Little people pay the price as big businesses avoid their fair share

ENDA Kenny started his trip to the US this week with a tongue-lashing from a Boston cardinal and concluded it with the US Senate deriding the country as a tax haven.

An explosive Senate report into Apple’s byzantine tax affairs doesn’t pull any punches, bluntly stating, “Ireland has essentially functioned as a tax haven for Apple, providing it with minimal tax rates approaching zero”.

Outraged members of the Government have denied the country operates as a tax haven, but the figures tell a different story.

The report reveals that two Apple subsidiaries incorporated in Ireland, Apple Sales International (ASI) and Apple Operations International (AOI), have no tax residency anywhere in the world and have paid almost no tax on earnings of more than $100bn. This is facilitated because of legal loopholes in the US and Irish tax systems. US companies have to be incorporated in that country to be tax resident while, in Ireland, companies have to be managed and controlled in this jurisdiction to be liable for corporate taxes. Apples two subsidiaries were incorporated in this country but are controlled from the US so fall into a lucrative no-man’s land that allows then avoid tens of billions of dollars of tax.

A member of the Senate subcommittee, which produced the report, has now dubbed these subsidiaries “iCompanies – “i” for imaginary, invisible”.

First incorporated in Ireland in 1980, AOI has operated for the past 33 years without a physical presence or its own employees. Despite this trifling detail, the company reported net income of $30 billion between 2009 and 2012 — 30% of the company’s worldwide profit in that period — but declined to declare any tax residence, filed no corporate income tax return, and paid no corporate income taxes to any national government.

ASI also claims to have no tax residency in any jurisdiction despite recording sales income of $74bn between 2009 and 2012.

The company books this money as Irish income in a process known as transfer pricing. The report succinctly explains the convoluted process: “ASI contracts with Apple’s third-party manufacturer in China to assemble Apple products and acts as the initial buyer of those finished goods. ASI then re-sells the finished products to Apple Distribution International (ADI) for sales [all over the world].

“ASI did not conduct any of the manufacturing — and added nothing — in Ireland to the finished Apple products it bought, yet booked a substantial profit in Ireland when it resold those products … In fact, ASI never took physical possession of the products it ordered from the third party manufacturer.”

Despite booking such mammoth sales figures in Ireland, ASI operated without any employees until 2012 when, as a result of restructuring, it was assigned 250 staff.

Even after this recent swelling of its ranks, ASI still maintains that its management and control is located outside of Ireland and, consequently, it has no tax residency in either Ireland or the US.

Democratic Senator Carl Levin, who is chairing the subcommittee investigation into the tax affairs of Apple and other multinationals, said the company’s ability to set up subsidiaries that have no tax residency anywhere in the world was unlike anything he had seen before. “Apple wasn’t satisfied with shifting its profits to a low-tax offshore tax haven. Apple successfully sought the holy grail of tax avoidance. It has created offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere,” he said.

While Apple clearly invests as much creativity into its accounting as it does in its products, the report also claims that the company reached a “special” deal with the Irish government vis-à-vis its tax rate.

“For many years, Ireland has provided Apple affiliates with a special tax rate that is substantially below its already relatively low statutory rate [12.5%]. Apple told the subcommittee that it had obtained this special rate through negotiations with the Irish government. According to Apple, for the last 10 years, this special corporate income tax rate has been 2% or less.”

As evidence of this, the report reveals that ASI paid an effective tax rate of just 0.1% in 2009, or $4m on $4bn pre-tax earnings, but even that derisory rate had dropped to 0.05% in 2011, $10m in tax on earnings of $22bn. Contacted by this column yesterday, the Department of Finance denied any such agreement had taken place.

“Ireland does not do special tax rate deals with companies. We do not have a special extra low corporate tax rate for multinational companies. Ireland’s tax system is statute based so there is no possibility of individual special tax rate deals for companies,” said a spokesman.

While this seems a more likely scenario, meaning the Government had best contact the US Senate to nail the damaging allegation that it does secret taxation deals with multinationals, the fact remains that large, rich companies are paying negligible amounts of tax here thanks to loopholes peculiar to our taxation system.

The Government prides itself on its low 12.5% corporate tax rate but thanks to structures like the “double Irish” or the “Dutch sandwich”, in which firms route earnings through an intricate web of accounts, companies avoid paying even that derisory sum.

CONSEQUENTLY, the headline 12.5% rate is meaningless, a mirage, as companies, like Google, Facebook and Apple, routinely pay effective rates that are far below this figure. Coupled with this, Enterprise Minister Richard Bruton now wants to further lower the tax liabilities of the rich with an income tax rate of 23% for those moneybags earning up to €500,000. This has implications for all of us and our personal tax liabilities as governments, who kowtow to companies and tolerate wholesale tax avoidance, look to citizens to fill the gap.

Startling figures from the US report highlight the disparity that has arisen there in the past 60 years, as neo-capitalist fervour reached a crescendo. In 1952, corporate tax generated 32.1% of all federal taxes while payroll tax amounted to 9.7% of revenue. Today, corporate tax amounts to just 8.9% of revenue with payroll taxes generating 40% of income. Apple is one of the richest companies in the world with cash reserves of an incredible $145bn.

This is a company that can afford to pay its fair share and it is grossly iniquitous for governments, in Ireland or anywhere else, to allow schemes that facilitate such egregious tax avoidance to continue.

These revelations must be especially galling for small and medium business owners, who provide the bulk of Ireland’s employment, and who are taxed to the hilt and levied with all sorts of charges, while multinationals are laughing all the way to their offshore Bermuda bank accounts.

Eamon Gilmore, responding to the report yesterday, said Apple’s tax avoidance was “not an issue” for Ireland – an incredible statement, considering the tax avoiding companies are incorporated in this country.

In a country where banks are too big to fail and developers are too big to repay their debts, certain companies are clearly deemed too big to pay their fair share of tax. As per usual, it will be left to the little guy to pick up the tab.

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