Ireland Cracks Down On Tax Loophole Used By Apple

Ireland’s Minister for Finance, Michael Noonan, plans to close a legal loophole used by companies such as Apple to avoid income tax by establishing Irish-based subsidiaries that are “stateless” for tax purposes.

The move follows comments by US senator Carl Levin earlier this year, who said the loophole had allowed Apple to achieve the “holy grail of tax avoidance” with a subsidiary that had no tax domiciliation, avoiding about $40bn (£25bn) in US income taxes in 2012. Irish politicians reacted angrily to the characterisation of the country as a tax haven.

‘Holy grail’

“Let me be crystal clear. Ireland wants to be part of the solution to this global tax challenge, not part of the problem,” Noonan said in his budget speech on Tuesday. “I want Ireland to play fair, as we always have done, and I want Ireland to play to win.”

He said a measure to close the loophole will be published next week and included in the Finance Bill. The measure will make it illegal for a company to have no tax residence.

US senators Carl Levin and John McCain applauded the move, but said in a statement that “important questions do remain”.

However, the change will not affect a more commonly used tax structure, known as “double Irish”, which allows companies to funnel profits to zero-tax jurisdictions such as Bermuda.

Double Irish

Under that structure, used by IT companies including Google, multinationals have Irish-registered subsidiaries which register the profits on sales to customers. These subsidiaries then pay large, tax-deductible sums in royalties to a Bermuda-resident affiliate, leaving the Irish company with a minimal tax bill. Apple could simply switch to the “double Irish” arrangement, leaving its tax bill essentially unchanged, according to tax experts.

Companies forced to declare a domiciliation will also have the option of nominating a foreign country, including a zero-tax jurisdiction such as Bermuda, as their tax residency.

Ireland’s move follows growing criticism of the tax structures of highly profitable multinational companies, which allow them to pay little income tax. Google and other IT companies have faced questioning by MPs in the UK on the issue several times in recent months, and the Organisation for Economic Co-operation and Development (OECD) is working on a plan to close tax loopholes. Ireland has committed to working with the OECD on the matter.

The European Commission last month took Ireland, the Netherlands and Luxembourg to task over tax issues, asking these countries to give details on how they work with companies such as Apple and Starbucks on their tax structures.

Last month Google reported it paid £35m in UK taxes in 2012 on revenues of £506m, despite registering sales of $4.9bn (£3bn) in sales to British customers.

Do you know all about IT and the law? Take our quiz.