Here’s the Full Guide to Apple’s Irish Tax Haven

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In May, Chief Executive Officer Tim Cook defended Apple’s (NASDAQ:AAPL) tax policy in a Senate hearing, denying findings by congressional investigators that the company employs a “highly questionable” tax minimization strategy. A 40-page memorandum released ahead of his appearance before Congress identified three subsidiaries that have no tax residency in Ireland, where they are incorporated, or in the United States, where the companies are managed. “Ireland has essentially functioned as a tax haven for Apple,” the report read.

Cook was not brought before the Senate subcommittee because Apple has violated the tax law but because an analysis of the company’s current practices were meant to further the legislative body’s attempts to draft new tax codes. However, his testimony did lay bare the complex Irish tax web. Apple has paid little or no tax on tens of billions of dollars in profits that have been routed through the country. Because the subsidiaries are incorporated in Ireland, they are not required to pay U.S. tax; and because the subsidiaries are controlled by United States-based Apple, they are not required to pay tax in Ireland.

Apple is in no way the only multinational corporation to make use of loopholes in the U.S. tax code; a Reuters analysis of Irish and United States securities filings showed that more than 40 percent of S&P 500 companies have registered one or more subsidiaries in Ireland, where corporate income tax is 12.5 percent — almost a third of the top U.S. federal income tax rate of 35 percent. Pfizer (NYSE:PFE) has 32 Irish-registered companies, the most of any other corporation.

The large number of companies that have set up subsidiaries in Ireland have created over 100,000 jobs as a result, and the country’s government has courted U.S. businesses for decades. Ireland’s leaders have denied the Senate’s claim that it is a tax haven, but the probe has damaged its reputation at a bad time; the country is currently seeking to emerge from the bailout backed by the European Union and International Monetary Fund and its export-focused economy is dipping back into recession.

Businesses, investors, and even some lawmakers argue that it is a public company’s duty to keep its tax bill down so that it can invest in future growth or return money to shareholders. For example, at Apple’s hearing, Republican Senator Rand Paul claimed that the legislative body had harassed Apple, which he called one of America’s greatest success stories. “Instead of doing the right thing, we drag businessmen and women in here to berate them for trying to maximize their profits for shareholders,” Paul said. “Apple has done more to enrich people’s lives than politicians will ever do.”

But other politicians argue that such tax strategies are unfair gimmicks. “They’ve created corporations that don’t exist anywhere for tax purposes,” said Democratic Senator Carl Levin of Michigan, who is chairman of the Senate Permanent Subcommittee on Investigations. “That is right at the epitome of creative tax gimmickry.”

He also claimed Apple has sought the “Holy Grail” of tax avoidance by setting up companies without workers in countries such as Ireland. While the company later denied that it had set up “shell companies,” it is true that the Irish subsidiaries of many corporations are significantly smaller than their counterparts elsewhere in the world. For example, Colorado-based Western Union (NYSE:WU) — the world’s largest money transfer firm — occupies just a single floor of a three-story building in a Dublin office park, and that set-up is typical of companies using Ireland to lower their tax bills. In fact, Western Union houses 11 of its 12 Irish subsidiaries in that one building. Some subsidiaries are even registered at the offices of Dublin-based law firms.

Western Union generated 92 percent of its pretax income outside the United States in 2012, but a fifth of its staff work in the U.S. Through these means the company was able to cut its effective tax rate to 12.2 percent, which is about average for a U.S. company.

“The [Irish] tax rate is not that relevant, because nobody pays 12.5 percent,” Jim Stewart, a professor at Trinity College Dublin who specializes in corporate finance and taxation, told Reuters. “It’s about the ease of incorporation, the ability of Irish corporate law and tax law to fit in with IRS (Internal Revenue Service) requirements, and the flexibility that is shown by the Department of Finance and Revenue to any of the multinationals’ needs. If they have a problem, the law will be changed.”

That Apple was able to pay tax on just two percent of its $74 billion in overseas income over the past three years was the result of a loophole in the Irish tax code that allowed the company to channel profits into Irish-incorporated subsidiaries that did not declare tax residency anywhere in the world. U.S. tax law complemented the arrangement.

But Apple, which employs about 4,000 people in Ireland is just one of many companies the send money through the country to lower their tax burdens. PepsiCo Global Investment Holdings, a multinational that provides financing to other companies owned by PepsiCo (NYSE:PEP) and is one of its 14 Irish subsidiaries, made a profit of about $6 million in 2011 and paid $215 in taxes to Curacao, giving it a tax rate of 0.004 percent, Irish records show.

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