Special Arrangements

It was to avoid this reputational damage that Ireland originally decided to fight the ruling from the European Commission. Rather than accept the windfall following a long phase of domestic austerity, the Irish government threw more than €10 million of public money into convincing the commission that it was not entitled to any of ASI’s more than €110 billion profits, even though all of the sales were booked through Ireland.

To make its case, the Irish government sent an ex–attorney general, Paul Gallagher, to argue that the European case was “fundamentally flawed, confused and inconsistent.” Gallagher’s argument centered on the low-value nature of Apple’s manufacturing operation in Cork. He claimed that it was “astonishing” for the commission to allocate taxes from ASI’s non-US profits to Ireland, since the intellectual property in question was produced in the United States while the customers were mostly located in Europe, North Africa, and the Middle East.

Gallagher went on to argue that by allocating the profits to Ireland in this way, the commission had overreached into Irish taxation policy, breaching Ireland’s national sovereignty in the process. But why were profits that had no economic relationship to Apple’s Irish operation routed through Ireland in the first place, and did the commission actually breach Ireland’s competencies around taxation? Answering these questions brings us into the heart of Apple’s unique arrangement with the Irish establishment.

The genesis of the European Commission case was a slip of the tongue by Apple CEO Tim Cook in 2013. Appearing before a US Senate committee on Apple’s offshore activities, Cook referred to a special “tax incentive arrangement” that Apple had received from the Irish Revenue Commissioners as far back as 1991 and renewed again in 2007.

This was an incredible admission to make in public, as it strongly suggested that Apple had a special deal with the Irish tax authorities. It also implied that one of the world’s most successful companies may have received a competitive advantage over its rivals. This set Europe’s competition commissioner, Margrethe Vestager, on the case.

By the time Cook appeared in front of the Senate committee, it was an open secret that Ireland was allowing major US corporations to avoid their taxes. Most US companies were using a Base Erosion and Profit Shifting (BEPS) tool known as the “Double Irish.” But Apple seemed to have an even better arrangement created in the years before the legal provisions for the “Double Irish” were enacted.

Race to the Bottom

Apple’s relationship with Ireland goes back to 1980, when the company was looking for a European base to make their products. At the time, Ireland offered US corporations a 10 percent “Exports Sales Tax Relief Scheme” on their profits. However, when this special rate was challenged in the European courts, Apple found that it could only avail itself of the scheme until 1990.

In 1991, the company sent three letters to the Revenue Commissioners proposing a new arrangement that would ensure that Apple continued to benefit from unusually low taxes in the Irish Republic. Its aim was to guarantee that its tax liability would never go beyond an agreed limit set in the low single figures. An official memo, issued to the US Senate committee and seen by the European Commission, stated the following:

Since the early nineties, the government of Ireland has calculated Apple’s taxable income in such a way as to produce an effective rate in the low single digits. . . . The rate has varied from year to year, but since 2003 it has been 2 percent or less.

This was the smoking gun that Vestager’s team had been looking for. Taking a case against companies using the “Double Irish” would have been next to impossible, as this avoidance strategy was part of Ireland’s taxation policy. The power to determine tax rates and regulations is jealously guarded by European member states who compete for mobile capital flows by offering different rates.

Larger European states often express frustration at the EU’s tax-haven economies (Ireland, the Netherlands, and Luxembourg). But tax competition has worked overall for Europe’s elites, who have seen their costs fall significantly over the last twenty-five years. While Europe certainly wants more of the value that accrues to mainly US technology corporations, its decision-makers seem willing to tolerate all but the most blatant tax-avoidance strategies, as those strategies drive down the costs of doing business and shift the tax burden away from elites and onto workers. This chart from the International Monetary Fund gives us the general pattern of corporate taxes in the neoliberal era.

This deal was different, however, as Apple had asked for a special guarantee to artificially calculate their taxes in such a way that they would pay very little to the Revenue Commissioners. This granted them unique competitive advantages over other corporations. The fact that Cook had explained this under oath meant that the European Commission could convict Apple of receiving illegal state aid — and implicitly convict Ireland of being a tax haven in the process.

Paul Gallagher’s claim that the commission had strayed into Irish taxation law is therefore revealing for what it doesn’t say. Everyone knew that Ireland was offering unfair tax advantages to major corporations, but it was only because Apple deviated from the general “Double Irish” avoidance tool that the commission could convict them.

