Apple, the world’s biggest company, swapped one tax haven for another, shifting the management of its Irish subsidiaries to Jersey, the Paradise Papers reveal, just days ahead of Irish government moves to close a loophole which allowed companies to claim they were stateless and not liable for tax.
Leaked documents from Bermuda law firm Appleby show that Apple started to revise its Irish structure in March 2014, two weeks after The Australian Financial Review detailed Apple’s secret Irish profits.
Apple had built up a cash pile of more than $US246 billion ($321 billion) from profits booked to Apple Sales International and Apple Operations International in Ireland, which were not taxed because the companies have no tax residence anywhere in the world.
In August last year the European Commission ruled that Apple must pay €13 billion ($20 billion) tax to Ireland, and last month announced court moves to ensure Ireland enforced the EC tax demand. But Apple was already a step ahead.
The Appleby files, which were obtained by German newspaper Suddeutsche Zeitung and shared with the International Consortium of Investigative Journalists, shed light on what was going on behind the scenes as the EC investigation ramped up.
‘A tremendous opportunity’
It began with a rushed email on March 20, 2014 from Baker McKenzie lawyer Irina Shestakova in San Francisco to Appleby’s global head of corporate, Cameron Adderley, in Hong Kong.
“Our client, Apple, has reached out to us with a request to provide assistance with and co-ordination of a multi-jurisdictional project involving BVI, Cayman, Guernsey, Isle of Man and Jersey,” Shestakova wrote.
An excited Adderley emailed Appleby offices around the world: “This is a tremendous opportunity for us to shine on a global basis with Baker & Mackenzie”.
The pressure that Apple was feeling had been triggered by a searing report by the US Senate Subcommittee on Investigation in May 2013 detailing how Apple Sales International (ASI) and Apple Operations International, the group’s chief subsidiaries in Ireland, were “stateless”.
They were not taxed in Ireland because they were managed in the US. But they were not taxed in the US because they were Irish companies.
The EC had asked Ireland for details of its arrangement with Apple, but the process appeared to lose momentum after the Irish finance minister Michael Noonan announced on October 15, 2013 the loophole that allowed companies to be stateless would be closed from January 1, 2015.
On March 5, 2014 the Financial Review revealed that Apple had released its Irish accounts from 2001 to 2009, in an obscure filing with the Australian Securities and Investments Commission – it filled the gaps in from the US Senate report, with figures that showed the proportion of profits that ended up in Ireland going forward.
Events moved quickly. Later that day Ireland supplied the EC with information it had requested in January.
On March 7, the EC ramped up its inquiry into a formal investigation of whether Apple had received illegal state aid from Ireland. It appears to be this move that stirred Apple into motion.
And on March 20, Appleby was given its chance to shine.
‘Apple are extremely sensitive’
Appleby had had a difficult relationship with Apple and Baker McKenzie. In late 2012 and early 2013 it had provided advice listed as “iTunes Expansion Billing” and “Charitable Promotions Program – Bermuda”. Then there was “Project Charlemagne 4”, “iTunes Affiliate Program”, and another unnamed matter.
It came to $12,671 in billing, and Baker McKenzie had been unhappy with the service. The bills went unpaid for months, as Appleby called in more and more senior Baker McKenzie people to get its money.
Not just that, Adderley noted, “Peter Denwood who was previously a very senior partner and the former leader of the Baker & McKenzie team (who we failed to impress) has gone in-house with Apple.”
Now Appleby was being asked to fill in a form of 14 detailed questions for five separate jurisdictions, about how hard it would be for Apple to move management of its Irish companies there – or to move it back out again.
“Does your jurisdiction have a bilateral investment treaty with Ireland that protects against expropriation of assets?” the form asked.
“I expect the [fees] involved to be nominal and would ask that you embrace this opportunity to build a closer relationship with B&M and with their prestigious client,” he wrote.
“Finally, for those of you who are not aware, Apple are extremely sensitive concerning publicity and do not generally permit their external counsel to disclose that they have been engaged by Apple or to make any mention,” he concluded.
This information was “need to know” only, he stressed.
Steven Rees Davies of Appleby’s Isle of Man office was upbeat on March 24 after Appleby agreed to skip any fees.
“We have impressed B&M who appeared in their email response to have been genuinely surprised by our gesture.”
Baker McKenzie confirmed they wanted the information on Isle of Man, Jersey, Guernsey, Caymans and the British Virgin Islands, as well as Bermuda (“Added in I expect because it’s free,” Rees Davies noted).
The Isle of Man team rallied around, only to hear . . . nothing. The Paradise Papers offer an indirect clue to what happened next.
No longer stateless
On October 14, Irish Finance Minister Noonan announced that “Double Irish” tax arrangements would be eased out over a six-year period beginning on January 1, 2015. But Apple didn’t use a Double Irish structure.
ICIJ journalist Simon Bowers found the clue in Appleby’s billing sheets. From December 2014, the deadline for stateless companies, Appleby’s Jersey office began billing Apple Sales International and Apple Operations International for administration fees, reflecting a move in the management of both companies from the US to Jersey, which is a tax haven.
ASI and AOI were no longer stateless. A third company, Apple Operations Europe, became an Irish taxpayer.
In July last year, Ireland announced that its Gross Domestic Product in 2015 had jumped a massive 26.3 per cent, or $US270 billion.
The OECD reported this was due to “a number of large multinational corporations [which] have relocated their economic activities, and more specifically their underlying intellectual property, to Ireland.
Apple is believed to have accounted for more than $US200 billion of this, selling its IP to Apple Operations Europe to utilise a capital allowance that Ireland expanded from 2015, which would allow Apple to retain the minuscule tax rates it enjoys in Ireland.
“The changes we made did not reduce our tax payments in any country,” Apple said in a statement. “In fact, our payments to Ireland increased significantly and over three years [2014, 2015 and 2016] we’ve paid $1.5 billion in tax there – 7 per cent of all corporate income taxes paid in that country.”
Apple estimated earnings through Ireland during those three years is more than $US120 billion.
Last month, the EC’s Vestager flagged that the commission would be taking an interest in Apple’s new structure.