Apple's tax dodge leaves Ireland uncomfortably in spotlight

It's time to weigh up whether the benefits are worth the costs, says Megan Greene.

They say there is no such thing as bad publicity. Ireland might beg to differ, having been at the centre of a US Senate hearing on Apple's tax practices at a time when the EU is working hard to crack down on tax evasion.

On May 21, the Senate Permanent Subcommittee for Investigations dug into Apple's tax activities in gory detail. Their findings show that Ireland has been at the centre of Apple's success in tax avoidance.

The subcommittee found that the company used subsidiaries in Ireland to funnel about $US74 billion in income away from the US. The subsidiaries involved were incorporated in Ireland but not tax resident anywhere.

The structure allowed Apple to pay an effective tax rate of 2 per cent or less since 2003, well below Ireland's corporate tax rate of 12.5 per cent. Perhaps the most damning part for Ireland came in the explanation of the low rate in the subcommittee's report: "Apple told the subcommittee that, for many years, Ireland has provided Apple affiliates with a special tax rate through negotiations with the Irish government."

This is serious. It would be awkward, to say the least, to have the government cutting deals with multinationals while also, as the holder of the EU presidency, presiding over a push for greater transparency in corporate tax dealings. Irish Prime Minister Enda Kenny immediately rebutted Apple's version of events. Is there another explanation for why Apple pays such a low tax rate?

Seamus Coffey offers one on the Irish Economy blog: Apple benefited from a loophole in the way Ireland defines taxable income. The country's 12.5 per cent tax rate applies to income after subtracting expenses such as royalty payments for intellectual property licences. In Apple's case, these payments are huge, significantly reducing taxable income.

The royalties are paid to another Apple subsidiary in a different tax jurisdiction. This is sometimes referred to as a "Dutch sandwich", because the payments are typically funnelled through the Netherlands on their way to Bermuda, where there is no corporate tax.

Whether Ireland really is a tax haven, the perception could be just as damaging as the reality. The countries calling the shots in the EU (namely, Germany) aren't favourably disposed to countries that lure away their tax revenue. Just ask Cyprus, which received little sympathy for its banking troubles. Ireland will almost certainly succeed in exiting its bailout program in the next year, but it may need assistance from its eurozone partners in the future.

Ireland should use the Apple drama as an opportunity to consider whether the benefits of an attractive tax regime are worth the costs. Many multinationals have set up in Ireland for access to the European market. The low corporate tax is clearly a draw, but so is the skilled, English-speaking talent pool. Multinationals have helped to keep Ireland's exports buoyant throughout the crisis, with pharmaceuticals, chemicals and business services performing well over the past few years. As of last year, multinationals employed about 150,000 people in Ireland.

Some analysts question how much Ireland benefits from the multinationals. Most of their profits flow to shareholders outside the country. Without them, Ireland would have struggled to achieve the export-led growth it posted last year. In the longer term, a sustainable growth model must involve Ireland weaning itself from exports and fostering domestic demand.

Perhaps the Apple embarrassment will awaken it to that reality.