There has never been a commission case against Ireland’s use of the “Double Irish,” as this was tolerated as part of Ireland’s taxation offering until it became politically toxic when Apple was exposed. Apple had a side deal from the Revenue Commissioners: since this couldn’t be written into Irish law, it could be defined as illegal state aid and a distortion of the Single Market.

Double or SIngle?

The substance of the arrangement was also important. To ensure that Apple received maximum benefit from their “special arrangement,” they set up Apple Operations Europe (AOE), from which they created a subsidiary known as Apple Sales International (ASI). Both had rights to share intellectual property with their American parent, allowing vast profits to be funneled into Ireland without any connection to their Irish manufacturing operation.

In the ten years from 2004 to 2014, ASI was deemed to have made €110.8 billion in profits from the sale of iPhones that were produced in China using IP that was created in California. It was these profits that the European Commission eventually homed in on. In the traditional “Double Irish,” corporations establish two Irish companies (hence the name). One is responsible for the sales of the parent company’s products outside the United States, while the other owns the non-US intellectual property (IP) of the parent company.

The arrangement worked because the Revenue Commissioners allowed companies to send their profits out of Ireland if they declared that their “command and control center” was overseas. So, all a corporation had to do was

1. Set up two Irish incorporated companies (IRL 1 and IRL 2).
2. Funnel the proceeds of their non-US sales into IRL 1 — this held the licenses to sell the products and was usually registered for Irish taxes.
3. Turn any profits made by IRL 1 into royalties owed to IRL 2 for IP owned by IRL2 and rented to IRL1.
4. Declare that IRL 2 is controlled overseas.
5. Move the profits out of IRL 2, usually to a state that charged a zero rate of corporate tax.

This scheme worked so well because it dovetailed perfectly with the needs of US corporations. The Internal Revenue Service (IRS) changed its rules in 1996 to allow US companies to separate their domestic profits from those made abroad, provided they paid their foreign taxes in a legitimate (non-tax-haven) country. In response, Ireland’s 1997 Taxes and Consolidation Act was designed to allow US firms to incorporate in a “legitimate economy” but still send their profits to a zero-tax destination.

As far as the IRS was concerned, Irish-incorporated companies paid their taxes in the Republic of Ireland. But the Irish Revenue Commissioners allowed companies controlled from abroad to send their profits overseas (often to a Caribbean island). By 2007, this arrangement was open to Apple as well. Yet the firm chose to establish two branches inside Apple Sales International instead of having two separate companies (IRL 1 and IRL 2) to avoid their taxes. One branch was responsible for most of Apple’s non-US sales, while the other had a license to sell Apple’s intellectual property and held its board meetings in Bermuda.

If these had been two separate companies, Apple might well have won the case. But since they were two branches of the same company (ASI), the commission could argue that the sales function overrode the fact that the second branch held its board meetings abroad. They were further able to argue that ASI was substantially an Irish company and should therefore pay its taxes in Ireland.

This brings us back to the arguments of Paul Gallagher, who wanted to argue that the profits should go back to the US headquarters responsible for creating the intellectual property without explaining why they had been routed through Ireland in the first place. Apple thought it had a more secure arrangement that avoided the obvious weaknesses associated with the “Double Irish.” However, it was these special features that made it vulnerable to the charges of illegal state aid.

Making Allowances

Apple wrote to the European Commission in the early months of 2015 confirming that it had closed the BEPS tool associated with ASI. They confirmed that the company would no longer be used to funnel profits into Ireland using IP that was primarily held in the US and that they would no longer abuse the discrepancy between Irish law and US law to make their profits effectively “stateless.”

What they didn’t say, however, was that they were in the process of creating an even more effective BEPS tool by moving their non-US intellectual property fully into Ireland. In the early part of 2015, Apple moved roughly €335 billion worth of IP into Ireland, causing an enormous distortion of the national accounts. Because the Revenue Commissioners defined these assets as capital investment, they obliged the state to declare that Irish GDP had grown by 26.3 percent in 2015 — a figure that later had to be revised upward to 32.4 percent.

This caused derision among economic commentators, with Paul Krugman famously labeling the announcement as a case of “Leprechaun Economics.” But this momentary reputational damage was a price worth paying, as Apple and Ireland jointly realized that their original mistake was to operate outside the terms of tolerated tax avoidance written into the tax code of a European member state.

