Interesting article at Forbes on Apple’s tax position in Ireland: pity the author doesn’t really appear to have thought things through all the way or developed the discussion usefully:
IP location: “Apple set up some Irish subsidiaries a mere four years after it was founded. Foreign sales, which account for 60% of Apple’s profits, are routed through these Irish subsidiaries and taxed nowhere. How is this possible, when the intellectual property that supports the value of Apple’s products is in the United States?”
But two paragraphs later the article says: “Beneath the holding company is an Irish principal company … It and another Apple operating affiliate share the foreign rights to Apple’s U.S. based technology.” Well, if the Irish principal company shares the foreign rights to the technology, then at least some of Apple’s IP (the non-US IP) isn’t in the US. “US-based” is just misleading – it might be developed in the US, and some of it might be registered in the US, but companies can have intellectual property registered and owned elsewhere in the world even when it’s developed in the US.
And confirmed by: “Apple’s intellectual property is in the United States, where it was developed.” Just because it might have been developed in the US doesn’t mean that some of the IP can’t be registered and owned elsewhere as well … in fact: “Apple has an old contract with its Irish principal company and Irish operating company, called a cost-sharing agreement, that … divides Apple’s research and development expenses between U.S. and foreign uses according to sales.” A cost-sharing agreement for R&D will also usually result in co-ownership of the resulting intellectual property – that’s one of the reasons why companies use them. Various subsidiaries contribute to the costs of R&D and share in the resulting IP so that there’s no requirement to enter into licences and deal with intra-group royalty payments later.
Cost-sharing: “IRS regulations no longer permit this division of income without a significant upfront payment to the U.S. parent for use of intellectual property” – not necessarily. Cross-border cost sharing agreements for R&D can still be entered into at relatively low cost where the R&D is undertaken on new projects that will result in future intellectual property, which is shared between those who paid for it and where there is substance outside the US (see, oh, for example, this Forbes article last year). The risk in the R&D looking for that potential IP is shared between the cost sharers; quite a lot of R&D goes nowhere, Apple included. The costs of the R&D are usually shared according to the hoped-for benefits to be derived by the co-owners – rather than having one entity develop and own the IP and then licence it out. Sharing developed and tested and proved intellectual property is expensive, agreed – but that’s because there’s little risk involved to those sharing in it.
And then Ireland: “If Ireland were a legitimate low-tax country, all of Apple’s Irish affiliates would be paying the statutory 12.5% rate on their income.” No, they’d be paying it on their profits.
“Irish law asks where a company is managed and controlled to determine its tax residence. U.S. law asks where the company was organized, that is, where papers creating it were filed.” Ireland isn’t very different to other developed countries – this is all about the somewhat ridiculous US position of only looking at the location of incorporation. It’s about the only developed country I’ve come across with quite such a blinkered view of corporate residence: most countries look at the location of central management and control as a test of residence – taxing where the strategic decisions are made – albeit not quite as comprehensively as Ireland does. If the US is so short-sighted that it ignores central management and control, then it’s mildly ridiculous to criticise Ireland for attracting business from the US. The Irish rules might allow for a stateless company but even if they followed more closely the rules in other European countries, it would still substantially reduce the tax charge.
IP & international tax: There’s a lot of discussion to be had about how intellectual property-based business and the world’s tax systems collide (and a good discussion to be had about creating a tax system for the 21st century rather than the 19th century one we currently have) but could we please start by understanding the systems we have?