European Commission - Press release
State aid: Commission refers Ireland to Court for failure to recover illegal tax benefits from Apple worth up to €13 billion
Brussels, 4 October 2017
The European Commission has decided to refer Ireland to the European Court of Justice for failing to recover from Apple illegal State aid worth up to €13 billion, as required by a Commission decision.
The Commission decision of 30 August 2016 concluded that Ireland's tax benefits to Apple were illegal under EU State aid rules, because it allowed Apple to pay substantially less tax than other businesses. As a matter of principle, EU State aid rules require that illegal State aid is recovered in order to remove the distortion of competition created by the aid.
Commissioner Margrethe Vestager, in charge of competition policy, said "Ireland has to recover up to 13 billion euros in illegal State aid from Apple. However, more than one year after the Commission adopted this decision, Ireland has still not recovered the money, also not in part. We of course understand that recovery in certain cases may be more complex than in others, and we are always ready to assist. But Member States need to make sufficient progress to restore competition. That is why we have today decided to refer Ireland to the EU Court for failing to implement our decision."
The deadline for Ireland to implement the Commission's decision on Apple's tax treatment was 3 January 2017 in line with standard procedures, i.e. four months from the official notification of the Commission decision. Until the illegal aid is recovered, the company in question continues to benefit from an illegal advantage, which is why recovery must happen as quickly as possible.
Today, more than one year after the Commission's decision, Ireland has still not recovered any of the illegal aid. Furthermore, although Ireland has made progress on the calculation of the exact amount of the illegal aid granted to Apple, it is only planning to conclude this work by March 2018 at the earliest.
The Commission has therefore decided to refer Ireland to the Court of Justice for failure to implement the Commission decision, in accordance with Article 108(2) of the Treaty on the Functioning of the European Union (TFEU).
Background
Ireland has appealed the Commission's August 2016 decision to the Court of Justice. Such actions for annulment brought against Commission decisions do not suspend a Member State's obligation to recover illegal aid (Article 278 TFEU) but it can, for example, place the recovered amount in an escrow account, pending the outcome of the EU court procedures.
Also, Member States still have to recover illegal State aid within the deadline set in the Commission decision, which is usually four months. Article 16(3) of Regulation 2015/1589 and the Commission's recovery notice (see Press Release) provide that Member States should immediately and effectively recover the aid from the beneficiary.
If a Member State does not implement a recovery decision, the Commission may refer the matter to the Court of Justice under Article 108(2) of the Treaty on the Functioning of the European Union (TFEU) that allows the Commission to directly refer cases to the Court for violations of EU State aid rules.
If a Member State does not comply with the judgment, the Commission may ask the Court to impose penalty payments under Article 260 TFEU.
IP/17/3702
http://europa.eu/rapid/press-release_IP-17-3702_en.htm
Ireland Promises Progress in Apple Tax Recovery in Coming WeeksBy ReutersNov. 21, 2017DUBLIN — Ireland expects to make progress in recovering up to 13 billion euros (£11.5 billion) in disputed taxes from Apple Inc in the coming weeks, its prime minister said on Tuesday, following EU criticism that Dublin was moving too slowly.
The European Commission ruled in August 2016 that Apple had received unfair tax incentives from Ireland and said last month it was taking Dublin to the European Court of Justice over its delays in recovering the money.
Both Apple and Dublin are appealing the original ruling, saying the iPhone maker's tax treatment was in line with Irish and European Union law.
"We've indicated to them (Apple) that we want the escrow account established and we want funds to be paid into the escrow account without further delay," Irish Prime Minister Leo Varadkar told parliament.
"We do not want to be in the situation where the Irish government has to take Apple to court because the European Commission is taking the Irish government to court. I think that message is understood and I'd anticipate progress in the coming weeks."
The Commission said last month the deadline for Ireland to implement its decision had been Jan. 3 this year and that, until the aid was recovered, the company continued to benefit from an illegal advantage.
You have 8 free articles remaining.Subscribe to The TimesIreland, which described the Commission's move to take it to court as "extremely regrettable," said it had been in constant contact with the Commission and Apple for more than a year and was close to setting up an escrow account to hold the funds.
Ireland's Finance Minister Paschal Donohoe also said at the time that, in addition to work on the escrow account, the government was in "commercially sensitive" talks with Apple about the exact terms of the transfer.
(Reporting by Padraic Halpin; Editing by David Evans and Mark Potter)
The European Commission ruled in August 2016 that Apple had received unfair tax incentives from Ireland and said last month it was taking Dublin to the European Court of Justice over its delays in recovering the money.
Both Apple and Dublin are appealing the original ruling, saying the iPhone maker's tax treatment was in line with Irish and European Union law.
"We've indicated to them (Apple) that we want the escrow account established and we want funds to be paid into the escrow account without further delay," Irish Prime Minister Leo Varadkar told parliament.
"We do not want to be in the situation where the Irish government has to take Apple to court because the European Commission is taking the Irish government to court. I think that message is understood and I'd anticipate progress in the coming weeks."
