The US just wants its bite of Apple

The US report on Apple is interesting but misleading, writes Seamus Coffey.

The international principles underlying the taxation of corporate income are attracting considerable attention. Ireland, in particular, has come under the spotlight.

A report prepared for two US senators includes a very interesting, but misleading, case study on the tax strategies of Apple. The report claims that in Ireland: “Apple has negotiated a special corporate tax rate of less than 2%.”

There are no special corporate tax rates in Ireland. There are rules on how taxable income is calculated to determine the figure on which the 12.5% rate is applied. This rate is applied to taxable income not gross profit.

Royalty payments for intellectual property licenses are one of the largest differences between gross income and taxable income for some companies. For example, if a company with a gross profit of A incurs a trade charge of B for royalty payments then taxable income (to which the 12.5% rate is applied) is A minus B.

Effective tax rates can be calculated using gross profit as the base but tax is actually charged on taxable income. Aggregate figures from the Revenue Commissioners show that the effective tax rate in Ireland on the gross income of companies in 2010 was 6.0%. However, the effective tax rate on taxable income was 10.3%. The important thing is how taxable income is calculated not “special” rates.

The report accuses Ireland of being a tax haven on the basis that the effective tax rates on Apple’s gross income are very small. They are. But this is because the trade charges on intellectual property are very large. There are international standards for the rules governing such transactions and the intellectual property (which was not created in Ireland) is held somewhere else and subject to tax there.

The main problem from a US perspective is when these companies are liable for their 35% tax on corporate profits. This has to be paid when global profits are repatriated to the US. From a US perspective it doesn’t really matter how much tax is paid in Ireland or elsewhere; the US just wants its share. The problem is that companies are indefinitely deferring this tax by not repatriating the money to the US.

Apple has more than $100bn (€77.7bn) of cash (mostly held by subsidiaries outside the US) but recently issued $17bn of bonds to engage in a share-buyback to return some cash to shareholders. Apple didn’t use its own cash because that would have meant repatriating it and incurring the 35% tax.

The provision that allows these companies to defer their US corporation tax is called the “same country exemption” in the US tax code. The “double-Irish” scheme for royalty income works because of this exemption granted by the US rather than any provision in the Irish tax code.

International taxation is hugely complex and should not be reduced to simple sound-bites but I can’t resist — Ireland is not a tax haven.

Seamus Coffey is a lecturer in economics at UCC