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News : US Economy Last Updated: Jun 17, 2013 - 11:59 AM

US Congress told Apple used Irish "shell companies"
By Michael Hennigan, editor and founder of Finfacts
Jun 14, 2013 - 8:26 AM

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Edward Kleinbard, a professor of law at the University of Southern California's Gould School of Law.
The House Ways and Means Committee of the US Congress, which is responsible for tax issues, held a hearing on Thursday on corporate tax reform and a prominent tax expert said on Apple that the question is not where the "minds and management" of the Irish "shell companies" might be, but whether they have any minds at all?

Dave Camp, the Republican chairman, said: "Whether a country has a hybrid system similar to the current US worldwide system or a dividend exemption system like that of our major trading partners, it is important to develop strong base erosion rules that protect against aggressive transfer pricing, anti-migration of intangible property overseas and foreign earnings stripping.

And let me just say that it is important to remember that the most effective anti-base erosion rule is a lower corporate tax rate.  But unfortunately, while a lower rate is necessary, the rate alone is not sufficient."

Pascal Saint-Amans, director, Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development (OECD), who is currently responsible for preparing proposals on corporate tax avoidance for a July meeting of the G-20 leading developed and emerging economies, told the hearing that a "key element is to better align taxation and the substance of taxpayers’ value creating activities."

He also highlighted the importance of transparency: "This includes the provision of better information by taxpayers to tax administrations and more effective cooperation among tax administrations. For example, many countries, including the United States, have rules that require disclosure of certain types of aggressive transactions, and work is expected to develop recommendations regarding the design of such rules."  

One proposal before the Committee is for income from intangible assets such as patents and trademarks earned by US companies overseas, would be subject to an immediate 15% tax rate compared with the standard 35% rate, which can be deferred by keeping profits abroad.

Companies would also get an immediate deduction for taxes paid. "Companies would feel less pressure to shift income to low-tax jurisdictions because that income would be taxed at the same rate - whether it is earned in the United States or Bermuda," Camp also said on Thursday.

Edward Kleinbard, a professor of law at the University of Southern California's Gould School of Law and former chief of staff of the US Congress’s nonpartisan Joint Committee on Taxation, however said it would be extremely difficult to estimate the profits from intangible assets. He referred to the Senate’s Permanent Subcommittee on Investigations (PSI) May case study of Apple’s stateless income generation strategies.

"What struck me as most remarkable about the PSI report and the hearing itself was the baldness of Apple’s tax planning. It did not involve 'Double Irish Dutch Sandwich' structures, exotic forms of Lichtenstein trusts or reliance on obscure tax treaties. Instead, the entirety of the business arrangements that explain why Apple paid virtually no tax anywhere in the world on $38bn of income in the period 2009-11 alone from research and development work conducted in California boils down to this: in 1980 Apple created a shell company subsidiary in Ireland, capitalized it, and entered into a special kind of contract with this shell company (a 'cost sharing agreement'), in which the shell company returned to Apple some of the capital seeded to it by Apple, thereby first purportedly acquiring ownership in all of Apple’s intangible assets outside the Americas. This description is a bit simplified, but in essence, that is the entirety of the story.

I refer to Apple’s Irish subsidiaries that purportedly own and exploit some of the world’s most valuable assets as 'shell companies' because they are. Until 2012, the key Irish subsidiary (Apple Sales International) had no employees and no independent ability to act according to its own perceived interests. What little activity the shell companies performed ('negotiating' a cost sharing agreement with the parent company, where the shell companies act through the mouthpiece of senior Apple Inc. employees who were ‘dual hatted’ to the Irish companies as well, and 'negotiating' contracts with third party manufacturers of Apple products, like Foxconn, when the record showed that those contracts again were in fact negotiated by Apple Inc. employees, and just mirror the contracts used by Apple Inc.) were not in any way performed by actors independent of Apple Inc. Nor have the subsidiaries done anything with their crown jewel intangible assets that is separate from what Apple Inc. does. These truly are shell companies.

He proposed a 25% tax on worldwide income and mandating that companies reveal where their income is earned and the tax rates they paid around the world. That would help solve the problem of 'stateless' income, which came up at the PSI hearing last month on Apple Inc.'s tax planning.

Written testimony of witnesses

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