The Commission said last month the deadline for Ireland to implement its decision had been Jan. 3 this year and that, until the aid was recovered, the company continued to benefit from an illegal advantage.
You have 8 free articles remaining.Subscribe to The TimesIreland, which described the Commission's move to take it to court as "extremely regrettable," said it had been in constant contact with the Commission and Apple for more than a year and was close to setting up an escrow account to hold the funds.
Ireland's Finance Minister Paschal Donohoe also said at the time that, in addition to work on the escrow account, the government was in "commercially sensitive" talks with Apple about the exact terms of the transfer.
(Reporting by Padraic Halpin; Editing by David Evans and Mark Potter)
Ireland promises progress in Apple tax recovery in coming weeks
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(Reuters) - Ireland expects to make progress in recovering up to 13 billion euros (£11.5 billion) in disputed taxes from Apple Inc (AAPL.O) in the coming weeks, its prime minister said on Tuesday, following EU criticism that Dublin was moving too slowly.
The European Commission ruled in August 2016 that Apple had received unfair tax incentives from Ireland and said last month it was taking Dublin to the European Court of Justice over its delays in recovering the money.
Both Apple and Dublin are appealing the original ruling, saying the iPhone maker's tax treatment was in line with Irish and European Union law.
"We've indicated to them (Apple) that we want the escrow account established and we want funds to be paid into the escrow account without further delay," Irish Prime Minister Leo Varadkar told parliament.
"We do not want to be in the situation where the Irish government has to take Apple to court because the European Commission is taking the Irish government to court. I think that message is understood and I'd anticipate progress in the coming weeks."
The Commission said last month the deadline for Ireland to implement its decision had been Jan. 3 this year and that, until the aid was recovered, the company continued to benefit from an illegal advantage.
Ireland, which described the Commission's move to take it to court as "extremely regrettable," said it had been in constant contact with the Commission and Apple for more than a year and was close to setting up an escrow account to hold the funds.
Ireland's Finance Minister Paschal Donohoe also said at the time that, in addition to work on the escrow account, the government was in "commercially sensitive" talks with Apple about the exact terms of the transfer.
(Reporting by Padraic Halpin; Editing by David Evans and Mark Potter)
http://uk.mobile.reuters.com/article/amp/idUKKBN1DL23C
After failing to meet the European Commission's January 3 deadline, Ireland has said it expects to collect the disputed taxes in the coming weeks
Ireland expects to recover up to €13 billion in disputed taxes from Apple in the coming weeks, following criticism from the European Commission for moving too slowly.
The deadline for Ireland to implement the European Commission's ruling had been January 3, 2017, the commission pointed out last month, adding it would be taking Ireland to the European Court of Justice for failure to collect the taxes despite considerable time passing.
After a two-year investigation, the European Commission declared in August 2016 that tax arrangements between Apple and Ireland, originally established in 1991, allowed the company to pay "substantially less tax" than rival companies, and were therefore illegal under state aid rules.
The commission concluded that Apple had used two shell companies incorporated in Ireland so that it could report its Europe-wide profits at effective rates significantly below 1 percent, at one point paying a tax rate of just 0.005 percent.
As a result, Ireland was ordered to recover €13 billion in back taxes from Apple.
Ireland's finance ministry said last month that it had been in constant contact with the European Commission and Apple for more than a year and was close to setting up an escrow account, through which the money will be deposited.
Paschal Donohoe, Ireland's finance minister, said at the time that the government was in "commercially sensitive" talks with Apple about the exact terms of the transfer, though he previously called the commission's ruling unjustified.
"We've indicated to them (Apple) that we want the escrow account established and we want funds to be paid into the escrow account without further delay," Irish Prime Minister Leo Varadkar told Parliament on Tuesday.
"We do not want to be in the situation where the Irish government has to take Apple to court because the European Commission is taking the Irish government to court. I think that message is understood and I'd anticipate progress in the coming weeks."
Both Apple and Dublin are said to still be in the process of appealing the original ruling.
In its legal submission against the EU's ruling, the Irish finance ministry claimed that it's not only legal to levy far less tax on profits imposed by competitors, but that it's the whole point of Ireland's sales pitch to foreign investors.
Along with Apple, companies such as Amazon, Facebook, and Google have come under scrutiny in the last few years for allegedly paying too little tax by establishing shell companies in low or no-tax countries such as Luxembourg and Ireland.
The European Commission recently ordered Amazon to pay about €250 million in taxes to Luxembourg, though the exact amount of tax to be repaid will need to be calculated by Luxembourg authorities.
According to the commission, Amazon received illegal tax advantages between 2006 and 2014 in Luxembourg without any "valid justification". It concluded that the online retail giant had transferred a large portion of its profits from a company that was subject to tax in Luxembourg to a shell company it incorporated in the country that was not subject to the same tax obligations.
