Apple’s new tax fraud

Posted by in Economics, Politics

After the European Commission’s state aid ruling on Ireland, both Apple and the Irish government assured us that Apple has paid tax at Ireland’s statutory rate of 12.5% since 2014. But our research, following up on the revelations made last November in the Paradise Papers, finds that changes in Ireland’s tax law in 2014 have provided Apple with a near-total offset mechanism for sales profits.

Using data from Apple Inc’s 10-K filings to the US Securities and Exchange Commission, we estimate that Apple’s tax rate for the period 2015-2017 for its non-US earnings is between 3.7% and 6.2%.
Within the EU, Apple paid tax at a rate of between 1.7% and 8.8% during the period 2015-2017. If we assume that Apple’s provision for foreign tax is substantially smaller than the amount actually transferred to foreign governments, we estimate that Apple may have paid as little as 0.7% tax in the EU. Applying this range of estimates, this means that Apple has avoided paying between €4bn-€21bn in tax to EU tax collection agencies during this period.

Ireland remains at the centre of Apple’s tax avoidance strategy. Apple organised a new structure in 2014-2015 that included the relocation of its non-US sales and intellectual property (IP) from “nowhere” to Ireland, and the relocation of its overseas cash to Jersey. But despite the relocation of sales income and IP assets to Ireland, there was no observable corresponding increase in corporation tax received from Apple by Irish Revenue from 2015-2017.

The structure Apple uses today was designed by the industry and willingly implemented by the Irish government as a replacement for the Double Irish scheme. It is based on the use of full capital allowances for expenditure on intellectual property and massive intra-group loans to purchase the IP, with full deductions on the interest paid for these loans, in order to cancel out the tax bill arising from sales profits.

Ireland’s capital allowance for intangible assets was introduced in the Finance Act 2009, with a cap of 80%. It meant relief in the form of a capital allowance for expenditure on IP against trading income in a given reporting period or as a write-off against taxable income over 15 years. Deductions for associated interest expenses could also be written off up to an 80% cap.

Our report reveals that the Irish government raised this 80% cap to 100% following lobbying by the American Chamber of Commerce in Ireland in 2014. This resulted in the amount of capital allowances being claimed by multinational corporations rising from €2.7 billion in 2014 to €28.9 billion in 2015.

In 2017 the Irish government announced that it would bring back the 80% cap but said it would not apply to the IP that was brought onshore from 2015-2017, which included Apple’s IP assets.

Our research indicates that, with the assistance of the Irish government, Apple has successfully created a new structure that allows IP and sales profit to be onshored, but the company is granted a tax write-off against almost all of its non-US sales profits.

Apple is achieving this by using a capital allowance for depreciation of intangible assets at a rate of 100%; a massive outflow of capital from its Ireland-based subsidiaries to its Jersey-based subsidiaries in the form of debt from intra-group loans used to fund the IP acquisition; and Interest deductions of 100% on these intra-group loans;

While several multinationals continue to use the Double Irish, which will not be phased out until 2020, briefings on Ireland’s tax regime from offshore law firms suggest this structure is the new normal – a “typical” structure now used by companies that trade in IP.

We call it the “Green Jersey” in reference to the Paradise Papers revelations regarding Apple’s use of Jersey in its new structure.

The essential features of this technique are that it can be used by large multinational corporations engaged in trading in IP. It has specifically been designed by the Irish government to facilitate near-total tax avoidance by the same companies who were using the Double Irish tax avoidance scheme.

While the Double Irish was characterized by the flow of outbound royalty payments from Ireland to Irish-registered but offshore-tax resident subsidiaries, this scheme is characterized by the onshoring of IP and sales profits to Ireland.

Sales profits are booked in Ireland, but the expenditure the company incurs in the one-off purchase of the IP license(s) can be written off against the sales profits by using the capital allowance program for intangible assets.

It is beneficial for the company to complement the tax write-off by continuing to use an offshore subsidiary, but no longer for outbound royalty payments. The role of the offshore subsidiary is to store cash and provide loans to the Irish subsidiary to fund the purchase of the IP. The expenditure on the IP is written off, but so too are the associated interest payments made to the offshore subsidiary, which thus accumulates more cash that goes untaxed.

The new structure has allowed Apple to almost double the mountain of cash it holds in offshore tax havens, as highlighted by the ICIJ.

The law governing the use of capital allowances for IP is not subject to Ireland’s transfer pricing legislation, but it includes a prohibition from being used for tax avoidance purposes. Apple is potentially breaking Irish law by its restructure and its exploitation of the capital allowance regime for tax purposes.

This article outlines the key findings of a new study co-authored by Martin Brehm Christensen and Emma Clancy, published by the European United Left (GUE/NGL) group in the European Parliament, called “Apple’s Golden Delicious tax deals: Is Ireland helping Apple pay less than 1% tax?” Read the full report here.

source: Emma Clancy, 4 July 2018. Emma is an economist specialising in tax justice and illicit financial flows; Eurozone economic policy; and feminist economics. She is currently an advisor on the ECON and TAX3 committees in the European Parliament for GUE/NGL; 

see als0: Emma’s article “The future of the Eurozone” – see extracts from recommendations below:

Progressive people will not oppose redistributive mechanisms or transfers from the core to the so-called peripheral states to correct the imbalances that damage our economies, but we should definitely oppose them if they are linked to conditionality.

QE for banks and corporations should be replaced by the direct transfer of newly created money to governments so they can engage in green investment, and by QE for people, with payments to individual households.

The ECB’s mandate must cover not only inflation but also employment and growth, like the other major central banks across the world.

For demand to rise enough to create a favourable investment climate, workers in Europe need a pay rise. The internal devaluation policies and competitiveness agenda needs to be replaced by the goals of the creation of decent jobs, increasing workers’ standard of living and social protection, and especially strengthening collective bargaining and collective agreements and extending the right to strike.

The Eurozone needs structural reforms that can actually achieve upwards convergence, and effective surplus recycling when banks refuse to lend to deficit countries. The most obvious reform in this regard is for the European Deposit Insurance Scheme proposal to proceed immediately, and without German-imposed conditions on risk that are designed to delay its implementation. Beyond that, the free movement of capital is one of the core principles of the EU but also one which has caused the most damage.

Rules should be set to limit the size and length of trade surpluses, and chronic and large current account surpluses should be discouraged by the use of penalty fines which can then be used to lower trade imbalances.

The Bank Structural Reform proposal (currently blocked in inter-institutional negotiations), which aims to ring-fence banks’ deposit channel from investment or trading activities, should immediately be implemented and capital requirements for the systemically important banks in the EU should be raised.

Policymakers should have a mature discussion, outside of the framework of an urgent crisis, about the possibility of the need for more fundamental change of the Eurozone, including the introduction of flexibility mechanisms in the euro exchange rate along the lines of the proposals outlined by Stiglitz in his book on the future of the euro, and including the option for future separate currency areas.

The option of a negotiated exit from the Eurozone should also be made legal and viable for member states that choose to do this as a result of their economic circumstances. Protections and guarantees should be developed for member states who want to remain within the Eurozone, who cannot be blackmailed or kicked out of the common currency against their will during a crisis.

The call made by the Greek government and others for a European debt conference to cancel odious, illegitimate and unsustainable debt should proceed in order to write off or write down the legacy debt in the crisis states.