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.

Industry designs a replacement for the Double Irish

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.

Apple and the ‘Green Jersey’ technique

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;
• 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:

• 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.