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News : Irish Economy Last Updated: Feb 13, 2015 - 6:24 AM

Corporate Tax 2014: Irish Government's "flawed premise" on Apple's avoidance
By Michael Hennigan, Finfacts founder and editor
Mar 8, 2014 - 8:03 AM

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Angela Merkel, German chancellor, and Enda Kenny, taoiseach/ prime minister, at a press conference, Dublin, March 08, 2014

Corporate Tax 2014: On Friday an anonymous civil servant at the Department of Finance was tasked with being a propaganda mouthpiece for Irish government ministers in responding to this week's revelations of Apple's intercontinental chain of tax avoidance involving Australian, Singaporean and Irish companies. The claim by the Irish Government that low effective rates in Ireland are based on a “a flawed premise” should boomerang right back to Dublin's Merrion Street.

Finfacts:Apple's massive tax avoidance revealed in Ireland and Australia

The anonymous civil servant set out the Irish Government's position that conveniently ignores key realities:

  • Two separate scenarios are often confused in discussions on the effective rate of corporation tax. “The first is the global rate of tax which is paid by multinational companies who operate across a number of jurisdictions. This is a ‘blended’ rate which takes into account the amount of tax charged across all of the countries that a company trades in and not just Ireland.

  • “The extremely low effective rate figures that have been quoted recently and attributed to Ireland are based on a flawed premise” because the figures were estimated by dividing the amount of Irish tax paid by a total profit figure that includes substantial profits made by companies that are not tax-resident in Ireland. “Ireland cannot tax profits that are properly attributable to other jurisdictions”;

  • The second issue is the relevant effective rate of tax that applies in individual countries and all companies operating in Ireland, domestic businesses and multinationals, were charged corporation tax at the 12.5%.

Seamus Coffey, UCC economist, makes a similar argument in The Irish Examiner today.

Let's see how flawed these arguments are in trying to evade responsibility for massive tax avoidance.

  • US companies in Ireland have for decades been using non- tax resident Irish companies for tax avoidance. They are usually mailbox companies in tax havens such as Bermuda and the Cayman Islands;

  • In 1999 under pressure from the EU, it was planned to have all Irish companies tax resident. However, an exemption was made under pressure from the American Chamber of Commerce in Ireland to maintain the offshore facility for US companies. So the Finance Bill of that year provided that an offshore company which  was tax resident in a double-tax agreement country could maintain its status while a new non-tax resident companies could be setup if it was related to an existing firm with Irish operations;

    The Irish exemption was made at a crucial time when US companies were beginning to take advantage of a tax loophole called 'check the box' that had been inadvertently introduced by President Clinton's Treasury Department to simplify the tax code through allowing companies to file subsidiaries' income with parent company income. The companies also were able to designate which units were irrelevant for tax purposes, termed "disregarded entities." In the four years, between 1999 and 2012, profits of Irish affiliates of US companies doubled from $13.4bn to $26.8bn. They became the most profitable in the world. Corporate payments to members of Congress ensured that the loophole could not be closed - - See Congressional Research Service report [pdf].

  • In Apple's case, last year's report from the US Senate's Permanent Subcommittee on Investigations revealed that the electronics giant was able to avoid the Dutch Irish Dutch Sandwich Scheme (explained here) by treating its Irish offshore companies as 'stateless' -- in effect not tax resident anywhere. That loophole was closed late year in the Irish Finance Act;

  • The Senate panel's report said in respect of Apple Sales International (ASI), a non-tax resident Irish offshore company that in 2012 became liable for some taxes on activities in Ireland: "In 2012, as a result of Apple’s restructuring of its Irish subsidiaries, ASI was assigned 250 employees who used to work for its parent, AOE (Apple Operations Europe). Despite acquiring those new employees, ASI maintains that its management and control is located outside of Ireland and continues to claim it has no tax residency in either Ireland or the United States. Despite its position that it is not a tax resident of Ireland, ASI has filed a corporate tax return related to its operating presence in that country. As shown in an earlier chart, ASI has paid minimal taxes on its income";

  • Apple through its Irish companies determine inter-company prices for global markets with a view to minimise tax in each main market as there is no tax on profits routed through the Irish companies. Taxes on reported profits in individual countries are at the local rate;

  • Google books over 40% of its global revenues in Ireland after booking enough to cover operating costs and some profits in various global markets, again paying the local rate; in Ireland it then minimises its reported profit by booking invoice charges from an Irish company in Bermuda; there is no evidence that the Irish Revenue pays close attention to these charges for technology and so on; in 2012, Google Ireland reported a net income as a ratio of sales of 0.8% compared with Google Inc's net income ratio of 30%.

  • Google reported foreign income of $8.1bn  in 2012 compared with US income of $5.31bn and it provided for $358m for foreign taxes giving it an effective foreign tax rate of 4.4%. It said: "Substantially all of the income from foreign operations was earned by an Irish subsidiary"  - - Google Ireland Holdings, the Irish-registered non-tax resident company located in Bermuda, which owns the intellectual property that Google Ireland Ltd is licensed to sell. It is a letter box company located at the Church Street, Hamilton offices of Conyers Dill & Pearlman, a company that provides services to offshore clients;

  • No withholding tax is paid when the money technically goes from Google Ireland, via a Google mailbox company in the Netherlands, to Bermuda. This of course just involves accounting transactions involving accounts in a US-owned bank; Google has no employees in Bermuda and the Irish company is likely managed from Google's headquarters in California.

  • Mailbox Irish holding companies in West Atlantic island tax havens, avail of secrecy courtesy of unlimited status provided by Irish company law;

  • It is US companies who identify Ireland as the location of profits used in US Bureau of Economic Analysis data - - for example Google and Facebook says in their Securities and Exchange Commission filings: "Although we file US federal, US state, and foreign tax returns, our two major tax jurisdictions are the US and Ireland."