"In fact, the ruling enabled Amazon to avoid taxation on three quarters of the profits it made from all Amazon sales in the EU," said Commissioner Margrethe Vestager.
"In other words, Amazon was allowed to pay four times less tax than other local companies subject to the same national tax rules. This is illegal under EU state aid rules. Member states cannot give selective tax benefits to multinational groups that are not available to others."
In May, Google agreed to pay €306 million in back taxes to Italy and Ireland to end a criminal investigation into whether the company avoided paying the full amount on its revenues for more than a decade.
The agreement resolves multiple disputes including a criminal probe that saw Milan prosecutors accuse Google of generating revenues of €1 billion in Italy and Ireland between 2009 and 2013. The sum also settles other disputes for the tax years 2002-2006 and 2014-2015.
Tax officials said the settlement also launches a process to determine Google's proper taxation level in Italy going forward.
Last month, the European Commission launched a public consultation to help it decide on a fairer and "growth-friendly" tax regime for multinational technology companies operating in the European Union.
The commission said it wanted binding legislative proposals for "unitary tax" that would be levied on a share of tech companies' global profits, divided up between the EU countries where they operate.
The rationale for this is that it could remove the incentive for multinationals to set up their headquarters or shell companies in low or no-tax jurisdictions.
"The current tax framework does not fit with modern realities. It was designed in a pre-computer age and cannot capture activities which are increasingly based on intangible assets and data," the European Commission said last month.
As a result, there is the risk of shrinking tax bases for member states, competitive distortions for businesses, and obstacles for innovative companies.
"The commission said it was also contemplating changing the principle of corporate establishment, so that companies could be taxed when they have a "digital" presence in a country. In the short term, EU states could impose a tax on revenues from "digital activities" or services, such as the sale of online ads. They could also withhold tax on digital payments or a "digital transaction tax" levied on companies selling consumers' personal data.
The European Commission also opened its investigation into whether a UK tax exemption for multinationals amounts to a breach of EU state aid rules.
The UK government introduced an exemption to its Controlled Foreign Company (CFC) rules, which was created to stop companies from shifting untaxed profits to low or no-tax jurisdictions.
The CFC rules allow UK tax authorities to reallocate all profits artificially shifted to an offshore subsidiary back to the UK parent company. However, the Group Financing Exemption that was introduced means certain financing income received by a company's offshore subsidiary will not be reallocated to the UK.
"Thus, a multinational active in the UK can provide financing to a foreign group company via an offshore subsidiary," the European Commission said in an announcement.
"Due to the exemption, it pays little or even no tax on the profits from these transactions, because: the offshore subsidiary pays little or no tax on the financing income in the country where it is based; and the offshore subsidiary's financing income is also not (or only partially) reallocated to the UK for taxation due to the exemption."
In July, the European Parliament passed a directive requiring big multinationals to report tax and financial data separately in all countries where they operate in a bid to tackle tax avoidance and profit shifting to countries with lower tax rates.
However, the requirements need approval from the EU member states, after which they would need to be instituted into national law in each country within a year.
EU countries lose between €50 billion and €70 billion in revenues every year because of tax avoidance, VP of the European Commission Valdis Dombrovskis told lawmakers previously.
The new measure would require firms with activities in the EU and an annual turnover of at least €750 million to disclose data such as profits, revenues, taxes paid, and number of employees for each country where they operate.
Currently, multinationals disclose their operations in one consolidated report.
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http://www.zdnet.com/article/ireland-to-collect-up-to-13b-in-disputed-taxes-from-apple-in-coming-weeks/
Why Apple and Ireland are finally starting to fall out of love
A gray afternoon in Dublin may have marked the point where Ireland and Apple truly started to fall out of love, at least publicly.
Up until about 4:15 p.m. on Tuesday, it was impossible to place a cigarette paper between Ireland's hip young prime minister Leo Varadkar and Apple's Tim Cook, as they united to fight Europe's contention that the government had granted the iPhone maker a sweetheart tax deal.
That alliance began to fray this week, as Varadkar appeared to blame Apple for delays in the collection of about 13 billion euros ($15.3 billion) in back taxes Ireland has been ordered to gather from the company. The European Commission sued Ireland in October for failing to collect the money quickly enough.
"We don't want to be in a situation where the Irish government has to take Apple to court because the commission is taking the Irish government to court," Varadkar, 38, told lawmakers in parliament in Dublin Tuesday. "I think that message is understood."
Apple declined to comment on this story.
Varadkar's intervention is the latest sign that all may not be well in a partnership that stretches back more three decades. While the two have joined forces to battle Europe on the tax question, elsewhere strains have emerged - mainly around the delays dogging Apple's plan to build a $1 billion data center close to the Atlantic Coast, in the West of Ireland.
Two years ago, Apple simultaneously laid out plans to construct such vast facilities in Ireland and Denmark, as part of one of its largest investments in Western Europe. While the Danish facility is completed, the chosen site in the middle of an Irish forest lies idle, stymied by a combination of objectors and court delays.
