There are lots of legitimate high-value cross border IP transfers, and since the US creates a lot of valuable IP it makes perfect sense that they’d oppose this.
Technically, we (the irish) create all that IP which we sell to American companies. People like Seamus Jobs and Paddy Wozniak made OSX and stuff, which is why Apple US pays Apple Ireland 100s of $bns to license it. MSFT's IP is Bermudan. Innovative little island.
That's not how it works at all. Apple Ireland is used to defer taxation on non-US sales, but those profits still needs to be eventually repatriated in order to pay out dividends and fund US R&D, which is the majority of its fixed costs. Profits from US sales stay in the US, and on net Apple Ireland pays Apple US 10's of billions a year.
How does Apple's money get to Ireland in the first place? I haven't read those filings (not gonna either, I have drinking to do), but I was under the impression that it was IP licensing.
Google Ireland takes payment directly. Unless they've changed recently, all non-US adwords invoices are paid to here.
Repatriation to pay dividends is fairly moot, since they don't pay dividends. Maybe this is one of the reasons buybacks are preferred.
Apple pays a regular dividend and does regular share repurchases. Since 2012 its paid out about a half trillion dollars to shareholders. These are equivalent from a corporate accounting point of view, share buybacks are paid out after US corporate taxes are paid. Buybacks are preferred recently just because of the better tax treatment from an investor point of view, it changes nothing for the company.
As for how the money gets to Ireland, most of Apple's non-US operations are subsidiaries of Apple Ireland. For illustration, there's this (somewhat outdated) graph of the revenue flows on wikipedia: https://upload.wikimedia.org/wikipedia/commons/a/a5/Apple%27...
You're right. I was wrong. There is no IP licensing payment from the US entity to Ireland.
IP licensing happens between 3rd party countries and Ireland. Irish tax law (to our great pride) gives IP licensing revenue tax exemption. It doesn't count as revenue for tax purposes. Once here, it can be transferred to a proper tax haven like Bermuda. Since its tax free, it doesn't matter that Ireland (like everyone) doesn't recognise the transaction to Bermuda as a legitimate expense. It didn't count as revenue anyway.
I guess that invoicing to Ireland is neither here nor there, just more convenient when the money needs to come here anyway.
Once the cash is in Bermuda, the game is done. The Bermuda company can hold it, buy shares, etc. This is why Apple (And MSFT) have moved all their IP to Ireland though.
Without such IP, if Microsoft charged a German end-customer, say $100, for Microsoft Office, a profit of circa $95 (as the cost to Microsoft for copies of Microsoft Office is small) would be realised in Germany, and German tax payable. With such IP, Microsoft can additionally charge Microsoft Germany $95 in IP royalty payments on each copy of Microsoft Office, ensuring that its German profits are zero. The $95 is paid to the location in which the IP is legally housed. Microsoft would prefer to house this IP in a tax haven; however, higher-tax locations like Germany do not sign full tax treaties with tax havens, and would not accept the IP charged from a tax haven as deductible against German taxation. The Double Irish fixes this problem.[8][9]
The Double Irish enables the IP to be charged-out from Ireland, which has a large global network of full bilateral tax treaties.[g] The Double Irish enables the hypothetical $95, which was sent from Germany to Ireland, to be sent-on to a tax haven like Bermuda, without incurring any Irish taxation.
Broadly, the point of these tax structures for US companies isn't for the company to completely avoid paying US corporate tax, it's to
- Avoid paying corporate tax at a higher rate than in the US, and
- Defer paying corporate tax, often for decades, until theres a more favourable tax situation in the US, or a better opportunity to reinvest their capital comes up.
At the end of the day the profits belong to the shareholders and the only way to return the money to shareholders is by paying US corporate tax. Shareholders usually don't mind these arrangements because the tax savings is often more than the cost of capital having the money sitting unproductively.
Avoiding paying more than the US rate doesn't require any of these shenanigans. They could just charge royalties to the US.
Beyond that, the arrangement essentially turns corporate income tax into a corporate dividend/buyback tax. Dividends are always much lower than profits, and many companies don't do them at all.
>> the only way to return the money to shareholders is by paying US corporate tax
"Return" is somewhat ambiguous here. Shareholders already own those profits, and cash is reflected pretty directly in share prices. They don't necessarily have to "return" value this way. Many don't.. eg Berkshire.
The parts that bother me most here is (a) all the wasted effort going into what is essentially a silly ritual. If we had to explain this to aliens, they'd bucket it into the same category that they use for whatever pharaonic priests. were up to. and (b) the unfairness. A small, unsophisticated company doesn't get to (eg) reinvest its profits tax free. If a farmer buys more land, its an investment. It isn't an expense. If Apple buys land, its effectively expensed.
> Avoiding paying more than the US rate doesn't require any of these shenanigans. They could just charge royalties to the US.
