The European Commission is expected to announce today that Apple, now one of the world's biggest listed companies, got special treatment from the Irish authorities, when the American company sought assurances on tax issues in 1991 and 2007 - - from the latter year, Apple's foreign tax rate tumbled compared with earlier in the decade. The Financial Times says today that Apple's CFO said the company in 2007 sought an “advanced opinion” that would provide “complete certainty” about its tax liabilities.
Joaquín Almunia, the EU’s competition commissioner, will set out the Commission's case that Apple's alleged special treatment in respect of its principal Irish offshore company Apple Operations International (AOI) and AOI's Apple Operations Europe (AOE) subsidiary, were in breach of EU state aid rules.
There will be a 30-day period from today for parties to respond to the preliminary finding.
Investigations are also in process in respect of Starbucks and the Dutch government, and Fiat Finance and Trade, the financial unit of the Italian automotive group, with Luxembourg.
The Irish Government emphatically rejects that any special treatment was given to Apple but we reported last June that AOI used to pay corporation tax in Ireland on its overseas revenues until it was declared by Apple in 2006/2007 to have no tax jurisdiction - - in effect stateless - - according to evidence given to the US Senate Permanent Subcommittee on Investigations.
The most explosive revelation in the May 2013
report [pdf] of the US Senate panel was Apple’s claim that three key offshore companies were not tax residents of Ireland, where they are incorporated, or of the United States, where Apple executives manage and control the companies. The report said Apple Operations International had "not paid any corporate income tax to any national government in the past 5 years."
“Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” said Senator Carl Levin. “Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere. We intend to highlight that gimmick and other Apple offshore tax avoidance tactics so that American working families who pay their share of taxes understand how offshore tax loopholes raise their tax burden, add to the federal deficit and ought to be closed.”
Apple Operations International (AOI) was formerly known as Apple Computer Inc. Limited. The company was incorporated in 1980 as an offshore company with an address at the Cork, Ireland manufacturing facility.
The last accounts filed for AOI (as Apple Computer Inc. Limited) was in 2005 in respect of fiscal 2004.
In that year Apple Inc. reported sales of $8.2bn and a net income before tax of $383m; the consolidated Apple Computer Inc. Limited, Cork + its subsidiaries, reported sales of $3.3bn and net income before tax of $345m.
Tax paid to the Irish Revenue was at $21m after offsets for foreign tax and other adjustments.
Irish Revenue officials must have been aware of the change of status of AOI from a tax-paying company in Ireland to a tax-exempt status?
There is evidence that a November 2005 report [pdf; free] by The Wall Street Journal on Microsoft's sophisticated tax avoidance schemes in Ireland, influenced Apple.
In 2006, Apple like Microsoft changed its Irish offshore companies to unlimited status, avoiding publication of financials while a new subsidiary named Braeburn Capital, in Reno Nevada, would not only avoid California's corporate tax but it would manage Apple's investments and tax strategy. Braeburn is a variety of apple and Apple told the US Senate panel that AOI’s assets are managed by Braeburn Capital. "Apple indicated that the assets themselves are held in bank accounts in New York."
So the request for an 'advanced opinion' on tax issues to the Irish authorities coincided with these developments.
With revenues and earnings accelerating and an apparent nod from the Irish authorities, there was no further tax paid in Ireland by AOI and cash was routed directly to New York.
In Apple's biggest markets the effective rate of corporate tax was in the 20s but the foreign tax rate could be cut to low single digit levels and to foreign tax authorities, the Irish offshore letter-box companies used the address of Apple's Irish facility in Cork, Ireland, and appeared as conventional operations.
This arrangement could not have been possible without driving a coach-and-four through the US tax system -- overseas cash could be held in New York.
At the end of June, Apple had $164.5bn of "cash, cash equivalents and marketable securities" on its balance sheet with $137.7bn technically held by Apple's foreign - - mainly Irish - - subsidiaries.
“There’s never been any special deal, there’s never been anything that would be construed as state aid,” Luca Maestri, Apple’s chief financial officer, told the Financial Times.
“We were simply trying to understand what was the right amount of taxes that we would have to pay in Ireland,” Maestri said of the agreements, describing Apple’s approach as “very responsible, transparent and prudent.”
For AOI, the answer was apparently none.
Why did the Irish authorities apparently agree to the change to a stateless status with no taxes due?
The Senate report in May 2013 said: "According to Apple, AOI’s net income made up 30% of Apple’s total worldwide net profits from 2009-2011, yet Apple also disclosed to the Subcommittee that AOI did not pay any corporate income tax to any national government during that period."
When asked whether AOI was instead managed and controlled in the United States, where the majority of its directors, assets, and records are located, Apple responded that it had not determined the answer to that question. Apple noted in a submission to the Subcommittee: 'Since its inception, Apple determined that AOI was not a tax resident of Ireland. Apple made this determination based on the application of the central management and control tests under Irish law.' Further, Apple informed the Subcommittee that it does not believe that 'AOI qualifies as a tax resident of any other country under the applicable local laws.'
For more than thirty years, Apple has taken the position that AOI has no tax residency, and AOI has not filed a corporate tax return in the past 5 years."
As outlined above AOI did operate as a tax resident company until recent times.
The stateless loophole was closed in an Irish Finance Act in 2013.
|Prepared by the US Senate Permanent Subcommittee on Investigations, May 2013. Source: Materials received from Apple Inc.|
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