Apple accused of using subsidiaries to dodge billions in taxes

0
160

May 21, 2013

WASHINGTON/CORK/DUBLIN: Apple Inc came under fire on Tuesday at a Senate hearing over an investigation that alleged the US high technology icon has kept billions of dollars in profits in Irish subsidiaries and paid little or no taxes to any government.

May 21, 2013

WASHINGTON/CORK/DUBLIN: Apple Inc came under fire on Tuesday at a Senate hearing over an investigation that alleged the US high technology icon has kept billions of dollars in profits in Irish subsidiaries and paid little or no taxes to any government.

The Irish government, which has seen the luring of US multinationals with low taxes as a key part of its economic policy since the 1960s, said its system was transparent and other countries were responsible if the tax rate paid by Apple was too low.

"Apple effectively shifts billions of dollars in profits offshore, profits that under one section of the tax code should nonetheless be subject to US taxes, but through a complex process avoids those taxes," said Senator Carl Levin.

Apple chief executive Tim Cook was slated to testify to the subcommittee at the hearing, along with other senior executives of the company.

As chairman of the Senate Permanent Subcommittee on Investigations, Levin frequently dives into complex tax issues. His latest probe targets one of America's most successful companies, with a powerful global brand.

Offshore tax avoidance by multinational companies has become a high-profile issue. Cash-strapped governments worldwide are increasingly focused on wringing more tax revenue from corporations that often have interests in many countries and easily shift capital and assets across national borders.

The Levin inquiry comes at a turbulent time in tax circles, with the US Internal Revenue Service under investigation over targeting by IRS agents of conservative political groups.

The impact of that controversy and Levin's allegations on the potential for a thorough overhaul of the US tax code were hard to predict. Tax law writers in Congress had been inching forward on such a project before the IRS scandal erupted earlier this month. Levin's inquiry has been under way for months.

Levin urged closing "unjustified tax loopholes" like those he said Apple used to avoid $9 billion in US taxes in 2012.

"Closing these kinds of unjustified loopholes could provide hundreds of billions of dollars to reduce the deficit and avert damaging budget cuts," said Levin, a Democrat, at the hearing.

"We should close them and dedicate the revenue that generates to these important priorities, whether or not we reform the overall tax code," he said.

Senator John McCain praised Apple as an American business success story, but he said that Apple's corporate tax strategy "reflects a flawed corporate tax system."

The former Republican presidential nominee said, "It is a system that allows large multinational corporations to shift profits offshore to low-tax jurisdictions.

"For years, Apple has opted to forego fully contributing to the US Treasury and to American society by shifting profits and circumventing U.S. taxes."

Subcommittee staffers said on Monday that Apple was not breaking any laws and had cooperated fully with the inquiry.

On Monday, Apple said in a comment posted online that it does not use "tax gimmicks." It said the existence of its "Apple Operations International" unit in Ireland does not reduce Apple's US tax liability and the company will pay more than $7 billion in US taxes in fiscal 2013.

At the hearing, Levin's subcommittee issued a 40-page memorandum focused on explaining allegations that Apple used three subsidiaries with no "tax residency" in Ireland, where company executives manage those companies.

The main subsidiary, a holding company that includes Apple's retail stores throughout Europe, has not paid any corporate income tax in the last five years, the subcommittee said.

Ireland rejects blame

Ireland said on Tuesday it was not to blame for Apple Inc's low global tax payments and had no special rate deal with the company after the US Senate said it paid little or no tax on tens of billions of dollars in profits stashed in Irish subsidiaries.

The Irish government, which has seen the luring of US multinationals with low taxes as a key part of its economic policy since the 1960s, said its system was transparent and other countries were responsible if the tax rate paid by Apple was too low.

"They are issues that arise from the taxation systems in other jurisdictions, and that is an issue that has to be addressed first of all in those jurisdictions," deputy prime minister Eamon Gilmore told national broadcaster RTE on Tuesday.

In a 40-page memorandum released ahead of an appearance by Apple Chief Executive Tim Cook before Congress on Tuesday, a Senate subcommittee identified three subsidiaries that have no tax residency either in Ireland, where they are incorporated, or in the United States, where those companies are managed.

The main subsidiary, a holding company that includes Apple's retail stores throughout Europe, has not paid any corporate income tax in the last five years, the report said.

Apple's arrangement has allowed it to pay just 1.9 per cent tax on its $37 billion in overseas profits in 2012, despite the fact that the average tax rate in the countries of the Organisation for Economic Co-operation and Development (OECD), its main markets, was 24 per cent in 2012.

The report said "Ireland has essentially functioned as a tax haven for Apple".

