International Tax Avoidance

In August 2016, the European Commission ordered Apple to repay thirteen billion euros in back taxes to Ireland. The commission had investigated Apple’s tax arrangements in Ireland and concluded that they amounted to illegal state aid: Ireland had given Apple a selective advantage unavailable to other companies, allowing the company to pay an effective tax rate of 0.005% on European profits of sixteen billion euros in 2014.

The Irish government was ordered to collect the money, and promptly announced it would appeal the ruling. Ireland did not want the thirteen billion euros; its government argued in court, alongside Apple, that the commission had made an error. This only baffled the cynical: Ireland’s unusually favorable tax treatment of multinationals was a deliberate policy to attract foreign companies.

The mechanism Apple used was a variant of a structure known as the Double Irish, which Irish tax law had made available through a combination of specific provisions and deliberate regulatory tolerance. Ireland taxes companies that are managed and controlled from Ireland. The United States taxes companies incorporated in the United States. Apple’s Irish subsidiaries were incorporated in Ireland but had their management and control located outside Ireland, so Ireland did not tax them. They were also not incorporated in the United States, so the US did not tax them either. At its peak, this arrangement sheltered tens of billions of dollars annually.

The intellectual property component made the structure self-sustaining. Apple’s valuable patents were licensed from a subsidiary in a low-tax jurisdiction. European sales flowed through Apple Sales International, which paid royalties back to the IP-holding entity. The royalties reduced taxable profit in the high-tax jurisdictions where the sales occurred. Transfer pricing (the setting of prices for transactions between subsidiaries of the same company) is supposed to follow the arm’s length principle: the price should be what unrelated parties would charge each other. In practice, there is no market price for a license to Apple’s entire product ecosystem, so whatever number Apple’s accountants put in the contract became the price. Tax authorities in each country then had to prove the price was wrong, which requires the kind of information that companies are not generally eager to provide.

Apple was not alone, and Ireland was not the only country involved. The Dutch Sandwich added a Netherlands entity to the structure, exploiting a Dutch tax provision that exempted certain royalty payments from withholding tax. Royalties would flow from Ireland to the Netherlands, then onward to the zero-tax jurisdiction, each step reducing the amount captured by any jurisdiction that might want to tax it. Luxembourg served a similar function for Amazon; by putting its European headquarters there, the company could book sales across the continent while keeping profits in a jurisdiction that had negotiated unusually favorable rulings with dozens of major multinationals. Google’s arrangement was so elaborate to have its own nickname: the Double Irish with a Dutch Sandwich.

The OECD’s BEPS project, launched in 2013, produced a fifteen-point action plan to close these loopholes. Countries that adopted its recommendations were supposed to require substance in the jurisdictions where companies claimed tax residence, limit the deductibility of interest payments used to shift profits, and require country-by-country reporting to make the overall structure visible. Ireland amended its tax law in 2015 to prevent new companies from using the Double Irish structure, but gave companies already using it a five-year phase-out period.

The 2021 agreement among 136 countries on a global minimum corporate tax rate of 15%, negotiated under OECD auspices, went further than any previous multilateral effort. It established the principle that no matter where a multinational’s profits were booked, at least 15% would be paid somewhere. The agreement was called historic, which was accurate, and transformative, which was not, since implementation depended on each country passing domestic legislation.

Gabriel Zucman’s estimates suggest that roughly 40% of multinational profits are shifted to tax havens annually, costing governments approximately $200 billion per year in corporate tax revenue. This is money that does not fund schools, infrastructure, or healthcare in the countries where the economic activity actually occurred. The companies that benefit from this system defend it as legal, which it is. They also describe it as responsible tax planning, which is a creative use of the word responsible.

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Schneier2023

Bruce Schneier: A Hacker’s Mind: How the Powerful Bend Society’s Rules, and How to Bend them Back. WW Norton, 2023, 978-0393866667.

Shaxson2011

Nicholas Shaxson: Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens. St. Martin’s, 2012, 978-0230341722.

Zucman2015

Gabriel Zucman: The Hidden Wealth of Nations: The Scourge of Tax Havens. University of Chicago Press, 2015, 978-0226422640.