How Apple helped Ireland become creditor to the US
Over the years, Apple has become the poster child for US multinationals accused of sheltering overseas profits to avoid US tax authorities. What's gone largely unnoticed is that it's been paid more than half a billion dollars by the US government to do just that.
Taking advantage of an exemption tucked into America's Byzantine tax code, Apple stashed much of its foreign earnings-tax-free in the US, in part by purchasing government bonds, according to people with direct knowledge of the matter.
In return, the Treasury Department paid Apple at least $600m (€558m) and possibly much more over the past five years in the form of interest, a Bloomberg review of its regulatory filings shows.
The untold story of Apple and its taxes wends its way from Cork to New York and then Reno, Nevada.
In Apple's case, more than 90 percent of its $238bn (€221bn) cash hoard is considered "overseas" in its accounting statements. Most of it belongs to the Cupertino, California-based company's Ireland units. But like many multinationals, Apple's cash sits in custodial accounts with US-based banks such as JPMorgan Chase and State Street, said people with direct knowledge of the matter, who asked not to be identified because they're not authorized to speak on the issue.
Apple typically directs Wall Street bond dealers and big money managers like BlackRock and Pimco to buy Treasuries at debt auctions and in the secondary market on behalf of its Irish subsidiaries, all from a nondescript, three-story building in Reno, Nevada - a state with no corporate taxes, the people said.
That's where its internal investment firm, Braeburn Capital, is housed. Apple established the unit in 2005 to manage its cash and short-term investments.
As for Ireland, Apple isn't alone. Nine of the 10 US companies with the most cash abroad have foreign subsidiaries there.
Over the years, lax Irish regulations have encouraged multinationals to pursue aggressive accounting practices that enabled them to shift much of their profits to those subsidiaries and minimize US tax liabilities, according to tax experts.
In one of the more notable examples that's drawn particular scrutiny, companies will book a disproportionate amount of revenue as "offshore" by claiming the underlying technologies are owned by their Irish units-even if the intellectual property originated in the US
Apple went even further. According to a 2013 report by the US Senate Permanent Subcommittee on Investigations, it exploited gaps in US and Irish laws so that it didn't have a tax home anywhere.
The company is already in hot water with the European Union. Regulators ordered Apple to pay $14.5bn (€13.4bn) in back taxes in August after concluding it paid an effective tax rate of 0.005pc in 2014 because of preferential Irish treatment. Last week, Apple called the EU decision "seriously flawed".
In November, Ireland filed an appeal against the ruling after repeatedly saying the country "fundamentally disagrees" with the analysis.
Using Irish subsidiaries to funnel all that cash into Treasuries may help explain a bond-market curiosity that's emerged in recent years: how Ireland, a nation of less than five million, managed to amass $271bn (€252bn) of US government bonds, based on data compiled by the Treasury, and become America's largest foreign creditor, after China and Japan.
Whatever the case, the need to address companies' untaxed profits may be one of the few things Republicans and Democrats can agree on. During the campaign, both Trump and opponent Hillary Clinton proposed one-time tax breaks on overseas earnings (a so-called repatriation tax holiday) to help fund competing infrastructure plans.
Yet absent a wholesale tax overhaul to close the repatriation loophole, such one-offs are Band-Aids that will only make things worse over time, according to H David Rosenbloom, an attorney at Caplin & Drysdale and the director of the international tax program at New York University School of Law.
He pointed to a similar 2004 tax holiday under President George W Bush, which ultimately led companies to accumulate more profits abroad after it expired. Almost all the repatriated cash during that time was used for shareholder rewards and executive bonuses-rather than investment and hiring in the US that many companies promised.
Last time, "it just encouraged companies to send more money abroad and wait for the next amnesty," he said. "It would be really foolish to do."