Gilmore said Ireland was pursuing the issue of international tax avoidance "very strongly" at the European Union and the OECD, which is spearheading initiatives.

The issue will be discussed at a meeting of European Union officials on Tuesday, he said.

The Senate report said a subsidiary with a mailing address in Cork, Ireland's second-largest city, received $29.9 billion in dividends from lower-tiered offshore affiliates from 2009 to 2012, comprising 30 per cent of Apple's global net profits.

It said it exploited a difference between Irish and U.S. tax residency rules.

'No special rates'

Apple said in a comment posted online on Monday it did not use "tax gimmicks". It said the existence of its subsidiary Apple Operations International in Ireland did not reduce Apple's US tax liability, and the company would pay more than $7 billion in US taxes in fiscal 2013.

A number of US multinationals including web search leader Google, online retailer Amazon.com and coffee chain Starbucks have come under criticism for arranging their affairs in a way that leaves them liable to low rates of tax on billions of dollars of overseas sales.

Apple's auditor, Ernst & Young, which also audits Google and Amazon.com, declined immediate comment.

According to the congressional report, Ireland had also agreed a special 2 per cent rate for Apple's Irish taxable profits instead of the normal 12.5 per cent.

Ireland's European Affairs minister Lucinda Creighton, denied this.

"There is no such deal. There is no deal for any company to pay 2 per cent corporate tax in Ireland – that is erroneous," said Creighton, a barrister by profession.

A spokesman for Ireland's finance department said Ireland's tax system was statute based, so there was "no possibility of individual special tax rate deals for companies".

A spokeswoman for the Office of the Revenue Commissioners said she could not comment on individual cases as that would breach taxpayer confidentiality, but she also denied that the tax authority agreed special low tax rates with multinationals.

"All companies in Ireland pay the standard 12.5 per cent rate on their trading profits arising in Ireland, and they pay a corporation tax rate of 25 per cent on their Irish non-trading income," she said.

Unemployed Cork local Tom Falvey, 55, who got 10 weeks' work attaching cladding to the exterior of Apple's three-storey headquarters in the early 1990s, said Ireland's jobless would pay the price for any rise in taxes.

"The companies will just say 'take a jump' and move somewhere else more obliging. Our unemployment is high enough as it is," he said, as he walked his dog past the sprawling complex 5 km from the city centre.

A dozen or so casually dressed Apple workers, most in their 20s and 30s, who were smoking cigarettes outside the 1990s office building, said they could not talk to the press.

Alongside, builders are working on a sleek new glass and concrete extension. Michael Ambrose, a 58-year-old former construction worker walking by, said the government was powerless to get more tax out of Apple.

"We're a small country and feel we can't say no. We know they'll just go off to one of these Asian countries … They're a law unto themselves."

Fiscal attraction

Apple said last year it would add 500 more people to its Cork workforce of 2,800.

Ireland's pro-business tax structures have attracted US multinationals including Google, Microsoft and Facebook , big employers who have helped offset an unemployment rate stuck above 14 per cent, but its low corporate tax rate of 12.5 per cent has drawn criticism elsewhere in Europe.

The government regularly touts its success in attracting international investment as one of its main achievements, and multinationals, which account for almost 10 per cent of Ireland's workforce, have taken the sting out of austerity measures prescribed under an EU/IMF bailout by creating jobs.

US firms invested $30 billion in Ireland last year, more than in China and the rest of emerging Asia combined, according to the American Chamber of Commerce.

In the 1960s Ireland turned around its economy by attracting foreign businesses with tax holidays. After joining what later became the European Union, it was no longer able to do this and instead shifted to a system of low tax rates – currently 12.5 per cent – and a light touch approach to tax administration that allows companies to reduce their effective rate much lower.

A raft of mainly US companies have taken advantage of Ireland's tax regime to minimize their tax bills.

Microsoft's Irish base, along with another operation in low-tax Singapore, helped the company pay tax of just 9.4 per cent on $21 billion of non-U.S. earnings last year. Google channels most of its overseas profits through Ireland, a practice that allowed it to pay tax at a rate of just 2.6 per cent on $6 billion of foreign profits in 2012.

Patrick Coveney, the chief executive of Greencore, one of Ireland largest companies, told RTE radio that it was politicians across the world who were responsible for these tax treaties and tax structures.

"I find it frankly a little frustrating that it is them who are piling in and criticizing international traded businesses who are merely availing of the tax environment that they have put in place," said Coveney, a former president of the Dublin Chamber of Commerce.


Courtesy: Reuters

LEAVE A REPLY

Please enter your comment!
Please enter your name here