For people in Cork, Apple Inc. (AAPL) is more than just a tax ghost.
Chief Executive Officer Tim Cook said at a conference this week that the company doesn’t use “tax gimmicks” after U.S. Senator Carl Levin in Washington described Ireland as a haven through which Apple avoids levies. Levin’s comments caused tremors across the Atlantic ocean in the southern Irish city, where the iPhone maker employs about 4,000 people.
“Whatever tax exemptions they have, they should be able to keep them with the people they employ,” said Liam O’Leary, 37, a taxi driver at Hollyhill Cabs, whose office is adjacent to the company’s European headquarters on the north side of the country’s second-largest city. “We depend on Apple.”
That reliance on Apple is raising the question over whether tax payments are worth trading for salaries in a country whose jobless rate has doubled to 14 percent over the past four years. Cork contrasts with the backlash in Britain and the U.S. against the financial affairs of companies also including Starbucks Corp. (SBUX) and Google Inc. (GOOG), which was accused by a U.K. lawmaker this month of using “smoke and mirrors” to avoid paying tax.
International and local laws allow companies to route profits through Ireland virtually tax free. At the same time, U.S. companies from Apple to Google employ more than 100,000 people in the country, whose main rate of corporation tax, at 12.5 percent, is already the lowest in western Europe.
The spotlight turned on Cork, a port twinned with San Francisco and nicknamed the Rebel County, since the Senate hearings last week.
“The city would be in a very different situation if Apple wasn’t here,” John Buttimer, Cork’s lord mayor, said in an interview in his office, which is decorated with a picture of John F. Kennedy’s visit to the city 50 years ago. “It’s a real company providing real jobs.”
Yet the portrait of Ireland as a tax haven, which is disputed by the government, risks tarnishing the nation’s reputation, some analysts say.
“The tax benefits have to be part of the wider cost-benefit analysis when companies are looking at Ireland,” Jim Power, chief economist at life insurer Friends First in Dublin, said in an interview this week. “The recent debate in the U.S. about Ireland’s corporate tax status is a cause for deep concern and poses a threat to the longer-term sustainability of Ireland’s foreign investment model.”
Ireland uses its tax rate, which compares with 33 percent in France and 23 percent currently in the U.K., to attract U.S. companies. Yet investors can avoid paying levies in Ireland almost completely by setting up units that don’t fall in any tax jurisdiction, according to the Senate panel report.
More than 1,000 multinational companies have their European base in Ireland, according to IDA Ireland, the government agency responsible for attracting investment.
In 1980, Apple created Apple Operations International in Ireland, which acts as its primary offshore holding company. The unit hasn’t declared tax residency anywhere, employs nobody and has no physical presence in Cork, though it does share a mailing address with other Apple units, the Senate report said.
Levin said Apple has “set up ghost companies, which for tax purposes, exist no-where.”
Where income is taxable, overseas companies can also reduce their tax bills by subtracting large royalty payments. Apple has paid a rate of 2 percent or less in Ireland over the last 10 years, the report showed, citing the company. Cook told lawmakers on May 21 that Apple had done nothing wrong and pays “all the taxes we owe -- every single dollar.”
“I would argue this is not a sustainable long-run industrial policy, but lots of people would disagree with me,” said Jim Stewart, associate finance professor at Trinity College Dublin. “The only people who understand it are chartered accountants. They get to be in charge.”
It’s the system that’s to blame for companies not paying tax, Steve Wozniak, co-founder of Apple, said at an event in Northern Ireland yesterday, the Belfast Telegraph reported. Companies are obeying tax rules that politicians and corporations create, he said.
“As a result, big companies including Apple pay only the tax that the system requires them to pay,” the newspaper cited Wozniak as saying. He said it was “ethically wrong” for companies not to pay more tax, though “for a corporation there is no such thing as corporate ethics,” he said.
While the entities at the center of the controversy employ few people directly, companies tapping the Irish tax route need to show they are doing business in the country, according to Aidan Byrne, international tax partner at Baker Tilly Ryan Glennon, a Dublin-based accountants and tax adviser.
“Establishing that type of business substance in Ireland is vital to legally availing of the corporate tax rate and optimizing corporate structures for tax purposes,” said Byrne. “If you’re just doing an intellectual property play with no substance, go to Bermuda, go to Luxembourg, go somewhere else, but don’t go to Ireland.”
Ireland provides no special tax concessions for individual companies, Michael Collins, Ireland’s ambassador to the U.S. said in a letter to Levin released by the country’s Finance Ministry today. Collins said the companies at the center of controversy aren’t tax resident in Ireland.
“The tax rates attributed to Ireland are wrong and misleading,” he said.
In general, the Irish government is pragmatic about the tax affairs of international companies operating in the country, saying that all rules are being followed.
“We would want to be very careful that we do not join in this clack of criticism,” Finance Minister Michael Noonan told lawmakers last week. Politicians “should remember” workers at U.S. multinationals in their constituencies.
By contrast, companies including Starbucks and Google have been criticized in the U.K. by politicians. On May 16, Margaret Hodge, a Labour Party lawmaker who chairs the Public Accounts Committee in parliament in London, said the company was acting unethically on tax matters.
“Your company says you don’t do evil; you do do evil,” Hodge told Matt Brittin, California-based Google’s vice president for sales and operations in northern and central Europe. “You use smoke and mirrors.”
In Cork, people are happier to overlook the bottom lines of overseas companies because of the job opportunities.
Apple employs people at its Hollyhill offices in online sales, manufacturing and technical support, the company said. Apple, which declined a request for a tour of the facility, is the biggest private employer in the city of Cork, according to city documents.
Unlike the modern, multi-story operations of Google and Facebook Inc. (FB) in Dublin’s rejuvenated docklands area, Apple operates out of low-slung aging red-brick buildings with a tinted glass exterior.
Cranes tower over the site, part of the plans to expand at Hollyhill this year. Beside the complex, is a site for Irish travelers that houses more than a dozen families. Horses graze across from the Apple site or amble along nearby footpaths.
Leaders in the county of 500,000, keen to keep Apple happy, agreed to reroute a local road that had run through the Apple campus to go around the facility, according to Buttimer, the lord mayor. Cork city itself has a population of about 120,000.
“Small is beautiful in some things,” said Buttimer, adding the city can move swiftly in its dealings with companies.
Ergin Yil, 43, opened up Zane Authentic Turkish barbers opposite Apple’s offices in the city center this month. Yil offers Apple workers 20 percent off their 15-euro cut and wash, and his nephew, who works for the company as a translator, distributed flyers at Apple advertising the offer.
“Business is good and it’s getting better,” Yil said, adding he had as many as 300 customers the past two weeks.
O’Leary, the taxi driver, says unemployment in the area is “massive” and he puts into the words the concern many locals have about Apple. “With all the money they have, they can afford to pull out of here at any time and set up elsewhere.”
To contact the editor responsible for this story: Douglas Lytle at email@example.com