I Do Wish People Would Get Apple's Irish Tax Deal Right

I think we all know that Apple gets an amazing deal on the corporate income tax it has to pay overseas. And I think that everyone's also aware that this revolves around its Irish subsidiaries. One recent look at Apple's financial statements revealed that that foreign tax rate is somewhere just south of 2%. Pretty good if you can manage it.

But I do wish that the various people reporting the story would get the reason for this astonishingly low rate correct. It isn't because Apple has a special deal in Ireland and it's also not because they have a particularly complex structure. It's actually just because that's the way the Irish tax system works:

Apple's ability to pay tax of just two percent of its $74 billion in overseas income over the past three years hinged on an unusual loophole in the Irish tax code that allowed it to channel profits into Irish-incorporated subsidiaries that had no declared tax residency anywhere in the world.

No, that's not it.

The Irish tax system is a territorial tax system. Ireland only charges tax to Irish corporations on money that was actually made in Ireland.

The way Apple organises itself is this: the Irish company purchases the iPhones and iPads from China. It then sells the kit on to the various distributors around the world: this could be a third party but it's more likely to be Apple UK, Apple Germany etc. The margins that these national companies make are small: they're enough to do the actual physical job of selling the equipment and not much more. The profits from the transactions end up in the Irish company. And that's really it. Buying something in China and selling it in Germany isn't an Irish transaction so the Irish government doesn't try to tax the profits arising from it.

The 2% taxation is a combination of two things. Apple generally allows those national subsidiaries to make something, however trivial, as profit and so they'll pay some amount in taxes. And Ireland does tax, at the normal rate, the profits that Apple makes in Ireland, selling kit to the Irish.

Apple then doesn't pay US corporate income tax because it doesn't take those foreign profits back into the US (it pays full US corporate income tax on the profits it makes inside the US though). Again, this is an option available to absolutely anyone: there's no special deals going on here.

That people don't like this system is absolutely fine. That people want to change it ditto. But it really is necessary to understand the current system before working out either whether it needs change and if it does, what kind of change. It's the territoriality of the Irish tax system that is at the heart of it all.