Not content with routing all of its sales from Europe, Africa, the Middle East, and India through subsidiaries in Ireland – and paying a 12.5 percent corporation tax on the profits – in 1991 Apple negotiated an even better deal with Ireland. That deal, and its 2007 version 2.0, reduced Apple’s tax rate on those profits to just five one-thousandths of 1 percent (.005!) in 2014.
Last March we learned a little bit about how Apple managed to negotiate perhaps the most favorable tax ruling ever issued by a developed country. Using its enormous economic power and information asymmetry, Apple convinced the Irish government that it would remain in Ireland and create jobs there, but only if Ireland would allow Apple to pay tax on just $30 million to $40 million in profits each year from its sales routed through that country – no matter how much it actually earned there.
This week we learned more – but not everything – about how Apple managed to earn €16 billion in profit in Ireland in 2011, but paid Irish corporation tax on just €50 million of that profit. According to the August 30 press release issued by the European Commission, Apple booked all of those sales through companies that were subject to tax in Ireland. But, lo and behold, those subsidiaries turned right around and paid “head office” expenses to two other Irish subsidiaries that were not resident in Ireland for tax purposes.
In fact, those subsidiaries were not resident anywhere on earth for tax purposes. They did not pay a dime of tax to Ireland, the United States, or anyone else.
What did those companies do that would have justified Apple’s Irish sales arms forking over nearly all of their revenue? According to Apple, the “head offices” owned the valuable intellectual property, the backbone of the Apple experience, that Apple develops primarily in Cupertino, California.
Yet those offices existed only on paper. They had no fixed location and no employees. And only occasionally did their boards of directors (all Apple executives) meet. For all intents and purposes, the head offices were, themselves, intellectual property – virtual tax avoidance machines that existed only in the cloud (alongside all the world’s music and selfies).
Whatever the European courts decide, a few things are clear:
1. Ireland cut a horrible deal with Apple. In exchange for Apple bringing 6,000 jobs to the country, Ireland gave up the right to collect €13 billion in corporate taxes over a 10-year period. If each job brought €50,000 into the country per year, the deal added €3 billion to the Irish economy over 10 years. It does not take an advanced degree in mathematics to calculate that the tax deal cost Ireland €10 billion over the past decade.
2. The United States must reform its corporate and international tax laws – yesterday.
3. The European Commission and the United States must sit down and negotiate a mutually acceptable end to the state aid cases – neither side can afford the coming tax and trade wars if they don’t.
The cloud has become a useful tool for storing files, photos, music, and documents. It should never be used to store profits.
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