  • The statement that “Ireland cannot tax profits that are properly attributable to other jurisdictions” does not match reality as Google for example gets about 11% of its revenues from the UK and it books most of this total in Ireland including the related profits that are then offset with charges from an offshore Irish company. In effect Ireland facilitates the company to reduce its UK liability;

So ministers and Department of Finance civil servants collectively claim that:

  • Ireland has no responsibility for profits diverted through Ireland to Irish offshore companies in island tax havens;

  • Ireland has no responsibility for Irish offshore companies as they are not managed from Ireland. Illegal activities? It would be a case of "we know nothing";

  • Google (ex-Motorola) had a payroll of 37,500 in December 2012 and 2,200 miracle workers in Dublin produced €15.5bn in revenues (41% of Google Inc.'s global revenues ex Motorola). Microsoft Operations Ireland reported a 37% rise in revenues in the year ended June 30, 2012 to €13.7bn (24% of Microsoft Inc's global revenues) without any significant change in its operations company payroll of less than 700. Microsoft Inc employed about 90,000.

  • Rising services exports reflects competitiveness!

John Herlihy, Google Ireland chief (left), apparently instructing Richard Bruton, enterprise minister, on pressing green lights, Dublin, September 2012.

According to our calculation about €40bn or over 40% of Irish services exports of €90bn in 2012 and related national output, resulted from global tax avoidance schemes.

It is true that Ireland gains little from tax cheating but at some point, the US tax system will be reformed and a territorial system where companies are only liable in the US on US profits, would only be viable if there was a disincentive to shift profits to non-tax or low tax countries. The risk for Ireland is that a minimum foreign tax would be introduced that would be greater than the Irish headline rate of 12.5%.

It's also likely that US investment in Ireland would not have been jeopardized if Irish politicians had not been so eager as supplicants to doff the cap.

Nevertheless today it would be taboo to admit the reality of participation in massive tax avoidance and the Captain Renaults of Merrion Street will continue with their version of the Dance of the Seven Veils.

On Friday at a press conference in Dublin with Angela Merkel, German chancellor, Enda Kenny, taoiseach/ prime minister, rejected criticism of Ireland’s corporate tax system, saying that the Government supports moves towards new international rules for “stateless” companies - - but that was a baby-step his government took last year.

Apple's revenue and profit per employee in 2013

Companies like Apple are huge beneficiaries of globalization and in the US the company exhibits the positives and negatives of that development.

It has world prices for its products but Chinese labour rates and a contract system

Apple employs about 50,000 in the US and most of the staff are not well paid. General Motors had over 618,000 employed in the US in 1979 - in well-paid jobs

About 30,000 work in Apple's retail stores with the pay typically at $25,000. There are about 8,000 in support and 12,000 developers who are the elite.

The New York Post reports that of the 18 biggest technology and media companies in 2013, Apple’s $460,772 in profits per employee heads the rankings, followed by 21st Century Fox at $277,344, Google at $270,123, Facebook at $236,705 and Viacom at $230,000 per employee.

Rounding out the top 10 were Microsoft at $221,212 in profit per employee, Discovery Communications at $188,597, Time Warner at $108,824, CBS at $96,460 and Netflix at $55,589 per employee.

The final eight included Comcast at $50,000 in profits per employee, Disney at $34,857, DreamWorks at $25,045, News Corp. at $21,083, The New York Times Co. at $18,447, AOL at $18,118, Gannett Co. at $12,310 and LinkedIn at $5,312 per employee.

Apple had $158bn in cash and near cash securities at end 2013.

The companies benefit from both competition within the US and internationally for their jobs as well as public education spending.

The median US household family income was $51,017 -- in inflation adjusted terms below the 1989 level.

Women, African-Americans and Hispanics/ Latinos are unwanted in Silicon Valley

Wall Street Journal on Silicon Valley dreams of techno-utopias and arrogance

Brian Marshall of ISI - International Strategy & Investment group said last year after publication of Apple's 2013 results that Apple's $11 billion in forecast capital expenditures for fiscal 2014is a double-digit increase from a company that was already "the single largest CapEx spender" in Marshall's "Big 7 Hyperscale group" -- Apple (AAPL), Google (GOOG), Microsoft (MSFT), Amazon (AMZN), EBay (EBAY), Facebook (FB) and Yahoo (YHOO.)

Apple's "off-the-charts" revenue-per-head metric compared with the other IT and networking companies he covers.

"The scale the company is executing on," he wrote, "is nothing less than astonishing."

Selection of Finfacts tax reports 2013/14:

US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

Corporate Tax 2014: Apple's massive tax avoidance revealed in Ireland and Australia

Corporate Tax 2014: White House and Congress to publish US reform proposals

Corporate Tax 2014: US proposal of 17% rate for foreign profits

Irish Corporate Tax 2014: How official spin and distortion works - in short-term

Irish Corporate Tax 2014: Noonan signalls publicity offensive on effective rate

Corporate Tax 2014: Obama running with the hare and hunting with the hounds

Corporate Tax 2014: Yahoo! joins “Double Irish Dutch Sandwich” club; IDA Ireland wants more members

Corporate Tax: Kenny reassures Facebook but Ireland's rate is too high

Foreign government requests Bermuda to investigate Microsoft's Irish-linked subsidiaries

G-20 Australian presidency focuses on tax "leaking bucket"; Ireland still in denial?

Corporate tax reform and the biggest tech tax havens

Ireland's new International Tax Charter: More political kabuki

Ireland's tax man for Silicon Valley

Corporate Tax 2014: UK's revenues plunge; France considers reform

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