The importance of Apple to Cork city and surrounds meant the furore of last week was bound to attract the attention of the local media. Here is a piece (continued below the fold) on Apple and the broader corporation tax debate that was carried in Monday’s Evening Echo.
Firms using US tax rules to their benefit
The intense focus this week on the tax strategies of US companies like Apple has led to speculation that there will be changes in international tax practices.
This is particularly important from a Cork perspective as not only is Apple based here but so too are many US companies in the pharmaceutical sector. These are large companies offering thousands of well-paid jobs that are hugely important for the Cork region.
There is no doubt there are some risks to having this dependence on US investment but the presence of two construction cranes in Hollyhill is an indication that Apple are not expecting any changes in the medium term.
There have been accusations that Ireland is using unfair tax competition and dodgy tax practices to attract foreign direct investment. However, most of the large companies that the IDA has attracted to Ireland are from the US. This would suggest that there is something in particular that makes Ireland attractive to US companies.
And there is: the US tax code. Most of the loopholes that the US companies are using to reduce their tax bill are in US law. Ireland has a fairly standard system of corporation tax. We do have a low rate by international standards but the rules and regulations that govern the application of this tax are in line with international standards as set out by the OECD.
The attraction of Ireland for the US companies is that the provisions in our system allow them to utilise the loopholes in the US system. Ireland didn’t create the system that allows companies to minimise their tax liabilities but we have used it to our advantage.
The focus on Apple gave rise to suggestions that it got a special deal. Apple did receive a tax incentive when it established a facility in Cork in 1980. This was a 10% corporation tax rate but this was available to all manufacturing firms who came to Ireland.
At the time the standard rate of corporation tax was 45% and the European Commission subsequently ruled that this tax incentive did not conform to EU law and had to be removed. In 2003 Ireland moved to a single rate of corporation tax at 12.5%.
Apple is not avoiding any tax in Ireland and pays the 12.5% rate on the profits its sales generate here. Legally, Apple is not avoiding any tax in other international countries though it does use transfer pricing to reduce the amount of profit it makes on the sale of iPhones, iPads and the like in large markets around the world like the UK, Germany, Australia and Japan.
The focus of the Apple story this week is the amount of US corporation tax it pays. The US levies a 35% corporation tax on the global profits of its companies. There is no way for US companies to avoid this although they do get a tax credit for amounts paid in other countries.
There are two major loopholes in US law that Apple takes advantage of to reduce the amount of tax it pays to the US Treasury each year. The first is that the US only treats companies incorporated or registered there as being resident in the US for tax purposes.
Apple has three companies that collect their global profits. These companies are registered in Ireland but, as confirmed to the US Senate this week, all of their activities are based in the US. They have been labelled Irish companies but their staff, management, operations, board meetings and assets are all in the US. The US tax authorities consider these to be offshore companies even though everything about them, except their incorporation, is in the US.
The second loophole that Apple uses is that US companies do not have to actually pay their share of the 35% US corporation tax on some foreign profits to the US Treasury until the profits are repatriated into the US.
The companies Apple uses to aggregate its global profits have profits of more than €20 billion per year. If Apple repatriated them it would have to pay €7 billion in tax on them. Apple defers this massive tax liability by keeping the money “offshore”, though we now know that these companies are fully managed in the US rather than Ireland.
There is no way for Apple to avoid this US tax liability on its global profits. What Apple is doing is deferring the actual payment of this tax liability using the loopholes in the US system.
It is the fact that the Irish system has been designed to allow American companies to take full advantage of these loopholes that makes Ireland an attractive place to locate. In order to be able to do so the rules of the Irish system require the US companies to have a “presence of substance” here. It is not sufficient for the US companies to establish a “brass plate operation” here. This presence has resulted in 100,000 jobs from US companies in Ireland.
Could the US system be changed so that the tax advantages offered by the Irish system are eliminated? The system could be changed. Although the investigation into Apple’s operations by some US politicians created a stir it revealed nothing that was not already known by governments and their tax authorities.
One reason for the lack of change is the difficulty in getting tax amendments through the US congress. There is a large group of Republican politicians who will not close off loopholes as they would view it as a tax increase to which they are vehemently opposed. On the other side there is a large group of Democrat politicians who will not vote for tax reductions that might make it more attractive for US companies to repatriate their foreign profits.
As long as this deadlock persists the benefits Ireland offers to US companies will remain.