Economy

The Investigation That Could Wake Apple Up From Its iPhone 6 Reverie

CREDIT: Flickr user sigalakos

This building in Cork, Ireland is the lynchpin in Apple's multinational tax avoidance scheme.

With their newest, largest iPhone now on shelves, Apple could soon face the newest, largest fine in the ongoing battle between corporate accountants and government lawyers over international tax avoidance strategies.

A European Commission investigation into the complex, legal system of companies in Ireland and elsewhere that Apple uses to avoid tens of billions of dollars in taxes is wrapping up this week, and the company could face “a record fine of as much as several billions of euros,” the Financial Times reports. Tax experts told Reuters that they expect the Commission to force the Irish government to change its tax laws rather than attempting to claw back funds from the American technology giant, however.

Ireland’s corporate tax rate is 12 percent on paper, but investigators allege that Apple worked out a deal with the country to pay just a 2 percent rate. If the European investigators decide that that deal amounts to “state aid” from Ireland to Apple, they could punish one or both parties.

Apple’s tax strategy has been an open secret for over a year following a Senate investigation into its corporate structures. The company set up three affiliates headquartered in Ireland and routed most of its global revenue to those companies, which pay royalties to the original, U.S.-based Apple, Inc. The tech titan pays American taxes on that royalty income, but shelters the vast majority of its profits in the Irish corporations.

This kind of corporate offshoring of profits to duck U.S. taxes is common. In one recent example, heavy machinery company Caterpillar paid accountants from PriceWaterhouseCoopers more than $55 million to set up a Swiss company that would hold much of Caterpillar’s revenue, saving the manufacturer $2.4 billion over the ensuing decade.

There is usually a third structure involved in these legal, thrifty tax schemes. The traditional method is for the Irish subsidiary company that receives revenues earned by the American company to turn around and redistribute that revenue to another country with even more favorable tax laws, such as Luxembourg, the Netherlands, or island nations in the Caribbean. This multi-layered tactic even has a cute nickname in tax law circles — the “Double Irish With A Dutch Sandwich” — and Apple is credited as being a pioneer of the technique.

But the scheme that the European Commission and U.S. Senate investigators have keyed on in the past two years is even stranger than the standard tactic of routing profits to a third country. Apple’s tax lawyers have decided that technically, for tax purposes, its Irish subsidiaries don’t exist anywhere at all. It has deemed the companies “to have no tax jurisdiction at all,” allowing them to pay near-zero percent tax rates on the income they gather. (Ireland’s government says it put a stop to this Shrödinger’s Corporation statelessness problem last fall, but the traditional shell game style of tax avoidance remains legal.)

Like other rich American corporations looking to stiff the I.R.S., Apple is hoarding vast amounts of untaxed cash offshore. The company has a reported $102 billion parked outside the reach of the U.S. tax system. A relative handful of American companies are holding a total of about $2 trillion offshore.

This has led some lawmakers, including former President Bill Clinton, to call for a “repatriation holiday” during which companies could bring their money home without having to pay back taxes. But when such holidays have been tried in the past, they have been disasters for the American public. A 2004 repatriation holiday shielded $300 billion in corporate cash from taxes, cost the government money on balance over the ensuing years, and produced big payoffs to wealthy shareholders rather than renewed investment in job creation by the business that took advantage of the holiday. The companies actually laid off thousands of workers in the years after the holiday, and the economy saw no boost.

Solutions that serve the public interest are tougher to come by. Everyone agrees that these schemes are technically legal in most cases, and that the driving cause of elaborate tax avoidance charades is an international race to the bottom where small countries undercut the business tax rates of their neighbors in order to lure Apple and its ilk.

Over the past few years, Ireland learned the hard way that becoming a tax haven does not ensure jobs, broad prosperity, or a resilient economy. But incentives remain for countries to kowtow to corporate tax departments, and constructing a new incentive structure will require a deep reappraisal from public policymakers throughout the developed world.