Analysis: Apple's Irish base comes under scrutiny

Tuesday 21 May 2013 20.21
Tim Cook defended Apple's Irish operation, saying it did not take tax away from the US
Tim Cook defended Apple's Irish operation, saying it did not take tax away from the US

By Adam Maguire

While the mechanics of Apple’s international tax strategy – in which Ireland plays a key role – is a little clearer following CEO Tim Cook’s appearance before a US Senate hearing, the rights and wrongs of it are still hotly contested.

Before Cook had even taken his seat before the panel of politicians, Senator John McCain made clear his opinion by declaring that Apple had “violated the spirit of the law, if not the letter of the law” in the way it handles its international income.

However fellow Republican Rand Paul lambasted the committee for “dragging” Apple executives in to be “harangued and bullied” for doing what all sensible companies – and people – do; minimise their tax bill.

The company could find itself guilty of malpractice if it failed to reduce what it paid in tax, he said and the committee “should be congratulating them for being a great American company”.

Chairman Carl Levin was quick to reject this characterisation of the hearing, saying that there was “no attempt to vilify” any person or company. The committee hearing intended to “shine a light” on how the system works, he said, rather than cast judgement on it.

Indeed the Washington session was consistently punctuated with qualifications, where senators couched each probe with an assurance that they were not trying to divine the legality or otherwise of Apple’s approach to tax.

At the heart of the questioning was an attempt to tease out the role of Apple Operations International, Apple Operations Europe and Apple Sales International – all registered in Ireland – in Apple’s business model.

This was important to the committee, as these companies manage Apple sales outside of America – in other words the majority of its revenue - and pay no tax back to the US. AOI is also the holder of a $100bn cash pile, money Apple has said it has no intention of repatriating to the US in the foreseeable future.

A nervous Phillip Bullock, Apple’s head of tax strategy, attempted to explain how the system worked.

The three were wholly-owned subsidiaries of Apple Inc, which were “functionally managed and controlled in the US” despite being based in Ireland. ASI and AOE paid tax in Ireland – though he confirmed it was at a rate of no more than 2% – while AOI was where international revenue would go after tax had been paid on it in the country of origin.

That money would then be invested, with earnings from this being paid and taxed through the US.

Apple’s Irish subsidiaries also hold the licences for Apple products outside of the US, which is given in return for the Irish wing's contribution to R&D.

The Irish arrangements dated back to 1980, he said, when a much smaller Apple first established in Co Cork - the implication being that they were made by a young company trying to grow rather than a money spinner trying to take revenue out of the reach of Uncle Sam.

Tim Cook said they established here to help them sell internationally, which they were not yet doing, and choose Ireland specifically because the Irish Government had offered them a “tax incentive arrangement”. To date the company has a close relationship with the Government here, said Cook.

“At the tax rate you pay I’m sure you do”, quipped John McCain.

While being vague about the nature of that incentive deal, Cook did go to great lengths to explain how Apple Ireland was important to the overall business – he repeatedly spoke about the near 4,000 employees, the recent investment in a new campus building and the fact that there was “a significant amount of decisions and leadership” taking place in Cork.

However the message Cook really wanted to get across was not what Apple did for Ireland, but rather what it was doing for the US.

All American profit was taxed in the US, executives repeatedly stated, Apple was now the US’s largest corporate tax payer, Cook claimed, while 95% of its R&D was done in California.

Apple was also planning to manufacture a line of Mac computers in Texas this year, Cook said, while he was also keen to sell the ‘halo effect’ of the company’s success – US-based companies making components for the iPhone, for example, or the boom in software sales due to it successful App Store.

However there was little needed to assure some senators that Apple was not stiffing the US taxpayer.

Apple was maximising profits for its shareholders - who were no doubt US citizens, pensions funds and investment vehicles said Ron Johnson. If Apple paid more tax in Ireland – or France or Germany for that matter – that would be of no benefit to the US.

Rand Paul said that making a villain of Apple for doing the sensible thing with its tax could mean “their headquarters could no longer be in Cupertino, it might be in Dublin.”

Others needed more convincing, not least Chairman Carl Levin.

After a protracted series of questions about the nature of Apple’s international business, of its Irish operations and the way it handles its cash, Levin’s approach became more pointed.

By giving Apple Ireland the licence to products it was passing on the right to benefit from its intellectual property, Levin argued, which was profit shifting in everything but name.

He dismissed Apple’s argument that profits made outside of the US did not need to be taxed there, highlighting the fact that the company already puts its Mexican and Canadian revenues through California.

He rejected the claim that Apple’s Irish arrangements dated back to a time when the company was a small player, pointing out that they were renewed by Cook and Co in 2008 and 2009. As controller of both sides of the deal, Cook was perfectly empowered to dictate their terms and change them if he wished.

Cook, along with Bullock and CFO Peter Oppenheim consistently rejected any claim that they were shifting anything.

The well-rehearsed comments were oft-repeated. Apple pays all of its tax in the US. Apple’s business creates employment and opportunities across the US. Apple’s international revenue is taxed in the country of origin. Apple is holds most of its cash abroad purely because repatriating it would be a waste of money.

Levin remained unmoved.

“It’s not right... the way a company can shift its value to... a tax haven, that’s what Ireland is,” he said.