After Bloomberg News first reported in September that the project was in jeopardy, Varadkar said he had been reassured that Apple remained committed to the project. Just over a month later, at a meeting with the Irish leader at Apple's California headquarters, Cook refused to give Varadkar guarantees that it would go ahead.
Apple agreed to continue considering the site close to the tiny, historic medieval village of Athenry only "in the context of their future business plans," according to Varadkar, leaving him open to political embarrassment back home.
Meanwhile, European authorities were growing restive over the tax case. The Irish government had been due to collect the cash by Jan. 3, and hold it in escrow until an appeal process is complete. Both Apple and Ireland are fighting the EU decision, which could take up to five years.
Last month, amid a string of delays, EU Competition Commissioner Margrethe Vestager finally lost patience, and Ireland was referred to the European Court of Justice for failing to recoup the money. That could leave the government on the hook for a fine.
Up to now, the government has diplomatically avoided publicly blaming anyone for the delay, and Varadkar has to tread carefully. Apple employs about 6,000 people in Ireland, according to its website. Most of those are based in Cork, where it's among the biggest private employers in the city. The company is also among the biggest taxpayers in the country.
Yet Tuesday, Varadkar too seemed to lose patience as well.
"We have indicated to it that we want the escrow account established and funds to be paid into that account without further delay," he told the Irish parliament Tuesday. "That message is understood and I would anticipate progress on that in the coming weeks."
Copyright © 2017, Chicago Tribune
http://www.chicagotribune.com/bluesky/technology/ct-apple-ireland-tax-dispute-20171125-story,amp.html
Ireland steps closer to collecting $15B in Apple (NASDAQ:AAPL) taxes following EU criticism that the country was dragging its feet.
The money traces back to an August European Commission ruling that Ireland gave Apple unfair tax incentives. Apple was meant to repay the taxes, but Ireland wants the money in an escrow account to avoid any liability during the appeal process.
Irish Prime Minister Leo Varadkar tells parliament, regarding Apple: “We’ve indicated to them that we want the escrow account established and we want funds to be paid into the escrow account without further delay. We do not want to be in the situation where the Irish government has to take Apple to court because the European Commission is taking the Irish government to court. I think that message is understood and I’d anticipate progress in the coming weeks.”
https://seekingalpha.com/news/3313899-ireland-closer-collecting-apple-taxes
- Nov 22, 2017, 11:45 AM ET
- The Treasury is cracking down on big tech firms like Amazon, Facebook, Google, and Apple that shift UK profits offshore to minimise their tax bills.
- Chancellor Philip Hammond announced that the UK's tax authorities will now charge 20% income tax on British earnings that are held offshore.
- The changes will come into force from April 2019.
- The UK joins the EU in becoming increasingly aggressive about the way big tech firms arrange their tax affairs.
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| Add caption |
Apple’s Holy Grail
Double Irish
Under the wire
Finding Home
Paradise Papers: Apple shifted billions offshore to avoid tax
Apple's Offshore Accounting Comes Up Against the SEC, Congress and the IRS
UK Chancellor Philip Hammond announced a crackdown on big tech firms which use complex, offshore tax structures to minimise their UK tax bill.
Hammond announced the initiative in the 2017 budget on Wednesday, saying the government would tax British royalties held in offshore accounts from next year.
He said: "There is a wider concern ... in the business community about the tax system in the digital age."
"Multinational digital businesses pay billions of pounds in royalties to jurisdictions where they are not taxed. And some of these royalties relate to UK sales.
"So from April 2019, and in accordance with our international obligations, we will apply income tax to royalties relating to UK sales, when those royalties are paid to a low tax jurisdiction."
Hammond didn't name names, but a Treasury source said the rule change would feasibly apply to big tech firms like Apple, Amazon, and Uber, which use complex offshore arrangements to minimise their taxable income in the UK.
Amazon, for example, uses a intricate arrangement that involves paying itself royalty fees for its own intellectual property. Those royalty fees are shielded from tax, and mean the company can wipe out its taxable income.
The Treasury source explained: "If you're hosting your intellectual property in a country that doesn't charge tax, and using that IP to make profit by interacting with UK customers, we will be taxing you at 20%."
Since the UK's tax authority can't tax an overseas subsidiary, it will charge a "withholding tax", meaning the money will be deducted at source.
Richard Murphy, a tax specialist who has previously written about the way tech firms avoid paying UK tax, described the announcement as "a good move."
According to Hammond, the changes will raise £200 million a year for the UK government - still small change compared to the huge tax reductions tech companies get.
"This does not solve the problem, but it does send a signal of our determination," he added.
Hammond also announced that firms like Amazon and eBay would need to cough up tax on behalf of overseas sellers who do not pay 20% VAT on UK sales.
According to the public accounts committee, the issue both undercuts British sellers and loses taxpayers up to £1.5 billion a year.