The Irish government once again facilitated Apple in its onshoring maneuver, this time by increasing tax allowances for intangible assets — the very assets that Apple was onshoring — from 80 percent to 100 percent. In other words, Apple now had €335 billion worth of (supposed) investment costs that it could use to obtain tax deductions from the Irish Revenue Commissioners.

The new Capital Allowances for Intangible Assets (CAIA) works so well because it was created by the Irish state to deal with assets that are extremely hard to value and extremely hard to regulate. Most tax codes allow deductions for investment in capital assets to allow companies to pay their costs before their revenues are defined as profits. If a company buys a piece of machinery for €1 million that will depreciate over a ten-year period, then the company can claim 10 percent of the cost of that asset each year for a decade. But the extension of this principle to intangible assets has proven wide open to abuse.

Appropriate Structuring

For one thing, intangible assets are usually produced in one arm of a major corporation and sold to another arm for what is known as a transfer price. These internal prices are notoriously difficult to measure objectively, and they have consistently been (ab)used to shift profits out of higher-tax jurisdictions into lower-tax alternatives.

Even more important, the value of intangible assets is extremely hard to assess objectively. KPMG informed its investors that companies with a stock market value of €1 billion and tangible assets of €100 million can legitimately argue that the difference is down to their intangible investment:

A hypothetical company with an equity market capitalisation of €1,000 million, but tangible assets of €100 million, can argue that the gap of €900 million represents its intangible asset base, which can be legally created and appropriately located. . . . Ireland’s Capital Allowances for Intangible Assets Programme enables these intangible assets to be turned into tax deductible charges. . . . With appropriate structuring, the intergroup acquisition financing for the purchase of these intangible assets can also be used to further amplify the quantum of tax deductible charges.

We have no way of knowing how much Apple actually spent to create the assets they valued at €335 billion. But we do know that they were not created in its Irish operation — remember that Gallagher’s case was based on the Cork operation being low value added — and that they were moved into Ireland for no other reason than to gain deductions in taxation.

In other words, an ex–attorney general was arguing that Apple should not pay Irish taxes on IP that was not produced in Ireland at the very same time as Apple was claiming tax deductions for these same assets through the Irish tax code. This speaks to the craven nature of the Irish state but also to the ultimate duplicity of the European elites.

After all, the commission took a case against Apple for receiving state aid until 2014, but not after that point. It did so knowing that the company was subsequently receiving even better advantages from 2015 onward through a CAIA scheme that would not be investigated.

The Green Jersey

To increase the attractiveness of its decision, Apple also set up a second holding company, this time in Jersey, which lends money to the Irish operation to purchase its IP from America. Jersey levies no taxes on the interest that Apple’s Irish-based holding company pays to its Jersey-based counterpart — thus giving Apple further deductions and prompting tax justice campaigners to label this new scheme the “Green Jersey.”

The success of Apple’s CAIA tax avoidance tool is evident in the enormous jump in allowances for capital investment that corporations have been claiming since the scheme was first enacted in 2015. It is also clear from the enormous increase in corporate tax receipts that the Irish government is now collecting. Table 1 captures the details.

*Note — The Capital Allowances for 2022 are a slightly better measure of the overall intangible assets deduction than previous years as the methodology has been tweaked to exclude more of the nonintangible assets that are part of the deductions for the earlier years.

The CAIA scheme is better for Ireland and better for its corporate partners. It dispenses with the obvious fiction of allowing companies to incorporate in Ireland while paying taxes in a foreign country. It also gives corporations almost limitless ways to write down their taxes against costs for IP produced anywhere in the world. 

Capital allowances for intangible assets have jumped 700 percent since 2011 while the Irish state’s tax take has increased by 442 percent over the same period. Apple and Ireland may have lost the battle, but they have continued to win the war against legitimate taxation. In the neoliberal era, the ability of elites to use tax competition to drive down the burdens placed on capital has proved to be more important than stamping out the tax avoidance that inevitably goes along with this competition.

New World Order?

Ireland responded to the ECJ ruling in typical fashion. Understanding the need to accept the ruling without antagonizing either the European courts or the corporations that benefit from Ireland’s tax regime, the Department of Finance said that it would “respect the judgement” and move to recover the unpaid taxes, even while it rejected the ultimate claims upon which the case had been won.

