Apple’s Tax Magic Leaves Irish Bondholders Unmoved: Euro Credit

As Ireland’s leaders try to limit the fallout from the tax crossfire between Apple Inc. and U.S. politicians, bond markets suggest they don’t have to worry.

Speaking to lawmakers in Dublin two days ago, Finance Minister Michael Noonan insisted the country is no tax haven, a day after a congressional hearing in Washington focused attention on Apple Inc.’s manoeuvers to minimize its tax bill through its operations in Cork in the south of Ireland.

“Maybe there was a magician,” said Noonan, adding that Ireland didn’t “want to be a whipping boy for misunderstandings” over Apple’s tax liabilities. “But the magician wasn’t resident down in Cork.”

At stake is Ireland’s model of attracting overseas companies with the lowest company tax rate in western Europe to drag the economy out of its worst recession on record. So far, investors are unmoved. Yields on two-year Irish securities are close to a record low, while those on 10-year bonds are near their lowest relative to benchmark German bunds in three years.

“It’s lots of bluster so far, with no actual suggestion as to what U.S. is going do,” said Owen Callan, an analyst at Danske Bank A/S in Dublin, a primary dealer in Irish government debt. “Bad headlines, but nothing behind it.”

Low Yields

After Apple Chief Executive Officer Tim Cook appeared at a congressional hearing on May 21, the yield on two-year Irish notes was little changed at 0.78 percent, the least since Bloomberg began compiling the data in 2003.

The yield on Ireland’s 10-year bonds fell one basis point this month to 3.54 percent today. That narrowed the premium the nation pays to borrow compared with Germany to 2.08 percentage points from 11.5 percentage points in July 2011.

In part, the decline in Irish borrowing costs has been driven by European Central Bank President Mario Draghi’s pledge last year to do whatever it takes to defend the euro. It also reflects Ireland’s strategy of protecting its 12.5 percent corporate tax rate, which had come under threat from European leaders two years ago following Ireland’s November 2010 bailout.

To an extent, it’s paying off, as companies making goods to ship abroad help propel the economy back to growth. Ireland’s top 10 exporters account for one-third of overseas sales. In a country of 4.4 million people, 115,000 work for U.S companies including Apple, Google, Pfizer Inc. and Microsoft Corp., according to data from the American Chamber of Commerce.

Senate Scrutiny

Yet, the government’s focus on wooing overseas companies has put them in the sights of U.S. politicians.

Apple, the world’s largest technology company by stock market value, negotiated a tax rate of less than 2 percent with Irish authorities, a senate report said this week, citing the company. Cook told lawmakers Apple had done nothing wrong and pays “all the taxes we owe -- every single dollar.”

“When Irish politicians get into the realms of having to defend the country against these accusations, much damage has already been done,” said Dermot O’Leary, an economist at Goodbody Stockbrokers in Dublin.

Apple, the maker of iPhones and iPads, reduced its tax bill by setting up a unit in Cork, which didn’t declare tax residency in Ireland because it’s neither managed nor controlled in the country, according to the hearing. As the unit is incorporated in Ireland, it’s not a U.S. tax resident either.

No Residency

The phenomenon of “stateless companies” may not survive, said Feargal O’Rourke, tax and legal services leader at PricewaterhouseCoopers in Dublin. Even that probably won’t hamper the government’s ability to attract investment, he said.

“Ireland has a much broader tax offering, which will continue after this,” said O’Rourke. “It will not have one iota of an impact on Ireland’s real offering.”

Unit labor costs adjusted for inflation dropped 9.2 percent between 2008 and 2012, against a 1.6 percent increase in the European Union average, according to Eurostat. Prime office rents in Dublin city center fell to 307 euros ($396) per square meter from 673 euros in the first quarter of 2008, according to CBRE Group Inc., a commercial real estate services firm.

Ireland’s tax rate compares with 35 percent in the U.S., 33 percent in France and 23 percent currently in the U.K. Companies are able to reduce their taxable income in Ireland by subtracting large royalty payments, said Seamus Coffey, an economics lecturer at University College Cork.

“There’s merit in some of the complaints, but most of it is political posturing,” said Coffey. “Few substantive proposals are being made. There may be a reputational impact on how Ireland is viewed by other governments, but for international companies, the controversy could highlight the attractiveness of the Irish system.”