funneled global sales into the Irish subsidiary and engages in “cost sharing” on research and development activities. Apple holds more than $100 billion in cash in the Irish subsidiaries. Mr. Cook said that makes sense, considering that 61 percent of the company’s sales were outside the United States in 2012.
He said Apple paid $6 billion in taxes to the U.S. government last year and that the company does not employ “tax gimmicks” but since 1980 has engaged in business activity in Ireland, where it currently has more than 4,000 employees.
Establishing that type of business “substance” in Ireland is vital to legally availing of the corporate tax rate, Mr. Byrne told attendees at the Habif seminar who were looking at ways to optimize their corporate structures for tax purposes.
In other words, the tax rate is only functional for companies who can show they’re doing business in the country, not just transferring intellectual property. Once companies prove that substance, the Irish tax authorities will actually lobby on their behalf if their international counterparts come knocking.
“If you’re just doing an IP play with no substance, go to Bermuda, go to Luxembourg, go somewhere else, but don’t go to Ireland. The reason Ireland works is because it’s about substance,” Mr. Byrne said, warning against “cash box” or “brass plate” operations that have a name but no employees or activities.
Mr. Byrne was adamant that Ireland is starkly different from countries that could be considered tax havens based on the definition put forth by the Organisation for Economic Co-operation and Development..
Tax havens lack transparency, employ small nominal tax rates that aren’t based on profits, have no requirements for substance and refuse to share information with their counterparts in other countries. Ireland differs on all fronts, Mr. Byrne said.
Still, companies like Apple have been able to game the system, the Senate investigators argued. It’s unclear whether the company used what’s known as a “double Irish,” a technique that involves setting up a subsidiary in Ireland (or another country with a favorable tax code) that pays royalties to another Irish subsidiary set up in a jurisdiction like Bermuda, which has no corporate income tax.
At the seminar, Mr. Byrne explained the method, which can achieve effective tax rates in the low single digits. He said it’s “completely legal and will remain so unless the U.S. changes its laws.”
Robert Verzi, a partner at Habif, Arogeti & Wynne, said more firms of all sizes have started to set up international tax structures since the Bush-era tax cuts expired at the beginning of 2013.
He advised companies to set up their offshore structures as quickly in their development as possible.
“What you’re basically trying to do in setting up one of these structures is to migrate value outside of the U.S. tax net and put it in a favorable tax jurisdiction. The primary driver of value of most companies is their intellectual property, and intellectual property can be easy to move if you move it at a time when it doesn’t have tremendous value,” Mr. Verzi said.
This makes the most sense for startups that foresee substantial sales in international markets but have stacked up losses developing their products, so their intellectual property wouldn’t yet receive high valuations. The key is figuring out how to get the rights to international sales into the hands of the foreign subsidiary.
Ireland is a good place for this, partly because it’s perceived well but mainly because it has the talent that many high-tech and pharmaceutical companies need. It also offers access to the EU market of more than 500 million people, bolstering the case for setting up a physical presence, Mr. Verzi and Mr. Byrne said.
Many companies use these structures as a “deferral strategy” to avoid U.S. taxes until they absolutely have to bring the money back into the U.S., Mr. Verzi said.
Even if they’re not setting up business activities in Ireland, they can set up an overseas subsidiary that would have the option of paying foreign-earned income as a dividend back to the U.S. parent company, which is taxed at a lower rate than corporate income. It all depends on the company’s long-term strategy, he said.
For more information, visit www.hawcpa.com or contact Mr. Verzi here. http://www.hawcpa.com/your-team/partners-directors/robert-verzi.