Location, location, location.

Apple's Irish Taxes Are the U.S.'s Problem

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
Read More.
a | A

Apple's relationship with Ireland, where it receives much of its profit, was always a mystery: The world's most valuable company had clearly made some sort of deal to pay as little tax as possible, but the details of that deal had never been revealed -- until today. Revealing as they are about Ireland's practices, they require action primarily from the U.S.

More than three months after the European Commission started investigating the possibility that Ireland had been providing illegal state aid for Apple, it finally published a lettercontaining the information that aroused its suspicions. Essentially, in 1991 and 2007, Apple and Ireland agreed that much of the money flowing into the company's Irish accounts had nothing to do with its operations in the country, and hence shouldn't be taxed as profit in Ireland. Instead, the two sides negotiated a deal in which Apple paid tax on a certain percentage of its Ireland-related costs. The deal stood for 15 years, much longer than most European countries would allow such tax rulings to remain in force. Even after some amendments, Apple Sales International paid taxes on less than $80 million in 2011, a year in which the Ireland-incorporated entity recorded $22 billion in pretax income, according to the U.S. Senate's Permanent Subcommittee on Investigations.

In most countries, such revelations would have led to a corruption scandal. Why would a government pass up a chance to levy taxes on billions of dollars in income? In Ireland's case, the situation is more complicated: It defines a company's domicile as the location of its central management and control operations, which in the case of Apple's subsidiaries would be the U.S. By contrast, the U.S. defines domicile as the place of incorporation. So Apple's Irish subsidiaries don't really have a home for tax purposes.

Should Ireland care? The Cupertino, California-based company has 4,000 employees at its Cork facility, where it still assembles some computers but mostly handles sales and user support. That's less than 5 percent of Apple's total workforce, but a big deal for the depressed city. The taxes calculated on the basis of the small operation's costs are not a major consideration for the Irish authorities -- they are just nice to have.

The EC's letter says that the deal appears to constitute illegal state aid: Because the tax base is negotiated, rather than calculated according to some predetermined formula, it provides unfair, selective advantages to Apple. Theoretically, the EC could recover billions of dollars in taxes that Ireland has failed to charge since 2003. To do that, the eurocrats would have to prove that Apple had been singled out for tax advantages. The Irish government says it's confident it hasn't violated state-aid rules. If the government in Dublin can show it treats other companies similarly -- as Google and other beneficiaries might confirm -- it will be difficult for the bureaucrats in Brussels to act.

Ireland is happy to have Apple and the other tech giants invest in its economy. There is no reason why it should pressure a U.S. company to pay more taxes. If the U.S. wants to make its companies pay their fair share, it has the power to do so -- either by coercing them or by enticing them with improved corporate tax legislation.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net