Apple's foreign tax rate fell from 12 to 2% in a decade
As Apple's earnings began to surge its foreign tax rate dropped from 12% in fiscal 2002 to 2% in fiscal 2012 with the biggest falls from 2007 when the second advance tax opinion — that is in breach of state aid rules according to the European Commission — was issued by the Irish Revenue and following the conversion of the main Irish offshore shell subsidiary Apple Operations International (AOI) to an investment firm.
The foreign tax rate was 6% in 2015.
Apple says most of its profits relate to the United States. However in its financial accounts it allocates about two-thirds of its earnings as foreign and in virtual terms the accumulation of overseas profits, that are almost tax-free despite headline corporate tax rates of 20% or above in many of its significant overseas markets, have resulted in what is commonly viewed as a foreign cash hoard of $216bn held in Irish shell companies — however most of the cash is in onshore US banks or invested in US Treasuries.
Apple in common with other US multinationals is hoping for a repeat of a 2004 tax amnesty with a low single digit rate, to enable it to have more flexibility in the use of the cash, which is designated as foreign.
Apple's two Irish shell companies that are the centre of its tax avoidance, were secretly designated as having no tax residencies anywhere on the planet because of different residency rules in Ireland and the United States — only a company of Apple's size and economic/ political clout, could avoid being charged with fraud for such blatant chicanery.
It is 30 years since significant tax reform was enacted in the US. American median household incomes, adjusted for inflation, have fallen 7% since 2000 while profits have risen to 12% of income from 8%. The top 20% of American families accounted for 48.9% of total income in 2014, Census figures show according to The Wall Street Journal, versus 44.3% in 1990.
6% of the companies of the S&P 500 accounted for 50% of US profit in 2015.
According to the Economist a very profitable American firm has an 80% chance of being that way ten years later. In the 1990s the odds were only about 50%. Some companies are capable of sustained excellence, but most would expect to see their profits competed away. Today, incumbents find it easier to make hay for longer.
The Economist says that European firms occupies the top spot in only one out of 24 global sectors (Nestlé in food). European leaders are typically much smaller than their rivals across the Atlantic. Unilever’s market value is three-fifths of Procter & Gamble’s, Airbus is about half as big as Boeing and Siemens is a third of the size of General Electric. Deutsche Bank’s market value is a tenth of JPMorgan Chase’s. Walmart is ten times bigger than Tesco.
The takeoff of multinational tax avoidance in Ireland
Ireland’s headline corporate tax rate of 12.5% is the lowest national rate in the developed world but American companies, from the late 1990s took advantage of an unintended loophole in US tax regulations to avoid the high federal rate of 35% while in Ireland in 1999, legislation requested by the EU had the goal of having all Irish companies tax resident. However, under pressure from the American Chamber of Commerce in Ireland, an exemption was made where US companies could use Irish offshore companies without having to pay tax in Ireland.
US companies discovered that they could do better with Irish help and pay tax at a lower rate than one of the best rates in the developed world.
The calculation for Ireland was that overall Irish tax paid would not be reduced as giving the companies the facility to suck in lots of income from around the world would deepen roots in Ireland and also boost Dublin’s offshore financial services centre.
The Irish exemption was made at a crucial time when US companies were beginning to take advantage of a tax loophole called ‘check the box’ that had been inadvertently introduced by
President Clinton’s Treasury Department to simplify the tax code through allowing companies to file subsidiaries’ income with parent company income. The companies also were able to designate which units were irrelevant for tax purposes, termed “disregarded entities.”
In the four years, between 1999 and 2012, profits of Irish affiliates of US companies doubled from $13.4bn to $26.8bn (including income in Irish offshore companies). They became the most profitable in the world according to Tax Analysts, a US tax research firm.
Tax Analysts said in 2004 that for each dollar of profit taken in Luxembourg in 1999, US corporations took $4.56 of profit in 2002. The result for Bermuda was $2.96; for Ireland $2.01; and for Singapore $1.72. It said these countries were viewed as tax havens or partial tax havens. For UK, each dollar of profit taken in 1999 was equal to 67 cents in 2002; for Germany, it was 46 cents.
Campaign payments to members of Congress ensured that the ‘check the box’ loophole could not be closed.
Companies like Apple cut manufacturing jobs in the US and Pfizer did after becoming the biggest beneficiary of the tax amnesty of 2004.
Good paying manufacturing jobs have declined and big companies engaged in tax gimmickry have been part of what is seen by many voters as a rigged system.
Actions to reduce avoidance in Europe may spur interest in tax reform in Washington DC in 2017.
About 75% of Ireland's 190,000 direct foreign investment exporting jobs are provided by American firms and Apple employs over 5,000 in Cork.
Ministers typically seem more eager for ready-made FDI jobs than giving attention to the underperforming indigenous exporting sector. The authorities have also been an easy pushover for the American Chamber in agreeing to its demands.
Until the report of a US Senate committee in 2013 on Apple's use of Ireland for tax avoidance, the issue was almost a taboo one in Ireland.
The Irish Times said in an editorial on 22 May, 2013 in support of the official line — a day after oral evidence on Capitol Hill from Tim Cook, Apple's CEO:
The charges made now need to be countered, speedily and effectively, by both political and diplomatic means. First, by Government setting out a clear narrative on corporate tax that can be easily understood — at home and abroad and that rebuts some of the erroneous claims made. Second, through a major diplomatic initiative in the US to ensure there is a better understanding of the Irish position on corporate taxation.
Italy has had two lost decades, only growing by 3.3% per capita in 20 years but it's striking that in 2015 its individual standard of living was higher than Ireland's.
Eurostat, the EU's statistics service, reported in June that the Irish average individual standard of living in 2015 was lower than Italy's. Ireland was also below both the EU28 and EA19 (Euro Area) averages. Eurostat compares individual consumption of public and private goods and services in each member country, adjusted for price differences.
Margrethe Vestager, European commissioner for competition, meets Jacob Lew, US Treasury secretary, in Brussels, July 2016
Pic on top: Tim Cook, Apple CEO, at Trinity College, Dublin, Nov 2015.