Paradise Papers reveals How Apple saved the tax accumulate $252 billion

Paradise Papers reveals How Apple saved the tax accumulate $252 billion

Paradise Papers important findings –
1- As governments shut down tax loopholes, Apple found new ways to keep tax rates ultra-low.
2-Those rates allowed it to accumulate a $252 billion mountain of cash offshore.
3-Ireland tied itself in knots hoping to retain Apple, its biggest source of corporate taxes.
4-Apple’s money trail has been traced to a building used by Appleby and Estera in Jersey, 19 miles off the coast of northern France. Apple, meanwhile, is being pursued for $14.5 billion in Irish back taxes after European regulators ruled that Ireland had granted illegal state aid by approving Apple’s tax structure.

It was May 2013, and Apple Inc. chief executive Tim Cook was angry.

He sat before the U.S. Senate Permanent Subcommittee on Investigations, which had completed an inquiry into how Apple avoided tens of billions of dollars in taxes by shifting profits into Irish subsidiaries that the subcommittee’s chairman called “ghost companies.”
“We pay all the taxes we owe, every single dollar,” Cook declared. “We do not depend on tax gimmicks. . . . We do not stash money on some Caribbean island.”

Five months later, Ireland bowed to international pressure and announced a crackdown on Irish firms, like Apple’s subsidiaries, that claimed that almost all of their income was not subject to taxes in Ireland or anywhere else in the world.

Now leaked documents, called the Paradise Papers,  shine a light on how the iPhone maker responded to this move. Despite its CEO’s public rejection of island havens, that’s where Apple turned as it began shopping for a new tax refuge.

Apple’s advisers at one of the world’s top law firms, U.S.-headquartered Baker McKenzie, canvassed one of the leading players in the offshore world, a firm of lawyers called Appleby, which specialized in setting up and administering tax haven companies.

Apple settled on Jersey, a tiny island in the English Channel that, like many Caribbean havens, charges no tax on corporate profits for most companies. Jersey was to play a significant role in Apple’s newly configured Irish tax structure set up in late 2014. Under this arrangement, the MacBook-maker has continued to enjoy ultra-low tax rates on most of its profits and now holds much of its non-U.S. earnings in a $252 billion mountain of cash offshore. The Irish government’s crackdown on shadow companies, meanwhile, has had little effect.

The inside story of Apple’s hunt for a new avoidance strategy is among the disclosures emerging from a leak of secret corporate records that reveals how the offshore tax game is played by Apple, Nike, Uber and other multinational corporations – and how top law firms help them exploit gaps between differing tax codes around the world.

Despite almost all design and development of its products taking place in the U.S., the iPhone-maker has for years been able to report that about two-thirds of its worldwide profits were made in other countries, where it has used loopholes to access ultra-low foreign tax rates.

Now leaked documents help show how Apple quietly carried out a restructuring of its Irish companies at the end of 2014, allowing it to carry on paying taxes at low rates on the majority of global profits.

By the time the U.S. Senate Permanent Subcommittee on Investigations released 142 pages of documents and analysis for its public hearing on Apple’s tax avoidance in May 2013, the world was paying attention. The subcommittee found that Apple was attributing billions of dollars of profits each year to three Irish subsidiaries that declared “tax residency” nowhere in the world.

Under Irish law, most firms incorporated in Ireland are required to pay taxes locally on their profits. But if the directors are able to convince the Irish tax authorities that a company is “managed and controlled” abroad, it can often escape all, or almost all, Irish tax.

For more than two decades, the directors of Apple’s three Irish companies – including, for many years, Tim Cook – did just that. By running these Irish subsidiaries from group headquarters in California, they avoided Irish tax residency.

At the same time, the directors knew that their Irish companies would not qualify for tax residency in the United States because American tax law worked differently. Under U.S. rules, a company has American tax residency only if it is incorporated there.

“Apple sought the Holy Grail of tax avoidance: offshore corporations that it argues are not, for tax purposes, resident anywhere in any nation,” then-Sen. Carl Levin (D-Mich.), the Senate subcommittee chairman, said at the 2013 hearing.

Ireland’s finance minister at the time, Michael Noonan, at first defended his country’s policies, saying, “I do not want to be the whipping boy for some misunderstanding in a hearing in the U.S. Congress.” But by October 2013, in response to growing international pressure, he announced plans to require Irish companies to declare tax residency somewhere in the world.

At that time, Apple had accumulated $111 billion in cash almost entirely held by its Irish shadow companies, beyond the reach of U.S. tax authorities. Each year, the pile grew higher and higher as billions of dollars in profits poured into these low-tax subsidiaries.

Company officials wanted to keep it that way.

So Apple sought alternatives to replace the tax shelter arrangements that Ireland would soon shut down. At the same time, however, the iPhone-maker wanted its interest in the offshore world kept quiet.

Behind closed doors, Apple decided that two of its Irish companies should, with the help of Appleby, claim tax residency in Jersey, one of the largest island shelters with strong links to the U.K. banking system, where Apple’s Irish subsidiaries already held accounts. Jersey is a crown dependency of the United Kingdom, but it makes its own laws, sets its own tax rates and is not subject to most European Union legislation, making it a popular tax haven.

By the start of 2015, it had restructured its affairs in Ireland, including securing tax residency in Jersey for Apple Sales International and Apple Operations International, two of the three Irish shadow companies highlighted in the U.S. Senate investigation a year earlier.

For the previous five years, Apple Sales International had been Apple’s biggest profit generator, churning out more than $120 billion, or close to 60 percent of Apple’s worldwide earnings.

Meanwhile, much of that profit was transferred as dividends to Apple Operations International, described by Cook as “a company set up to provide an efficient way to manage Apple’s cash.”

Before their move to Jersey, these two subsidiaries had played a leading role in helping Apple accumulate and hold $137 billion in cash – most of which came from non-U.S. profits barely taxed by any government in the world.

The latest figures indicate that since Apple’s reorganization of its Irish companies this sum has increased 84 percent, though Apple won’t confirm which of its foreign subsidiaries own this cash.

This pile of money has inadvertently made Apple one of the biggest investment funds in the world, and its offshore cash reserves have been put to work in a portfolio that includes corporate bonds, government debt and mortgage-backed securities.

Together with Apple Operations International and Apple Sales International, the company made up the three Irish firms criticized by U.S. senators in 2013 for being “ghost companies,” not tax resident anywhere in the world.

By 2015, tighter Irish laws had caused all three to find a new tax home. But while the other two Irish companies took up residency in Jersey, Apple Operations Europe became tax resident in Ireland, the country of its incorporation.

Source – ICIJ

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Tuesday, November 7, 2017

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