Marketplaces like Amazon and eBay will now be "jointly liable for VAT", essentially meaning they will have to pick up the bill.
Read the original article on Business Insider UK Copyright 2017
https://amp.businessinsider.com/treasury-to-tax-uk-generated-revenue-held-offshore-by-tech-firms-such-as-amazon-and-apple-2017-11
It was May 2013, and Apple Inc. chief executive Tim Cook was angry.
He sat before the U.S. 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 declared. “We do not depend on tax gimmicks. . . . We do not stash money on some Caribbean island.”
Five months later, Ireland bowed to international pressure and announced a crackdown on Irish firms, like Apple’s subsidiaries, that claimed that almost all of their income was not subject to taxes in Ireland or anywhere else in the world.
Now leaked documents, called the Paradise Papers, shine a light on how the iPhone maker responded to this move. Despite its CEO’s public rejection of island havens, that’s where Apple turned as it began shopping for a new tax refuge.
Apple’s advisers at one of the world’s top law firms, U.S.-headquartered Baker McKenzie, canvassed one of the leading players in the offshore world, a firm of lawyers called Appleby, which specialized in setting up and administering tax haven companies.
A questionnaire that Baker McKenzie emailed 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?”
In the end, Apple settled on Jersey, a tiny island in the English Channel that, like many Caribbean havens, charges no tax on corporate profits for most companies. Jersey was to play a significant role in Apple’s newly configured Irish tax structure set up in late 2014. Under this arrangement, the MacBook-maker has continued to enjoy ultra-low tax rates on most of its profits and now holds much of its non-U.S. earnings in a $252 billion mountain of cash offshore. The Irish government’s crackdown on shadow companies, meanwhile, has had little effect.
Source: SEC Filings.
The inside story of Apple’s hunt for a new avoidance strategy is among the disclosures emerging from a leak of secret corporate 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 gaps between differing tax codes around the world.
The documents come from the internal files of offshore law firm Appleby and corporate services provider Estera, two businesses that operated together under the Appleby name until Estera became independent in 2016.
The files show how Appleby played a cameo role in creating many cross-border tax structures. German newspaper Süddeutsche Zeitung obtained the records and shared them with the International Consortium of Investigative Journalists and its media partners, including The New York Times, Australia’s ABC, the BBC in the United Kingdom, Le Monde in France and CBC in Canada.
These disclosures come as the White House and Congress consider cutting the U.S. federal tax on corporate income, pushing its top rate of 35 percent down to 20 percent or lower. President Donald Trump has insisted that American firms are getting a bad deal from current tax rules.
The documents show that, in reality, many big U.S. multinationals pay income taxes at very low rates, thanks in part to complex corporate structures they set up with the help of a global network of elite tax advisers.
In this regard, Apple has led the field. Despite almost all design and development of its products taking place in the U.S., the iPhone-maker has for years been able to report that about two-thirds of its worldwide profits were made in other countries, where it has used loopholes to access ultra-low foreign tax rates.
Now leaked documents help show how Apple quietly carried out a restructuring of its Irish companies at the end of 2014, allowing it to carry on paying taxes at low rates on the majority of global profits.
Multinationals that transfer intangible assets to tax havens and adopt other aggressive avoidance strategies are costing governments around the world as much as $240 billion a year in lost tax revenue, according to a conservative estimate in 2015 by the Organization for Economic Cooperation and Development.
Documents reviewed by ICIJ and other media partners provide insight into how those strategies work. They show the creative methods that advisory firms devise in response to attempts by regulators to crack down on tax shelters.
“U.S. multinational firms are the global grandmasters of tax avoidance schemes that deplete not just U.S. tax collection but the tax collection of most every large economy in the world,” said Edward Kleinbard, a former corporate lawyer who is now a professor of tax law at the University of Southern California.
The Trump administration and Congress are considering whether to grant a one-time tax holiday that would allow big multinationals to bring home, at a sharply reduced tax rate, more than $2.6 trillion they have stowed in offshore subsidiaries.
Kleinbard said the prospect of a big corporate tax holiday “simply begs companies to ramp up their tax avoidance strategy still further in anticipation of more holidays in years to come. And it removes pressure for genuine reform.”
An Apple spokesperson declined to answer a list of questions about the company’s offshore tax strategy, except to say it had informed U.S., Irish and European Commission regulators of its reorganization at the end of 2014. “The changes we made did not reduce our tax payments in any country,” the spokesman said.
He added: “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.”
By quietly transferring trademarks, patent rights and other intangible assets to offshore companies, many other global businesses have also been able to cut their tax bills dramatically.
The leaked papers show how the ownership of prized assets – including rights to Nike’s Swoosh trademark, Uber’s taxi-hailing app and medical patents covering such treatment options as Botox and breast implants – could all be traced to a five-story office block in Bermuda occupied by Appleby and Estera.
