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Even Before Apple Tax Breaks, Ireland’s Policy Had Its Critics

Apple's flagship New York store.
Adam Jeffery | CNBC
Apple's flagship New York store.

The secrets of how Apple avoided billions of dollars taxes lie in a low-slung building of glass and brick in the hills of County Cork.

There, in the Hollyhill Industrial Estate and elsewhere in Ireland, Apple employs a mere 4 percent of its global work force. But there, too, Apple recorded a staggering 65 percent of its worldwide income — $26 billion last year — enabling the company, according to Senate investigators, to markedly reduce its tax bill in the United States and the rest of the world.

Such arrangements are not uncommon in Ireland, where for years authorities have not only tolerated but encouraged multinational companies like Google, Facebook, Pfizer, Johnson & Johnson and Citigroup to set up shop and provide good jobs, in return for helping those companies pay less tax around the world.

But on Tuesday, as Timothy D. Cook, Apple's chief executive, found himself on Capitol Hill being questioned about Apple's tax practices, Ireland came under sharp criticism for its attractiveness as a pied-à-terre for American companies doing business in Europe. At the eye of that storm: a special corporate tax rate of only 2 percent that Senate investigators say Apple worked out with Irish tax authorities.

(Read More: Ireland Says Not to Blame for Apple's Low Tax Rate)

Carl Levin, the Michigan senator who heads the Senate Permanent Subcommittee on Investigations, said Apple was "exploiting an absurdity" by using three Irish subsidiaries to legally avoid taxes.

The United States Senate is hardly Ireland's only critic on tax matters. Britain, France and other European Union countries have long been annoyed by Irish policies. During hearings in the British Parliament last week, Margaret Hodge, a member of the opposition Labour Party and chairwoman of the Public Accounts Committee, which oversees taxation, upbraided Matt Brittin, Google's vice president for North and Central Europe, that the company's tax practices were "devious, calculated and, in my view, unethical."

Even before the Senate subcommittee invited Mr. Cook to testify, the British prime minister, David Cameron, declared that the topic would be a focus of the meeting of the Group of 8 richest countries he plans to convene next month at Lough Erne in Northern Ireland.

"We need a truly global solution," Mr. Cameron wrote in a letter to Herman Van Rompuy, president of the European Council, in April. "As I am sure you will agree, the path to reform starts with the basic recognition that current global tax rules do not reflect the modern and globalized economy that our citizens live and trade in."

Ireland, with an economy that ranks 47th in the world, is not a member of the Group of 8.

(Read More: Apple's Cook to Propose Tax Changes at Congressional Hearing)

Ireland's deputy prime minister, Eamon Gilmore, on Tuesday disputed the Senate report's contention that Apple paid a special rate, saying "Ireland doesn't negotiate special tax rate deals with any companies." He said that if Apple was not paying its fair share elsewhere in Europe, the fault lay in "loopholes" in other European countries that make it too easy for companies to avoid taxation.

"That's an issue that has to be addressed first of all in those jurisdictions," Mr. Gilmore told reporters in Brussels.

More From The New York Times:

One Response to Apple Tax Strategy May Be to Copy It
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For US Companies, Money 'Offshore' Means Manhattan

The charge by the Senate subcommittee that Apple avoided paying $44 billion in taxes in the United States by keeping the bulk of its $102 billion cash hoard offshore has struck a nerve here in a recession-racked country where unemployment is 15 percent and the government is looking for ways to repay an 80 billion euro bailout, now equivalent to $103 billion, that it received from the European Union and the International Monetary Fund in 2010.

"There is something wrong with this picture — the revenues of these companies keep increasing while our workers are getting crushed," said Peter Mathews, a chartered accountant who is also a member of the Irish Parliament for the governing Fine Gael party. "Apple's cash pile is about the size of our national income. Why not have them pay a 4 percent levy to contribute to our national recovery?"

Apple, which set up its first overseas headquarters in 1980 in Cork to assemble Macintosh computers, has a long history with the Irish. Its 4,000 workers — the largest Apple labor force in Europe — is significant in a country of only 4.6 million people. Apple's employees assemble iMacs and Mac Pros and are also engaged in research, customer service and other support functions. "Our tax system may be lax, but in exchange we get jobs and more foreign investment," said Stephen Kinsella, an economist at the University of Limerick who contributes to the influential Irish Economy blog. "No doubt about it, the benefits outweigh the costs."

Irish politicians through the years have stood behind the country's official 12.5 percent corporate tax rate, so much so that three years ago when the previous government negotiated the international bailout, it refused to budge when European negotiators wanted to make a higher tax rate a condition for a deal.

Government figures show that in 2010 the effective rate on the gross income of companies here was only 6 percent, and economists say that in some cases — as with Apple — it can go lower than that. That stands in contrast to the effective corporate tax rate in other countries: 29 percent in the United States, 22 percent in Britain, 27 percent for France and 24 percent for Germany.

(Read More: Senate Probe Finds Apple Used Unusual Tax Structure to Avoid Taxes)

More than 600 American companies have set up in Ireland, employing 100,000 Irish workers and enjoying the advantages of an English-speaking work force and low taxes.

Representatives of several American companies, including Amazon and Starbucks, have, like Google and Apple, insisted that they comply with the law.

"Apple does not use tax gimmicks," Mr. Cook told the Senate subcommittee Tuesday.

Under European Union law, companies based in one European country are permitted to do business across the 27-nation bloc, and Internet companies, in particular, use that rule to book their European revenue in the country offering the greatest tax benefits. For many, that is Ireland.

But if Ireland were to change its approach to taxation, other low-tax European countries like Luxembourg and Slovakia would simply take its place.

"Back in the 1970s and '80s, when Ireland was a poor state desperately trying to attract investment, tax was a weapon that others weren't using," said Richard Murphy, founder of the Tax Justice Network, a group in London that campaigns against tax havens. "So Ireland developed a twofold strategy: low rates and not too many questions. It became the conduit state of choice."

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