Foreign countries not US have first call on Apple's $200bn+ cash trove in Irish shell firms
It's not a recent development for tax offices to look behind sham/artificial structures in dissecting schemes to reduce tax. In recent years the abuse in the CT area has also focused on sham arrangements.
The House of Commons Public Accounts Committee in 2013 rejected Google's argument that sales of corporate advertising were completed and thus invoiced in Dublin as Google UK staff only partially handled sales issues with clients — "an argument which we find deeply unconvincing on the basis of evidence"; "Google has also conceded that its engineers in the UK are contributing to product development and creating economic value in the UK"; "HMRC needs to be much more effective in challenging the artificial corporate structures created by multinationals with no other purpose than to avoid tax."
Edward Kleinbard, professor of law and business at the University of Southern California, is a former chief of staff of the US Congress's Joint Committee on Taxation, and he testified at the US Senate hearings on Apple in May 2013. Prof Kleinbard wrote this week on The European Commission ruling that Ireland provided Apple with illegal state aid:
Tax here was just the instrument for delivering state aid. The US Treasury is expert in detecting tax shams used to disadvantage US tax collections, and should have recognized that the EC similarly is making a sham arrangement argument.
Kleinbard says Jack Lew, US Treasury secretary, and Apple are wrong when they argue that only the Internal Revenue Service has a legitimate claim to Apple’s $230bn in largely untaxed offshore cash, technically in Irish offshore shell companies but actually in the United States. "This is a misstatement of US law."
Apple says 65% of its earnings are foreign-related but it also contradicts itself by saying most profits are generated in the US. However, the the profits it books overseas puts overseas tax offices other than the IRS ahead in the taxing queue. Apple settled a tax fraud case last year with Italy and there are more to come.
For nearly 100 years the nation has followed the principle that the jurisdiction in which income arises (the “source jurisdiction”) has priority in taxing cross-border income. To prevent double taxation, a US company can claim a credit against its US tax bill for levies already paid to source countries. So US tax on a dividend repatriation is a residual liability of the company, payable only to the extent that source countries have not first taxed the income.
Kleinbard says the United States aids and abets US multinationals in their stateless income tax gaming, whose object is to skim profits from countries where income actually is earned, and then to deposit those profits in a zero or near zero tax receptacle. That is the source of Apple’s offshore cash hoard totaling more than $200 billion.
Distilling the facts to their essence, in Europe, Apple has deployed the almost farcical charade that its income from retail sales in Germany, for example, really is earned by an Irish subsidiary that hovers just beyond the German border, doing all the value-added work to offer Apple products to German retail customers, but never quite putting a foot down in Germany.
For the United States, the game is different, but just as artificial. Apple’s plan, authorized in broad outline by IRS regulations, was to create an Irish subsidiary, stuff it with seed money, and to pretend that the subsidiary had its own independent business agenda. Apple Cupertino and Apple Ireland then entered into an “arm’s length cost sharing agreement” of the sort that two independent drug companies might employ to jointly develop a new drug.
The Irish shell companies were available to Apple for massive tax avoidance with reported sales in several countries artificially suppressed. The EC views the structure as a sham and it's unlikely that it was commonly available to other companies.
What makes this a state aid case rather than a tax one is that there is no plausible explanation for Ireland ceding its tax authority other than its understanding that jobs would follow. The parties reverse engineered a methodology to yield an agreed minimal tax take.
Edward Kleinbard: Apple’s Ireland tax avoidance should spur major reforms