SAN FRANCISCO/DUBLINΒ (Reuters) –Β AppleΒ has operated almost tax-free inΒ IrelandΒ since 1980, welcomed by a government keen to bring jobs to what was then one ofΒ Europe‘s poorest countries, former company executives and Irish officials have said.Β Chief Executive Tim Cook faced criticism from aΒ Senate subcommittee in WashingtonΒ on Tuesday over theΒ iPadΒ andΒ iPhoneΒ maker’s tax practices, which had been shrouded from full view behind secretive tax-exempt Irish-based corporate entities.
Apple, one ofΒ Ireland‘s top multinational employers, denied avoiding billions of dollars in U.S. taxes and said its arrangements helped fund research jobs in theΒ United States. The committee revealed thatΒ Apple‘s Irish companies, some of which are not tax resident in any jurisdiction, allowed the group to pay no tax on much of its overseas earnings in recent years.Β SenatorΒ Carl Levin, chairman of the subcommittee, saidΒ AppleΒ had sought “the Holy Grail of tax avoidance”.Β A former company executive and Irish officials told Reuters the almost tax-free status dates all the way back toΒ Apple‘s arrival in County Cork 32 years ago.
AppleΒ must have seemed attractive toΒ IrelandΒ and to Cork. Amid a generally moribund Irish economy, Cork had been hard hit by the closure of its shipyards and a Ford car plant, and in 1986 nearly one in four were out of work in the city.Β In the early days,Β Apple‘s staff sat down to meals together. Now the company employs 4,000 inΒ Ireland.
“There were tax concessions for us to go there,” said DelΒ Yocam, who was Vice President of manufacturing atΒ AppleΒ in the early 1980s. “It was a big concession.”Β In fact, the deal was about as good as a company can get.Β “We had a tax holiday for the first 10 years inΒ Ireland. We paid no taxes to theΒ Irish government,” one former finance executive, who asked not to be named, said.Β AppleΒ wasn’t an exception, although it was among the last to enjoy such favorable treatment. From 1956 to 1980,Β IrelandΒ attracted foreign companies by offering a zero rate of tax, according to theΒ Irish government‘s website. Eligible companies arriving in 1980 were given holidays until 1990.
“Any multinational attracted intoΒ IrelandΒ that was focusing on the export market paid zero percent corporation tax,” saidΒ Barry O’Leary, CEO ofΒ IDA Ireland, which is charged with attracting investment intoΒ Ireland.Β AppleΒ said it pays all the tax due in every country where it operates. It declined to comment on the tax treatment it received in the 1980s.Β As part ofΒ Ireland‘s accession to theΒ European Economic Community, precursor to theΒ European Union, in 1973, it was forced to stop offering tax holidays to exporters.Β From 1981, companies arriving inΒ IrelandΒ had to pay tax, albeit at a low 10 percent rate, providing they qualified for manufacturing status.
ECONOMIC COUP
Apple‘s investment was a major coup forΒ Ireland. At the time, the country was struggling with high and rising unemployment, double-digit inflation and a brain drain of the young and educated through emigration.Β “We were the first technology company to establish a manufacturing operation inΒ Ireland,” recalledΒ John Sculley,Β Apple‘s CEO from 1983 to 1993. He said government subsidies had also played a role in deciding to set up a base inΒ Ireland.Β IrelandΒ also offered low wage rates – a big attraction when it came to hiring hundreds of people for the relatively low-skilled work of assembling electronic equipment.
AppleΒ told the subcommittee it could not answer questions about why it choseΒ IrelandΒ as a base since it had lost the paperwork from the period.Β The operation in Cork built the company’sΒ AppleΒ II computer and would later build disc drives, βMac’ computers and others. These would be sold inΒ Europe, theΒ Middle East,Β AfricaΒ andΒ Asia.Β But having a tax holiday inΒ IrelandΒ would not, in itself, have allowedΒ AppleΒ to operate tax free in these markets.Β Equipment assembly is not the kind of activity that economists or tax authorities usually credit with generating a large share of a technology company’s profits.
More value has been associated with generating the intellectual property behind the technology – whichΒ AppleΒ did in theΒ United StatesΒ – and with the selling of goods, which was to be done on the ground inΒ France, Britain andΒ India.Β But none of these countries offered the tax advantagesΒ IrelandΒ did. The key to minimizingΒ Apple‘s tax bill was maximizing the amount of profit that could be ascribed toΒ Apple‘s Irish operations.