These were carefully chosen words. The Irish elites never wanted to collect taxes they had helped Apple to shelter. However, faced with a ruling from the highest court in the European Union, their strategy has been to accept the money with as little fanfare as possible; to downplay any sense that Ireland has benefited from the judgement; and to forcefully claim — in an obviously contradictory manner — that the state has already changed the law to stop the tax avoidance at the center of the case.

“Nothing to see” and “don’t expect much” were the key elements of the Irish state’s messaging around the issue, as the government’s official statement reveals:

The Apple case involved an issue that is now of historical relevance only; the Revenue opinions date back to 1991 and 2007 and are no longer in force; and Ireland has already introduced changes to the law regarding corporate residence rules and the attribution of profits to branches of non-resident companies operating in the State.

This statement is necessarily deceitful, but it could only have been written with the connivance of ruling classes well beyond Ireland itself. Having suffered reputational damage through the ECJ decision, the Department of Finance is desperate to convey the impression that any tax avoidance that may have occurred was inadvertent from its perspective and has not been happening since 2015.

It also wants to put across the message that the state has moved decisively to close down loopholes that it had no part in creating. In reality, as we have seen, the Revenue Commissioners have exchanged a less effective BEPS tool based on its bogus residency rules for a more effective one based on capital allowances.

The European Commission knows this, as does every serious analyst of the Irish taxation system. But it will not take effective action against the CAIA scheme without the active involvement of the US authorities. The problem is that the scheme rewards the world’s most powerful corporations — corporations that have their political centers in the US and can use innovations in technology and digitization to strategically place their intellectual property in low-tax jurisdictions.

Faced with this reality, it seems that the European establishment is torn. The major states (particularly Germany and France) are losing substantial revenues to US shareholders through offshore economies within the EU. European decision-makers also recognize that US corporations have benefited disproportionately from the current system of international taxation.

This helps explain why the EU initially wanted a 3 percent tax on the entire global sales of major technology corporations, before the Organisation for Economic Co-operation and Development (OECD) BEPS initiative effectively torpedoed this proposal. The “Twin Pillars” of the BEPS agreement are meant to tackle the new reality of transfer pricing and intellectual property by linking the taxes of the world’s biggest corporations more closely to where they perform their economic activity (Pillar One) and by imposing a minimum global tax rate of 15 percent on companies with annual revenue in excess of €750 million (Pillar Two).

Biden’s Bluff

Joe Biden has been a vocal supporter of these ideas, but his position often feels more of a rhetorical strategy to differentiate the Democrats from Donald Trump than a genuine move to reduce the advantages enjoyed by US corporations. Both Biden and Kamala Harris have promised that they will stop the global race to the bottom on corporate taxation, and the US system has become marginally less favorable to corporations through the 2017 Global Intangible Low Tax Income (GILTI) measures and the Inflation Reduction Act of 2022. However, the US has yet to sign up to either pillar of the BEPS proposal, even though the agreement is nearly a decade old.

Any change to the law would require a majority in the House of Representatives as well as the Senate. This means the Democrats can promise change in the run-up to November’s presidential election, secure in the knowledge that their ability to deliver on such pledges will not be tested until after the election is over. At that stage, no matter who comes out on top, neither Harris nor Trump seems likely to have an outright majority in both Houses. With the Republicans implacably opposed to any changes that would disadvantage US corporations, the chances of US lawmakers giving the green light for BEPS are slim.

Irish policymakers have made roughly the same calculation. While they have signed up to a 15 percent tax as the least bad option for Pillar Two, compared with an EU proposal for a digital tax on sales, they are more confident that Pillar One (which would threaten Ireland’s status as a tax haven) will never see the light of day. This is why they continue hiding in plain sight, offering tax advantages to global corporations as part of their wider strategy to compete for mobile investment and high-paying jobs.

Apple and Ireland have been compelled to accept that they jointly constructed a tax haven to avoid taxes that should have been paid until 2015. But they have not yet been forced to stop their ongoing practice of tax avoidance in any meaningful way. For that to happen, it will require more than a few tweaks in international corporate law — we will need a far more militant working class that puts our rulers under pressure in Ireland and elsewhere.