Taxes

Did Apple Pare Its Tax Bill With a 'Double Irish?'


Apple's European headquarters in Cork, Ireland

Photograph by Anthony Sigalas via Flickr

Apple's European headquarters in Cork, Ireland

Apple (AAPL) has a deal with Ireland granting it an effective 2 percent tax rate on tens of billions of dollars in profit at the company’s Irish affiliates, according to a U.S. Senate report released on May 20.

Ireland, though, says that isn’t true. “There is no special deal for Apple or any other company,” Barry O’Leary, the head of Ireland’s inward investment agency, said today in an interview with Irish broadcaster RTE. O’Leary and other Irish officials say the country applies its 12.5 percent corporate tax rate equally to all companies.

Who’s right? Technically, they both could be. The explanation may lie in a tax shelter called the “double Irish.” This two-step technique involves exploiting loopholes in the Irish tax code—first, to shelter profits from U.S. taxes, and then to provide additional shelter from Ireland’s already low corporate rate.

It works like this: First, the U.S. company attributes profits to an offshore subsidiary—generally in Ireland, although the technique has been used in some other countries. The company then sets up a second Irish subsidiary, nominally managed and controlled from a jurisdiction, such as the British Virgin Islands or Bermuda, that has no corporate income tax. Intellectual-property rights are transferred to that subsidiary, which then receives royalty payments from the Irish-based subsidiary. The Irish subsidiary, in turn, claims the royalty payments as tax deductions in Ireland. Google (GOOG) has used such an arrangement with a Bermuda subsidiary.

“The best thing about Ireland, for taxes, isn’t the 12.5 percent rate; it’s the transfer pricing,” says Chris William Sanchirico, a University of Pennsylvania law professor specializing in tax policy. By using transfers between subsidiaries, “they’ll let you shift [tax liability] down to zero,” he says. Sanchirico says he has not studied Apple’s case in detail.

Neither Apple nor the Senate investigative report has said whether the company used the “double Irish.” The report does say, however, that Apple has an affiliate in the British Virgin Islands that owns a small share of its chief Irish subsidiary.

Apple Chief Executive Tim Cook testified before a Senate investigation panel on May 21 that Apple didn’t use foreign subsidiaries to avoid U.S. taxes. “We don’t depend on tax gimmicks,” he said. In prepared testimony, Apple said it attributed profits to Irish subsidiaries to help finance research and development, an arrangement that it described as “cost sharing.”

The bipartisan report submitted to the Senate panel found that three Apple subsidiaries in Ireland hold 60 percent of the company’s profit and declare no tax residence. Apple told Senate investigators that the tax rate paid by its Irish affiliates was “in the low single digits,” far below the standard 12.5 percent rate.

How did Apple manage to secure such a low rate? The company hasn’t said. But hefty tax savings have been reported by other companies using the “double Irish.” U.S. pharmaceutical group Forest Laboratories (FRX), for example, reported that it paid a 4.7 percent corporate rate in Ireland last year after claiming deductions for $360 million paid by its Irish affiliate to another subsidiary domiciled in Bermuda.

Another advantage of the “double Irish” appears to be Ireland’s relatively lenient tax enforcement. “Ireland is attractive because it has yet to implement (or enforce aggressively) some of the more familiar anti-abuse mechanisms that are present in the tax regimes of most other advanced countries,” U.S. tax lawyers Joseph B. Darby III and Kelsey Lemaster wrote in a 2007 article in the newsletter Practical US/International Tax Strategies. “Perhaps cognizant that Ireland does not aggressively apply its transfer pricing rules,” companies can set payments between subsidiaries “at an optimal level” to reduce taxes, they wrote.

With Jesse Drucker
Matlack is a Paris correspondent for Bloomberg Businessweek.

The Good Business Issue
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • AAPL
    (Apple Inc)
    • $112.01 USD
    • -0.53
    • -0.47%
  • GOOG
    (Google Inc)
    • $528.77 USD
    • -1.82
    • -0.34%
Market data is delayed at least 15 minutes.

Sponsored Links

Buy a link now!

 
blog comments powered by Disqus