THE ARCHITECT
This task fell toΒ Mike Rashkin,Β Apple‘s first tax director, two executives from the period said. One called him “the father of it all”.Β Rashkin arrived atΒ AppleΒ in 1980, from computer pioneer Digital Equipment Corp (DEC) inΒ Massachusetts, where he had learnt about tax-efficient corporate structuring in tech companies.Β AppleΒ had already decided to establish its base inΒ IrelandΒ when Rashkin moved to Silicon Valley, but he used his experience at DEC to set up a tax structure that took advantage ofΒ Apple‘s base in the country, the executives said. Rashkin declined to comment.Β TheΒ SenateΒ subcommittee’s report reveals how the arrangement was structured. In 1980,Β AppleΒ entered into a deal with its Irish operation, whereby the latter would share the cost of fundingΒ Apple‘s research and development. In return, the Irish unit would be able to enjoy rights toΒ Apple‘s intellectual property for goods sold outside theΒ Americas.
AppleΒ secured the blessing of the U.S. tax authority, theΒ Internal Revenue Service, for the deal, one executive said. The IRS gaveΒ AppleΒ an advance pricing agreement, or APA, an agreement which establishes how the IRS will treat a transaction between affiliates for tax purposes, before it is entered into.Β Many countries’ tax authorities offer APAs, and companies say they are necessary to facilitate international trade and investment. Tax campaigners say tax authorities have been too ready to accept the pricing proposed by companies which apply for APAs.Β The New York TimesΒ reported last year thatΒ Apple‘s low taxes were at least in part due to the confidential technology transfer arrangement.Β The terms of the deal and subsequent cost-sharing deals were favorable forΒ Apple‘s Irish unit. In effect, the Irish unit paid much less to its U.S. parent for the use ofΒ AppleΒ intellectual property than it made from selling that property on to affiliates.
“Apple‘s cost sharing agreement (CSA) with its offshore affiliates inΒ IrelandΒ is primarily a conduit for shifting billions of dollars in income from theΒ United StatesΒ to a low tax jurisdiction,” the subcommittee’s report said.Β Meanwhile,Β AppleΒ also constructed a system whereby the affiliates which were actually selling the finished equipment would earn minimal profits.Β The techniquesΒ AppleΒ used over the years included selling goods to affiliates at prices which generated little profit at the retail level, or by paying sales affiliates commissions which are just about enough to cover their operating costs.Β Rashkin’s work andΒ Ireland‘s accommodating approach had the desired result forΒ Apple.
“We’re very, very pleased,”Β Apple‘s then-President A.C. βMike’ Markulla said in 1981. “The Irish have really lived up to their promises.”Β Indeed, the accounts forΒ Apple‘s main Irish unit, then known asΒ AppleΒ Computer Inc. Ltd, for 1989, the earliest year for which detailed accounts were filed, show exactly how effective the arrangement was.Β The subsidiary paid $500,000 in income tax on profits of $317 million, a rate of 0.2 percent.
END OF THE HOLIDAY
In 1990,Β Apple‘s tax holiday came to an end, and in that year, the Irish operation’s tax rate hit 4 percent, accounts from the period show.Β At the same time,Β Apple‘s Irish manufacturing activities came under question as the company looked to cut costs by outsourcing. In 1992, the company announced plans to cut hundreds of jobs after deciding to shift some work toΒ Singapore, which at this time was attracting increasing investment by offering tax holidays.Β “They nearly leftΒ IrelandΒ altogether,” O’Leary said.Β By this stage, the European Community had banned tax holidays of the kind given toΒ Apple, so the company andΒ DublinΒ negotiated an arrangement which had a similar outcome but fell within European rules.
The precise details of the arrangement were not disclosed, but Phillip Bullock,Β Apple‘s head of tax operations, indicated that it was linked to minimizing taxable profit.Β “Since the early 1990s, theΒ Government of IrelandΒ has calculatedΒ Apple‘s taxable income in such a way as to produce an effective rate in the low single digits,” he told the subcommittee.Β The deal didn’t stopΒ AppleΒ from shifting manufacturing work toΒ Asia, but in the years that followed new jobs were created in Cork, in sales and administrative support for the European operation, the accounts of the Irish units show. Some manufacturing remains inΒ Ireland, the subcommittee said.
AnΒ Irish governmentΒ spokesman declined to even confirm it held discussions withΒ AppleΒ regarding tax, citing rules on taxpayer confidentiality.Β From 1996Β IrelandΒ phased in a 12.5 percent tax on all corporate trading income, although foreign companies often pay effective rates lower than this by shifting money into tax havens such asΒ Bermuda.Β Apple‘s Cook told theΒ SenateΒ panel on Tuesday thatΒ AppleΒ does not hold money on aΒ CaribbeanΒ island or divert profits from sales to U.S. customers to other jurisdictions to avoid U.S. taxes.
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