International Corporate Tax
This post was written by Seamus Coffey
The international tax principles underlying the taxation of corporate income are attracting more and more attention. Ireland, in particular, has come under the spotlight. There is merit to some of the complaints made but most of it is little more than political posturing. Few substantive proposals are being made.
The latest is a report prepared for US Senators Levin (D) and McCain (R) which includes a very interesting appendix on Apple. The appendix opens:
“The Apple case study examines how Apple Inc., a U.S. corporation, has used a variety of offshore structures, arrangements, and transactions to shift billions of dollars in profits away from the United States and into Ireland, where Apple has negotiated a special corporate tax rate of less than 2%.”
The submission by Apple to today’s Senate hearing is here.
There are no special corporate tax rates in Ireland. There are rules (which apply to all companies) on how taxable income is calculated to determine the figure to which the 12.5% rate is applied. This rate is applied to taxable income not gross profit.
Royalty payments for intellectual property licenses are one of the largest differences between gross income and taxable income for some companies. For example, if a company with a gross income of A incurs a trade charge of B for royalty payments then taxable income (to which the 12.5% rate is applied in Ireland) is A minus B.
Effective tax rates can be calculated using gross profit as the base but tax is actually charged on taxable income. Aggregate figures from the Revenue Commissioners show that the effective tax rate in Ireland on the gross income of companies in 2010 was 6.0%. However, the effective tax rate on taxable income was 10.3%. The important thing is how taxable income is calculated not “special” rates.
Are royalty payments on intellectual property licenses a legitimate business expense? Yes. Are there issues in how the prices for such licenses are set? Yes. Are the rules for setting these prices individual to each country? No.
The report accuses Ireland of being a tax haven on the basis that the effective tax rates on Apple’s gross income are very very small. They are. But this is achieved because the trade charges on intellectual property are very very large. The intellectual property (which was not created in Ireland) is held somewhere else and subject to tax there.
The intellectual property used by Google is held by a Bermuda-resident company and its income is subject to the 0% rate of corporation tax there. The interesting thing in the Apple case is that the Levin-McCain report suggests that the holding company is not tax-resident anywhere! These profits will not be subject to Irish tax but should be tax-resident somewhere.
The main problem from a US perspective is when these companies are subject to the 35% tax on corporate profits. This has to be paid when global profits are repatriated to the US. From a US perspective it doesn’t really matter how much tax is paid in Ireland, Bermuda or the like. The US wants its 35% share.
The problem is that companies are indefinitely deferring this tax by holding the money offshore and not repatriating it. The money will be subject to the 35% rate when it is repatriated but the companies refuse to do so.
Apple has more than $100 billion of cash (mostly held by subsidiaries outside the US) but recently issued $17 billion of bonds to engage in a share-buyback to return some of that cash to shareholders. Apple didn’t use its own cash because that would have meant repatriating it and incurring the 35% tax. This key concern of the US has very little to do with Ireland.
The provision that allows these companies to defer their US corporation tax is the “same country exemption” for Subpart F Income in the US tax code. The scheme for royalty income works because of this exemption granted by the US rather than any provision in the Irish tax code. The body of the Levin-McCain report discusses the “same country exemption” and a useful, short summary of Subpart F Income is here.
International taxation is hugely complex and should not be reduced to simple sound-bites but I can’t resist. Ireland is not a tax haven.