updated 08:30 pm EDT, Fri May 31, 2013
Tells Senators McCain, Levin Ireland is not a 'tax haven'
Michael Collins, the Irish ambassador to the US, has written a letter to US Senators Carl Levin (D-New York) and John McCain (R-Arizona) flatly denying the charge that Apple negotiated a "special deal" to get an exceptionally lower tax rate in the country for its European headquarters. McCain and Levin made the charge, which Collins calls "wrong and misleading," during testimony from Apple CEO Tim Cook about the company's strategic tax policies that allow it to reduce its US tax liability -- even though a Senate report said Apple's policies were fully legal.
"Ireland's tax system is set out in statute, [meaning] there is no possibility of individual special tax rates being negotiated for companies," Collins wrote in the letter (seen below). McCain and Levin had claimed that Apple negotiated a deal with the Irish government back in 1980 to lower the tax bill of Apple Operations International -- the Ireland-based holding company that manages most of Apple's foreign operations -- to just two percent. This, Collins said, is simply an error of mathematics on the part of the committee.
"All tax-resident companies in Ireland are liable to corporation tax on their chargeable income at the rate of 12.5 percent on trading income, and at 25 percent on non-trading income," he wrote. "The tax rates attributable to Ireland in the [US Senate subcommittee on tax reform]'s Memorandum appear to be calculated by reference to the companies' entire profits, as if those companies are tax-resident in Ireland ... despite the fact that the Memorandum clearly states that the companies concerned are not tax-resident in Ireland." Apple and other tech companies such as Yahoo and Google have offices in Ireland to take advantage of the low corporate tax rate, which at 12.5 percent is only about one-third of the top corporate tax rate in the US (35 percent).
Though Apple has been accused of "parking" profits in a "complex web of offshore entities" in order to avoid paying billions of dollars in US taxes on some $44 billion in foreign profits over the last four years, Cook's testimony before the panel demonstrated clearly -- to the frustration of the senators -- that Apple neither employs any complex schemes, nor has changed its tax strategy over the last three decades. The iPhone maker pays an effective 25 percent tax on profits it makes in the Americas, a point Cook made repeatedly as he noted that Apple pays a higher corporate tax rate and larger amount than any other US multi-national corporation, accounting for one out of every six dollars in corporate tax collected in the US.
What the company does do, however, is refuse to bring already-taxed foreign profits back to the United States, where they would be subject to a second -- and among the world's highest -- corporate tax. Apple and other companies have previously lobbied for a "tax holiday" to allow corporations to "repatriate" foreign profits at a dramatically reduced rate, which the Obama administration (like the Bush administration before it) has thus far refused to do.
Under Cook, Apple appears to have abandoned that approach and is instead favoring its own proposal for corporate tax reform that is similar to a legislative initiative put forth by the President -- a permanent but smaller lowering of the US corporate tax rate in order to be more competitive, accompanied by some reductions in deductions and credits widely used by multi-nationals to avoid paying any US income tax at all (with General Electric being one of the best-known examples, having a negative effective tax rate despite making many billions more than Apple annually).
Cook flatly denied charges from the committee that Apple engages in tax-avoidance practices common among other companies such as transferring intellectual property and profits into offshore tax havens such as small Caribbean nations. "We don't depend on tax gimmicks," Cook said, though the company's foresight in setting up the Irish holding company in 1980 do appear to outsiders to be intended -- however legally -- to reduce the company's foreign tax burden and allow foreign profits to remain outside the US. Apple routinely chooses locations for holding companies based in part on corporate tax rates, though it can be argued that this too is part of its legal, fiduciary responsibility to stockholders to maximize profits.
The crux of the issue comes from the different ways in which various countries account for how to tax multi-national companies. In the US, "residency" for tax purposes is based on where a company is incorporated -- and in the case of AOI, that would be Ireland, meaning its income isn't taxable in the US. However, in Ireland, "residency" depends on where the company is managed and controlled -- which for AOI would be the US, meaning its income isn't as highly-taxed as a "resident" corporation. Though Apple had nothing to do with the definitions the two countries use for tax purposes, its holding company benefits from the difference to effectively pay almost nothing in taxes on the money it makes through UK and European sales compared to what it would pay in US taxes.
Apple's proposal on corporate tax reform would actually cause the company's tax bill to go up somewhat, Cook told the committee, but he believes the changes would be better for the long-term sustainability of repatriation of foreign profits and US job creation over the short-term benefits of a "tax holiday," which in the past have tended to benefit mainly executives and stockholders rather than the US economy overall.