Ownership of Facebook’s user database for most countries outside the United States as well as rights to use its platform technology – together worth billions of dollars – has been held through companies at a similarly unassuming address on Grand Cayman used by Appleby and Estera. And Apple’s money trail has been traced to a building used by Appleby and Estera in Jersey, 19 miles off the coast of northern France.
Addresses shared by the two offshore firms on tax haven islands have played host to secretive shell companies buried deep within the corporate architecture of many of the largest multinationals. Despite moves by governments to phase out loopholes, tax shelters remain as popular as ever.
Governments around the world have challenged some of the tax structures maintained by Appleby and Estera clients – though not always successfully. Nike triumphed over the U.S. Internal Revenue Service a year ago. A dispute between Facebook and U.S. tax authorities continues to play out in court. Apple, meanwhile, is being pursued for $14.5 billion in Irish back taxes after European regulators ruled that Ireland had granted illegal state aid by approving Apple’s tax structure.
The leaked documents help explain how three small jurisdictions – the Netherlands, Ireland and Bermuda – have become go-to destinations for big corporations looking to avoid taxes on their overseas earnings. Among them, these three spots hold less than one-third of 1 percent of the world’s population – but they accounted for 35 percent of all profits that U.S. multinationals reported earning overseas last year, according to analysis by Gabriel Zucman, an economist at the University of California, Berkeley.
Over three decades, U.S. multinationals have been growing bolder, shifting vast chunks of profits into tax havens. Concerns about their tactics were largely ignored until government finances around the world came under pressure in the wake of the 2008 financial crisis. Beginning in the fall of 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 U.S. 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 declared “tax residency” nowhere in the world.
Under Irish law, most firms 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 company 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, Tim Cook – did just that. By running these Irish subsidiaries from group headquarters in California, they avoided Irish tax residency.
At the same time, the directors knew that their Irish companies would not qualify for tax residency in the United States because American tax law worked differently. Under U.S. rules, a company has American tax residency only if it is incorporated there.
“Apple sought the Holy Grail of tax avoidance: offshore corporations that it argues are not, for tax purposes, resident anywhere in any nation,” then-Sen. Carl Levin (D-Mich.), the Senate subcommittee chairman, said at the 2013 hearing.
Ireland’s finance minister at the time, Michael Noonan, at first defended his country’s policies, saying, “I do not want to be the whipping boy for some misunderstanding in a hearing in the U.S. Congress.” 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 $111 billion in cash almost entirely held by its Irish shadow companies, beyond the reach of U.S. tax authorities. Each year, the pile grew higher and higher as billions of dollars in profits poured into these low-tax subsidiaries.
Company officials wanted to keep it that way.
So Apple sought alternatives to replace the tax shelter arrangements that 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 email 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.”
For Appleby, Adderley explained, this was “a tremendous opportunity for us to shine on a global basis with Baker McKenzie.”
Baker McKenzie’s role in setting up offshore structures for multinationals, and then defending them when
challenged by tax regulators, is legendary. The law firm has also been involved in lobbying against proposals to crack down on tax avoidance by technology giants. It has 5,000 attorneys in 77 offices around the world. Former partners include Christine Lagarde, the former French finance minister and now managing director of the International Monetary Fund.
Behind closed doors, Apple decided that two of its Irish companies should, with the help of Appleby, claim tax residency in Jersey, one of the largest island shelters with strong links to the U.K. banking system, where Apple’s Irish subsidiaries already held accounts. Jersey is a crown dependency of the United Kingdom, but it makes its own laws, sets its own tax rates and is not subject to most European Union legislation, making it a popular tax haven.
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 scores of companies, including Google, Facebook, LinkedIn, other tech companies and drugmakers such as Abbott Laboratories.
The Double Irish allows companies to collect profits through one Irish unit that actually employs people in Ireland and is tax resident there – then route those profits to a second Irish subsidiary that claims tax residency in a low-tax island such as Bermuda, Grand Cayman or the Isle of Man.
A crackdown on such arrangements could have interfered with Apple’s plans in Jersey before they had gotten off the ground. 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.
While the iPhone maker was not in a position to protest loudly, others spoke up. California-based Terilea Wielenga, who was then international president of the Tax Executives Institute, wrote to Irish Finance Minister Noonan in July 2014, warning that moves that would effectively ban Double Irish structures “may not be prudent.” And if Irish ministers did press ahead, she added, they would be well advised to incorporate “a substantial transition period.”
What her letter did not tell, but leaked Appleby papers now show, was that Wielenga was quietly orchestrating a long-standing Double Irish structure at Botox-maker Allergan, where at the time she worked as head of tax. For over a decade, the structure has shifted profits away from Ireland, where Allergan has a Botox factory, to Bermuda.
ICIJ attempted to contact Wielenga but did not receive a response. Allergan did not answer specific questions about its tax affairs but said: “Allergan abides by all applicable tax laws and accounting rules and pays all taxes owed in all jurisdictions where it does business.”
The lobbying seemed to work.
