Apple was criticized in a Senate committee hearing Tuesday for using complex accounting to minimize the corporate taxes it pays. One key piece of the company's tax strategy: It funnels lots of its profits through subsidiaries in Ireland.
Offering low corporate tax rates has been a fundamental part of Ireland's economic strategy for decades — a way to get foreign companies to set up operations in the country.
In the hearing, Apple CEO Tim Cook mentioned that Apple has had a subsidiary in Ireland since 1980, when the country was recruiting international tech companies and offering tax deals.
As it happens, the idea of using taxes to lure foreign companies goes back even further than that, according to Frank Barry, an Irish economist who has studied the country's tax history.
After World War II, the Irish government used rebuilding funds provided by the U.S. government to, among other things, hire U.S. consultants, Barry says. The consultants produced a 100-page report that was a broad look at the Irish economy. (First line: "In the Irish economy, cattle is king.")
On one page, the report noted that Puerto Rico — another small island economy — had done well by lowering its corporate tax rate, which attracted multinational corporations.
"The U.S. consultants downplayed it," Barry says. "But our bureaucrats here spotted it and said, 'This has the makings of a very good idea.' "
DAVID GREENE, HOST:
OK, we reported yesterday that Apple, the most profitable tech company in the United States has found a loophole to keep down its U.S. tax burden. They store billions of dollars overseas, paying very little taxes on that money. While it's legal, the news has Apple in hot water with Congress at the moment. A lot of Apple money effectively lives in this pastoral little country across the ocean: Ireland.
NPR's Zoe Chace explains why the Irish help Apple pay no taxes and where this idea came from in the first place.
ZOE CHACE, BYLINE: When a company like Apple doesn't pay taxes, Congress doesn't like it. Here's Senator John McCain.
SENATOR JOHN MCCAIN: Apple's three primary Irish entities hold 60 percent of the company's profits, but claim to be tax residents nowhere in the world.
DANIEL GOTTFRIED: They call it nowhere income. You have income that's just not sourced anywhere because of different countries different tax rules.
CHACE: Daniel Gottfried is a tax lawyer. We looked at Apple's situation together. He says, what Apple's doing is perfectly legal and common.
Apple has couple subsidiary companies in Ireland. Let's highlight one, Apple Operations International. It's a holding company - a company of companies. It has an address in Ireland, but there's nobody there. The company has no employees.
Here's what Apple Operations International does. It holds European iPhone money. If you buy an iPhone in Brussels, that money gets transferred to a company, which transfers it to another company, then another company - which transfers it to Apple Operations International. And there it sits.
So why no taxes in Ireland? Because of a quirk in the Irish tax code. If the company is managed somewhere else - Apple Operations International, for example, managed out of California, it pays no Irish taxes.
Opposite quirk in U.S. law: a company that's incorporated outside of the U.S. also doesn't pay taxes here, even if it's managed out of California. This has been going on for more than 30 years.
Here's Apple's CEO Tim Cook, testifying before Congress yesterday.
TIM COOK: We went to Ireland in 1980, and they were very much recruiting, I believe, technology companies at that time, and as a part of recruiting us, the Irish government did give us a tax incentive agreement.
CHACE: It's been a fundamental part of Ireland's economic strategy to get foreign companies to set up operations in Ireland. They offer these really low corporate tax rates. In Apple's case, not all their subsidiaries pay zero taxes, but the taxes they do pay are much, much lower than what they'd pay in the U.S. on the order of 30 percentage points lower.
And whose idea was it, that the Irish corporate tax rate rip off the U.S. government? Essentially, the U.S. government itself. It dates back to rebuilding money Ireland got from the U.S. right after the war.
Frank Barry is an Irish economist who's studied Irish tax history. He says the first thing Ireland did when it got the U.S. money was to ask for advice on how to spend it.
FRANK BARRY: Amongst the things we did was we hired a group of U.S. consultants. They issued a 100-page report to the Irish government.
CHACE: And tucked into this 100-page report - on a single page - the consultants...
BARRY: Drew Ireland's attention to the case of Puerto Rico.
CHACE: Puerto Rico, the consultants noted, had done very well in the post-war period by lowering its corporate tax rate.
BARRY: To lure U.S. multinationals corporations to set up production in Puerto Rico and export back to the U.S.
CHACE: Oh, that single page in the 100-page report turned out to be the very best part, even though...
BARRY: The U.S. consultants downplayed it. They said this is probably not relevant to the Irish situation. But we - our bureaucrats here spotted it and said, this has the makings of a very good idea.
CHACE: Ireland the tax shelter was born, in the style of Puerto Rico - with State Department funds. This, of course, was not the Americans' intention. In fact, the report started out quite boldly.
BARRY: The single opening line says, in the Irish economy cattle is king.
CHACE: Not anymore.
Zoe Chace, NPR News.
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