Further disclosures from the Paradise Papers
• Leaked documents show that technology behemoth restructured offshore subsidiaries to avoid paying taxes
It was May 2013 and Apple CEO Tim Cook was angry. He sat before the US Senate permanent subcommittee on investigations, which had completed an inquiry into how Apple avoided tens of billions of dollars in taxes by shifting profits into Irish subsidiaries that the subcommittee’s chairman called “ghost companies”.
“We pay all the taxes we owe, every single dollar,” Cook said. “We do not depend on tax gimmicks…. We do not stash money on some Caribbean island.”
Ireland bowed to international pressure five months later and announced a crackdown on firms, such as Apple’s subsidiaries, which claimed that almost all of their income was not subject to taxes in Ireland or anywhere else in the world.
Now leaked documents shine a light on how the iPhone maker responded to this. Despite its CEO’s public rejection of island havens, that is where Apple turned as it began shopping for a new tax refuge.
Apple’s advisers at one of the world’s top law firms, Baker McKenzie, canvassed one of the leading players in the offshore world — a firm of lawyers called Appleby — which specialised in setting up and administering tax-haven companies.
A questionnaire that Baker McKenzie e-mailed in March 2014 set out 14 questions for Appleby’s offices in the Cayman Islands, the British Virgin Islands, Bermuda, the Isle of Man, Guernsey and Jersey.
One asked that the offices, “Confirm that an Irish company can conduct management activities … without being subject to taxation in your jurisdiction.”
Apple also asked for assurances that the local political climate would remain friendly: “Are there any developments suggesting that the law may change in an unfavourable way in the foreseeable future?”
Apple settled on Jersey, which charges no tax on corporate profits for most companies. Jersey was to play a key role in Apple’s newly configured Irish tax structure set up in late 2014.
Under this arrangement, the MacBook maker has continued to enjoy ultralow tax rates on most of its profits and now holds much of its non-US earnings in $252bn cash offshore.
The story of Apple’s hunt for a new avoidance strategy is among the disclosures emerging from a leak of secret records that reveals how the offshore tax game is played by Apple, Nike, Uber and other multinational corporations – and how top law firms help them exploit tax gaps around the world.
Multinationals that transfer intangible assets to tax havens and adopt other aggressive avoidance strategies are costing governments around the world as much as $240bn a year in lost tax revenue, according to a conservative estimate in 2015 by the Organisation for Economic Cooperation and Development.
An Apple spokesman declined to answer a list of questions about the company’s offshore tax strategy, except to say it had informed US, Irish and European Commission regulators of its reorganisation at the end of 2014. “The changes we made did not reduce our tax payments in any country,” the spokesman said.
“At Apple we follow the laws, and if the system changes we will comply. We strongly support efforts from the global community toward comprehensive international tax reform and a far simpler system, and we will continue to advocate for that.”
Apple is being pursued for $14.5bn in Irish back taxes after European regulators ruled that Ireland had granted illegal state aid by approving the company’s tax structure.
Over three decades, US multinationals have been growing bolder, shifting chunks of profits into tax havens. Concern about their tactics was largely ignored until government finances around the world came under pressure after 2008.
In 2012 the issue came to a head in a welter of government inquiries, tax inspector raids, investigative reporting and promises of reform. By the time the US Senate permanent subcommittee on investigations released 142 pages of documents and analysis for its public hearing on Apple’s tax avoidance in May 2013, the world was paying attention.
The subcommittee found that Apple was attributing billions of dollars of profits each year to three Irish subsidiaries that had declared “tax residency” nowhere in the world.
Under Irish law, most companies incorporated in Ireland are required to pay taxes locally on their profits. But if the directors are able to convince the Irish tax authorities that a firm is “managed and controlled” abroad, it can often escape all, or almost all, Irish tax.
For more than two decades, the directors of Apple’s three Irish companies — including, for many years, Cook — did just that. By running these Irish subsidiaries from group headquarters in California, they avoided Irish tax residency.
Ireland’s finance minister at the time, Michael Noonan, at first defended his country’s policies. But by October 2013, in response to growing international pressure, he announced plans to require Irish companies to declare tax residency somewhere in the world.