Ireland included a generous grandfathering clause for Allergan and other multinationals using Irish tax structures. “For existing companies, there will be provision for a transition period until the end of 2020,” Noonan declared on Oct. 14, 2014.
More precisely, the fine print of policy documents revealed, the grandfathering provisions would apply not just to companies in existence when the finance minister spoke but also any new ones created up until the end of 2014.
That gave Apple just enough time. By the start of 2015, it 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 U.S. Senate investigation a year earlier.
For the previous five years, Apple Sales International had been Apple’s biggest profit generator, churning out more than $120 billion, or close to 60 percent of Apple’s worldwide earnings.
Meanwhile, much of that profit was transferred as dividends to Apple Operations International, described by Cook as “a company set up to provide an efficient way to manage Apple’s cash.”
Before their move to Jersey, these two subsidiaries had played a leading role in helping Apple accumulate and hold $137 billion in cash – most of which came from non-U.S. profits barely taxed by any government in the world.
The latest figures indicate that since Apple’s reorganization of its Irish companies this sum has increased 84 percent, though Apple won’t confirm which of its foreign subsidiaries own this cash.
This pile of money has inadvertently made Apple one of the biggest investment funds in the world, and its offshore cash reserves have been put to work in a portfolio that includes corporate bonds, government debt and mortgage-backed securities.
Apple was not the only multinational that moved quickly to grab a final chance before 2015 dawned.
“At the end of 2014 a window of opportunity closes,” advisers from big U.S. law firm DLA Piper explained to CitiXsys, a retail software supplier based in New York. DLA Piper set out a frenetic schedule of incorporations and intellectual property transfers to be rushed through before the new year to set up a Double Irish.
As DLA Piper explained, this arrangement “must be managed and controlled in [a] 0% or low tax jurisdiction, such as the Isle of Man, where the bulk of profits are recognized.” That way, the entire structure “produces a very low effective tax rate, approximately 5% to 7%.”
ICIJ contacted CitiXsys and other multinationals featured in this story. CitiXsys did not respond, and Uber declined to comment. Nike, Facebook and Allergan declined to answer questions but provided general statements saying they fully complied with tax regulations in countries where they operate.
DLA Piper declined to comment, and Baker McKenzie said it does not discuss client matters. Appleby declined to answer questions but said on its website: “We are an offshore law firm who advises clients on legitimate and lawful ways to conduct their business.” Estera, the corporate services company that split away from Appleby at the beginning of 2016 and continues to administer many offshore companies on behalf of clients, declined to comment.
While CitiXsys’s rapidly assembled structure mirrored the structures embraced by Facebook, Google and others using the “Double Irish,” Apple’s reorganized Irish companies appear to function very differently.
The iPhone-maker has declined to answer ICIJ’s questions about its new setup, 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 criticized by U.S. senators in 2013 for being “ghost companies,” not tax resident anywhere in the world.
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, once again, in finance minister 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, however, 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 those multinationals that were 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.
In effect, even though the internal sale would cost the multinational nothing, such a move could nevertheless unlock huge tax breaks in Ireland.
Even before Noonan sweetened the terms of this capital allowance tax break, some experts suggested it could be used to achieve tax rates as low as 2.5 percent.
Apple declined to answer questions about whether it has taken advantage of this tax break by selling rights to use its intangible property from Apple Sales International in Jersey to Apple Operations Europe in Ireland.
It’s clear, though, that a large amount of intangible property landed abruptly in Ireland around the period when Apple reorganized its three Irish subsidiaries. In fact, the country’s gross domestic product for 2015 leapt by an incredible 26 percent, boosted by close to $270 billion of intangible assets suddenly appearing in Ireland’s national accounts at the start of the year – more than the entire value of residential property in Ireland.
Nobel Prize-winning economist Paul Krugman called the development “Leprechaun economics.”
The ICIJ showed the findings from its investigation to J. Richard Harvey, a Villanova University law professor, and Stephen Shay, senior lecturer at Harvard Law School. In 2013, both of them gave detailed testimony on Apple’s previous Irish structure to the U.S. Senate Subcommittee’s investigation. They both told the ICIJ it appeared likely the iPhone maker had transferred intangible assets to Ireland.
“While it is not 100 percent clear how Apple has restructured its Irish operations, one strong possibility is that they have transferred more than $200 billion of valuable intangible assets … to an Irish resident company, for example Apple Operations Europe,” Harvey said.
Shay added: “By using Irish intangible property tax reliefs, Apple likely will pay little or no additional Irish tax for years to come on income at Apple Operations Europe.”
The Irish Department of Finance told the ICIJ: “The Irish regime for capital allowances … is broadly similar to regimes available in other countries and does not confer any additional benefits to multinationals.” In October 2017, Ireland nevertheless withdrew the sweetened terms Noonan had added to the tax break three years earlier. This change will not affect Apple however.
