updated 01:00 am EST, Thu March 6, 2014
Practice is perfectly legal, admits government, but abused
Apple's practice over the past decade of funnelling all of its foreign profits through its international sales office in Cork, Ireland has allowed it to skip out on taxes in some other countries on billions of dollars in profits, according to an audit done by the Australian Financial Review. In Australia, Apple has paid only $200 million on ten years' worth of profits, totally nearly AUS $9 billion, the report said.
Apple Sales International (ASI), Apple's Ireland-based foreign sales office, takes advantage of a loophole in Irish law that foreign companies which are "managed" by outside countries, and thus is not "tax resident" in Ireland. This means it doesn't have to pay the usual 12.5 percent tax of Irish corporations, and allows Apple to transfer profits made in other countries as royalties on its intellectual property, based on its patents, to Ireland. ASI then contributes its money to Apple's overall research and development costs, giving ASI a legal stake in the company's intellectual property.
Sometime in 2010, Apple opened and may have begun routing Australian profits through an office in Singapore rather than Ireland, but the effect was the same: taxes were avoided in a perfectly legal manner by taking full advantage of tax breaks and the differences in international regulations. In Australia, the incorporation of Apple there can thus report much lower profits than what it actually made there, and pay taxes on only the money that's left after the bulk of profits have been transferred to Ireland (or Singapore as case may be).
The practices Apple engages in with regards to its taxes -- researching and employing any loopholes -- are followed by most multi-national corporations and tech companies, so much so that the technique has a name: "Double Irish with a Dutch sandwich." Efforts by the various countries to stem the various tax-dodging schemes usually fails because of an inability to enforce rules across the multitude of countries involved.
For its part, Irish Michael Noonan has said he plans to reform his country's "tax residence" loophole, which would allow Ireland to tax ASI at the normal corporate rate, but in all likelihood Apple would simply move its European headquarters to another country with more favorable tax rates. ASI in Ireland has, over the past five years, reported some $100 billion in profit -- and paid $5 million in taxes.
For 2013, Apple Australia reported pretax earnings of only $88.5 million -- because some $2 billion had already been sent to ASI. In 2012, the Australian Tax Office reports, Apple took in nearly $5 billion in overall revenue, but paid only a total $94.7 million in taxes. Australian officials in 2012 charged Apple another $28.5 million for back taxes, and officials have said they will try to recover more of the millions Apple has avoided paying under the scheme.
Ultimately, the real solution to the problem is global tax reform so that Apple and other multi-national companies can't play one country's tax codes off another. A surprising advocate of reform is, of all people, Apple CEO Tim Cook -- who has met with Congressional leaders and Irish Finance Minister Noonan on the topic, and advocated for proposals similar to President Obama's ideas on corporate tax loophole closing. In the meantime, Cook is legally obligated by a fiduciary duty to shareholders to seek out any tax-avoidance strategies (provided they are legal) as part of his responsibility to maximize profits.