At that time, Apple had accumulated $111bn in cash almost entirely held by its Irish shadow companies, beyond the reach of US tax authorities. Each year, the pile grew higher and higher — and company officials wanted to keep it that way. So Apple sought alternatives to replace the tax shelter arrangements Ireland would soon shut down. At the same time, however, the iPhone maker wanted its interest in the offshore world kept quiet.
As Cameron Adderley, global head of Appleby’s corporate division, explained in an e-mail to other senior partners: “For those of you who are not aware Apple [officials] are extremely sensitive concerning publicity…. They also expect the work that is being done for them only to be discussed amongst personnel who need to know.”
Behind closed doors, Apple decided that two of its Irish companies should, with the help of Appleby, claim tax residency in Jersey. But as Apple’s plans to use an offshore tax haven progressed, another potential problem emerged. In mid-2014, again under pressure from other governments, Irish ministers had begun exploring a ban on a tax shelter known as the “Double Irish,” an avoidance strategy used by companies, including Google, Facebook and LinkedIn.
The Double Irish allows firms to collect profits through one Irish unit that employs people in Ireland and is tax resident there, and then route those profits to a second Irish subsidiary that claims tax residency in a lowtax island.
Although it was aimed at Double Irish structures, the potential rule change would ban all Irish companies from claiming tax residency in a tax haven.
By the start of 2015, Apple had restructured its affairs in Ireland, including securing tax residency in Jersey for Apple Sales International and Apple Operations International, two of the three Irish shadow companies highlighted in the US Senate investigation a year earlier.
For the previous five years, Apple Sales International had been Apple’s biggest profit generator, churning out more than $120bn, or close to 60% of Apple’s worldwide earnings.
Much of that profit was transferred as dividends to Apple Operations International.
Before their move to Jersey, these two subsidiaries had played a key role in helping Apple accumulate and hold $137bn in cash. The latest figures indicate that since Apple’s reorganisation of its Irish companies this sum has increased 84%, though Apple will not confirm which of its foreign subsidiaries own this cash.
The iPhone maker has also declined to answer questions about its new set-up, but it appears to give a key role to another of Apple’s Irish subsidiaries, a company called Apple Operations Europe.
Together with Apple Operations International and Apple Sales International, the company made up the three Irish firms criticised by US senators in 2013 for being “ghost companies”.
By 2015, tighter Irish laws had caused all three to find a new tax home. But while the other two Irish companies took up residency in Jersey, Apple Operations Europe became tax resident in Ireland, the country of its incorporation.
A clue as to why a multinational might want a subsidiary that was liable for taxes in Ireland can be found in Noonan’s budget announcement in 2014.
While media headlines focused on his decision to crack down on Double Irish arrangements, less attention was paid to measures not mentioned in his budget speech but contained in accompanying policy documents. In particular, the paperwork revealed plans to expand an already generous tax regime for companies that bring intangible property into Ireland.
The incentive, known as a capital allowance, offered Irish companies big tax deductions over many years if they spent money buying expensive intangible property. Importantly for multinationals, it was also available to an Irish company that bought intangible property from another company within the same group.
The arrangement was especially attractive to multinationals in a position to sell their intangible property into Ireland from a subsidiary in a tax haven, where the gain from the sale would go untaxed.
Apple declined to answer questions about whether it had taken advantage of this tax break. It is clear, though, that a large amount of intangible property landed abruptly in Ireland around the period when Apple reorganised its subsidiaries.
The country’s GDP for 2015 leapt by 26%, boosted by close to $270bn of intangible assets suddenly appearing in Ireland’s national accounts at the start of the year.
However, in October 2017, Ireland reversed the sweetened terms Noonan had added to the tax break three years earlier.
Apple said that after its reorganisation it is paying more Irish tax than before.
“The changes we made did not reduce our tax payments in any country. In fact, our payments to Ireland increased significantly and over three years [2014, 2015 and 2016] we’ve paid $1.5bn in tax there — 7% of all corporate income taxes paid in that country.”
But the iPhone maker still won’t say how much profit it makes through its Irish companies — making it impossible to gauge whether $1.5bn is a lot of tax to pay in three years or not.
A LARGE AMOUNT OF INTANGIBLE PROPERTY LANDED IN IRELAND AROUND THE TIME APPLE SHUFFLED ITS SUBSIDIARIES