Apple said that following its reorganization it pays more Irish tax than before. “The changes we made did not reduce our tax payments in any country,” Apple said in a statement. “In fact, our payments to Ireland increased significantly and over three years [2014, 2015 and 2016] we’ve paid $1.5 billion in tax there – 7 percent 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 $1.5 billion is a lot of tax to pay in three years or not. Reuven Avi-Yonah, director of the international tax program at the University of Michigan Law School, said Apple was “determined not to be hurt” when it had to abandon its previous Irish structure. “This is how it usually works: You close one tax shelter, and something else opens up,” he said. “It just goes on endlessly.”
Jesse Drucker, a reporter with The New York Times, contributed to this story.
https://www.icij.org/investigations/paradise-papers/apples-secret-offshore-island-hop-revealed-by-paradise-papers-leak-icij/
Apple has denied accusations in the Paradise Papers investigation that it moved its operations from Ireland to an offshore center to avoid tax.
Documents cited by German newspaper Süddeutsche Zeitung on Monday suggested that offshore law firm Appleby, which is based in multiple tax havens, helped the iPhone maker move billions of dollars in revenues collected in Ireland to the Channel Islands to head off increased European Union scrutiny of its tax affairs in Dublin.
The revelations, which were also published by the BBC and New York Times, suggested that Apple had transferred funds to the island of Jersey, near the coast of Normandy, which is largely exempt from European Union tax regulations and where no corporate income tax is levied.
The Paradise Papers are the result of a year-long investigation by the International Consortium of Investigative Journalists, which studied some 13.4 million leaked documents revealing the scale of offshore tax avoidance schemes employed by large multinationals and the rich and famous.
The iPhone maker insisted the new report contained several "inaccuracies" and said it made changes to its corporate structure in 2015, which were designed to preserve tax payments to the US, not to reduce taxes elsewhere
https://www.usatoday.com/story/news/world/2017/11/07/paradise-papers-apple-shifted-billions-offshore-avoid-tax/839565001/
The government is serious about going after Apple's untaxed offshore cash.
NEW YORK (TheStreet) -- The Securities and Exchange Commission is serious about going afterApple's (AAPL - Get Report) off-shore cash.
In a letter of comment to Apple's in-house counsel, SEC accounting branch chief Kathleen Collins challenged the company's aggressive accounting policies. Apple has about $16 billion of offshore cash exempt from taxation by the Internal Revenue Service.
In a letter of comment to Apple's in-house counsel, SEC accounting branch chief Kathleen Collins challenged the company's aggressive accounting policies. Apple has about $16 billion of offshore cash exempt from taxation by the Internal Revenue Service.
The letter questions Apple's stated plans for the use of its rapidly growing offshore cash holdings:
Your financial statements indicate that you provide for any related tax liability on cash that may be repatriated. Please explain to us how the phrase may be repatriated should be interpreted in this context. We note that Tim Cook, the company's chief executive officer, stated in testimony before the Permanent Subcommittee on Investigations of the U.S. Senate on May 21, 2013, that you have no plans to repatriate these earnings at the current tax rate.
Tax avoidance has been under investigation by a Senate subcommittee chaired by Sen. Carl Levin of Michigan. In February he said that the loopholes used by some of the largest U.S. tech companies are "one significant cause of the [federal] budget deficit."
The subcommittee may push Congress to make changes to the U.S. tax code that could enable the IRS to get its hands on some of Apple's non-taxed cash.
Apple is aware of the risks to this huge offshore nest egg. The company stated in its last SEC 10Q filing:
In the event that the company determines all or part of the net deferred tax assets are not realizable in the future, the company will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made....The foreign provision for income taxes is based on foreign pretax earnings of $36.8 billion, $24.0 billion and $13.0 billion in 2012, 2011 and 2010, respectively. The company's consolidated financial statements provide for any related tax liability on amounts that may be repatriated, aside from undistributed earnings of certain of the company's foreign subsidiaries that are intended to be indefinitely reinvested in operations outside the U.S....As of Sept. 29, 2012, U.S. income taxes have not been provided on a cumulative total of $40.4 billion of such earnings. The amount of unrecognized deferred tax liability related to these temporary differences is estimated to be approximately $13.8 billion.
Any deviation from more stringent accounting interpretations about the "true intentions" of companies employing offshore tax haven strategies might cross the lines if they are redrawn by SEC Chairman Mary Joe White and Congress.
"I think financial-statement fraud, accounting fraud has always been important to the SEC," White said in an interview in July of last year. "It's certainly an area that I'm interested in and you're going to see more targeted resources in that area going forward."
Not a happy prospect for Apple's shareholders if the SEC and Congress actually even the playing field. This is true as well for other players without Apple's clout. Every company would prefer to keep the taxman from grabbing a share of profits, especially those held offshore.
Finally, here's Apple's free cash flow as reported in December 2013.
At the time of publication the author had no position in any of the stocks mentioned.
https://www.thestreet.com/story/12631014/1/apples-offshore-accouting-vs-the-sec-congress-and-the-irs.html#2
http://www.ctj.org/pdf/appletaxhavens0513.pdf
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