I'm not sure exactly what you mean by this
> Dividends are always much lower than profits, and many companies don't do them at all.
Dividends are lower than profits only for companies that have opportunities to reinvest profits into growth. For companies that don't, in principal, you'd expect dividends to be exactly profits.
> Shareholders already own those profits, and cash is reflected pretty directly in share prices. They don't necessarily have to "return" value this way.
There's large opportunity cost to shareholders for companies to hold onto cash, which is usually in low-risk investments, compared to how that shareholder would invest it themselves. That's what I mean by cost-of-capital.
> Many don't.. eg Berkshire.
This is a bit of a special case because Berkshires core business is making investment decisions (and doing so through a holding company is itself tax advantaged). When the day comes the value of Berkshire companies consistently underperforms the market, shareholders will absolutely demand Berkshire start distributing profits instead of making investment decisions on their behalf.
> A small, unsophisticated company doesn't get to (eg) reinvest its profits tax free.
It absolutely can reinvest its profits tax free! It just can't build up a long-term cash pile tax free.
I mean that they could have just paid royalties to the US entity, avoiding Ireland and Bermuda.
Beyond that, you're taking a very naive, textbook approach. Tomorrow never comes, in the sense that you are talking about. Tax deferral should be thought of like an accounting equivalent of equilibrium in economics. It's never reached, but affects how some things work in the present. Dividends<profit isn't explained by the accounting point you made, it's accounted for that way. It actually doesn't require any explanation. It's simply true empirically. In many cases, companies don't pay dividends. Berkshire is one such company. There are other ways, many using less legible, more complex structures to do so.
Berkshire's "special case" is not arbitrary. They're structured in such a way for tax advantage. Restructuring can happen, as do rule changes. One of the reasons why tomorrow never comes.
>> It (small, simple company) absolutely can reinvest its profits tax free!
Ask a farmer what happens when they buy land. Ask a store what happens when they increase stock. This is emphatically untrue. If it were, we wouldn't call this an income tax. We'd call it a dividend tax.
As with the first point, if the tax was intentionally applied only to dividends, there would be no need for shenanigans. Apple & MSFT could be housing their cash where they are actually headquartered.
I don't have any opinion on corporate tax generally. IMO, the whole thing advantages financial & software firms unfairly, relative to companies that need to make real capital investments in order to grow. I do have an opinion on the fairness of it.
Two reasons: they’re not always actually intra company. Apple and Apple Ireland are different companies - and while intuitively it feels like you can just lump them together, it’s often much more complicated than that.
Second, because it is actually moving money. If I’m a Canadian software company that does most of its sales in the US through an American subsidiary (not uncommon), the way it works is the American subsidiary pays the Canadian company back for the sales of the Canadian company’s IP. Otherwise the money would never get back to Canada and the developers wouldn’t get paid! Furthermore, would be silly and tax-suboptimal to ignore the IP-money-flow and treat the Canadian company as nearly pure loss while treating the American one as nearly pure profit.
One is a wholly owned subsidiaries of the other. It's not of course a sufficient condition, but I m sure it's possible to distinguish the relationship between Apple and Apple Ireland from that between say Dell and EMC, or IBM and Red Hat, or the daughter companies of conglomerates like Berkshire Hathaway.
> Otherwise the money would never get back to Canada and I wouldn’t be able to pay my developers!
It doesn't have to be paid for the right to sell the IP. You can just move all revenue back into headquarters' coffers, and use it to finance the various cost centers. Just write the law so that it cannot be called a sale.
> You can just move all revenue back into headquarters' coffers
So it's actually moving money! And you need a reason to move money from one company (in the US) to another (in Canada). Call it sale, call it IP licensing...
The difference is that "IP" production occurs where the R&D departments exist and salaries have to be paid, rather than where the corporate taxes are lowest.
The context was "If I’m a Canadian software company that does most of its sales in the US through an American subsidiary (not uncommon), the way it works is the American subsidiary pays the Canadian company back for the sales of the Canadian company’s IP."
The IP production occurs in Canada where the R&D departments exist and salaries have to be paid and the US subsidiary company pays to the Canadian parent company.
They cannot just "move all revenue back into headquarters' coffers."
The difference between moving money in your situation and in Apple's, where there's no correspondence between where engineers are located and where IP is licensed from.
By forcing all revenue to go through a single point (the headquarters) it's much harder to establish fake licensing like Apple Ireland's.
Ok, I was commenting on the US subsidiary of Canadian firm example (which you didn't seem to agree on).
But I don't think that the meaning of "forcing all revenue to go through a single point" is clear at all.
From the point of view of most countries sending money out to Cupertino wouldn't be an improvement over sending it to Cork if that still means that they don't get to tax it.
Isn't there a way to block internal up transfers and actual IP sales? Is that the issue? Like we want to block google to Google transfers, but not company a to "actually unrelated" company b?
