You Can't Blame Ireland for Apple's Tax-Avoidance, Either

The country was just trying to boost its economy -- and some say it worked.

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Joe O'Malley and his sheep dog Floss check on his sheep grazing on the common land on Clare Island, County Mayo, Ireland September 23, 2009. (Cathal McNaughton/Reuters)

While being grilled in a Senate committee hearing Tuesday, Apple CEO Tim Cook said he was "recruited" by Ireland in the 1980s to base a subsidiary there -- a move that would allow the company to save billions in corporate taxes over the next few decades.

As it happens, Apple wasn't the only firm enticed by the Emerald Isle. Back in the late 1970s and early 80s, Ireland was facing sluggish GDP growth and double-digit unemployment. Then, it hired some U.S. consultants who urged it to try what was then an innovative strategy: incredibly low taxes for companies. (Hey, it worked for Puerto Rico, the consultants argued.)

In the process, Ireland has basically become Europe's Texas. The country's corporate tax rate of 12.5 percent is less than half that of most other European countries. The average tax rate for the countries in the Organization for Economic Co-operation and Development was 24 percent in 2012.

The Senate said the tech company actually paid a much lower rate of 2 percent -- a result of what Apple said was a "negotiated" rate with the Irish government. (It was a negotiation Ireland vehemently denied.)

Perhaps Apple was getting such a good deal because Ireland couples its low rate with another inducement: Looking the other way as corporations move money around from their Irish subsidiaries to even more lucrative tax havens in exotic locations. (How exotic? In the eyebrow-raising "Dutch sandwich," a Dublin company could funnel its payments through the Netherlands and over to Bermuda, for example.) In Apple's case, the Irish subsidiaries listed "no declared tax residency anywhere in the world," a perfectly legal maneuver that allowed the company to wriggle out of almost its entire tax burden.

"Ireland developed a twofold strategy: low rates and not too many questions," Richard Murphy, founder of the Tax Justice Network, a group that campaigns against tax havens, told the New York Times. "It became the conduit state of choice."

Apple isn't the only company to have discovered these loopholes: Google paid just 22.2 million euros in taxes on its 9 billion euros in Ireland-registered European profits, and Irish subsidiaries allowed Microsoft to shave $2.43 billion off its American tax bill.

This has been pretty great for Ireland. The combination of low rates and accounting wizardry has encouraged hundreds of multinational companies to set up shop there, bringing tens of thousands of jobs with them. The country does miss out on some corporate tax revenues, but income taxes and spending by white-collar programmers and engineers recoup some of that.

Some analysts think these foreign firms played a big role in Ireland's rebound from its 2008 economic slump. Multinationals account for almost 10 percent of Ireland's workforce, and U.S. businesses invested $30 billion in Ireland last year.

The benefits are written in Ireland's economic data: Whereas in most countries GDP and GNP track closely with one another, Irish GDP far oustrips its GNP. The difference? The second metric doesn't count revenue from non-Irish firms. Here's a look at the difference between GDP and GNP over time, as measured by Dr. Constantin Gurdgiev, a finance professor at Trinity College, Dublin:

gdpgnpgapireland.png

What's more, most of the recent GDP growth in Ireland was accounted for by exports -- again, mostly by non-Irish multinational firms. This year, employment at foreign companies in Ireland has returned to pre-2008 levels after multinationals added jobs at their fastest rate in a decade.

The EU and U.S. have both criticized Ireland for its corporate tax rates, and British Prime Minister David Cameron promises to bring up the issue of global taxation at the G8 meeting next month.

But despite the fracas with Apple, Ireland has few incentives to become less cozy for foreign firms -- there are plenty of other worldwide tax havens they can turn to instead.

"The companies will just say 'take a jump' and move somewhere else more obliging," if taxes in Ireland rise, a 55-year-old man from the town of Cork told Reuters. "Our unemployment is high enough as it is."

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Olga Khazan is a staff writer at The Atlantic, where she covers health.

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