“Leprechaun economics” is the term Nobel-prize winning economist Paul Krugman used. With all due respect to Ireland–that greenest land of wind, stories, and music to soothe the soul–their tax law sucks bilgewater.
The Republic of Ireland has managed, in the last fifty years, to transform itself into the world’s largest tax haven. Meaning a place that allows multinational corporations, particularly those formed and operating in the U.S., to use creative accounting to pay very little in taxes. How little? How about 0.005%?
Apple Chooses Between Single Malt or Double Irish
Apple is a company that has always thought far in advance about packaging and design–including on their financial statements. Back in 1980, about the time when they were prototyping the Macintosh, Apple opened a small office in Cork, Ireland, lured by a deal to pay no taxes for several years. Such local tax arrangements aren’t that unusual–Twitter moved into a derelict building in downtown San Francisco for the same “no tax for years” deal, while Delaware has long been known as a favorable legal and financial place for companies to incorporate.
What Apple was also able to do, over decades, was use its growing economic power to support an Irish shift into a myriad of favorable tax strategies–favorable to corporations, that is. A so-called Base Erosion and Profit Shifting (BEPS) plan allows companies to put their huge patents as giant assets on their balance sheets, in Irish subsidiaries. These patents, the stock and trade for tech companies, are amortized (charged out over time) in a convoluted way that allows the income received to be located in Ireland–with very low tax rates–even if it was earned somewhere else.
The practice became so lucrative that Apple created a myriad of accounting structures in Ireland that allowed them to avoid huge amounts of tax worldwide, so much so that a commission within the European Union found them guilty of 13 billion Euros worth of evading European tax law.
The Irish government jumped in to argue against the ruling, “No, thanks, we really don’t want the 13 billion.” While years of tax austerity ought to have led the Irish to welcome monies owed, the government was more interested in retaining Irish sovereignty, and thus remained complacent about multinational dodgy tax practices.
Ireland itself was able to report a 26% jump in GDP growth, easily traceable to the year that they changed their tax rules to lure Apple and others into shifting their patent locations. Way to increase productivity!
Last year, a court ruled that the commission was wrong and that Apple was simply following Irish law. The E.U. plans to appeal. Stay tuned!
If At First You’ve Already Expensed It, Try, Try, Again…
Tech companies aren’t the only ones with large patents that might be looking for a tax haven. The second largest U.S. drug company, Bristol-Myers-Squibb, was also recently called out for its Irish tax practices. BMS has significant drug patents on its balance sheet, many of which have been fully amortized, which fairly lowered its U.S. taxes.
What they were able to do, according to advice given by the accounting firm PwC and law firm White & Case, was charge them off via an Irish subsidiary–again. Somehow, the accounting approach suggested that Irish tax law would allow BMS to shift the patents over to their subsidiaries, then re-amortize the same patents. The IRS disagreed, to the tune of $1.4 billion. The IRS called it a “tax-abusive” arrangement, which they had already disallowed with other multinationals like General Electric, Dow, and Merck.
BMS had been doing this for a few years. Shareholders had even asked why their tax rate was so much lower than their competitors. “Just clever,” was the response. Thus, the situation became complex for two reasons. First, if BMS loses to the IRS, they owe $1.4 billion. Secondly, though, since the dispute is now years old, this potential liability to the IRS has not been disclosed to shareholders. And, BMS even used some of the tax savings to buy back stock in 2013.
The mess got messier. The details only became public because some information published by the IRS wasn’t properly redacted for a brief time, and tax experts downloaded the unredacted portions. Meanwhile, PwC and White & Case claimed they never reviewed the specific anti-abuse provision at the core of the IRS’ objection. PwC is likely thinking about the fate of the Arthur Andersen auditors after the Enron debacle.
For an accountant, watching these Apple and BMS scandals develop, this means pass the popcorn. Meanwhile, Ireland needs to close down some of these loopholes! Maybe if someone wrote a song about it?