Paradise Papers | Offshore leaks depict Apple’s quiet shift to Island of Jersey

The European Union’s high-profile investigation into Apple’s tax avoidance ended last year with a USD15 billion fine and an unanswered question: How exactly did the company structure itself in recent years to save billions in taxes? 

EU officials said then they were unable to fully decode Apple’s techniques even after a two-year inquiry and the examination of thousands of pages of internal corporate documents.

But new details emerged Monday, as the International Consortium of Investigative Journalists published leaked documents from an offshore law firm called Appleby, operating in locations including Bermuda and the Isle of Man. The emails show how lawyers at another firm working for Apple aggressively shopped for a new haven after the U.S. cracked down on its accounting practices in 2013 and after Europe followed suit, focusing on Apple’s arrangements in Ireland.

Just days before Ireland was planning to close a loophole that had saved Apple billions, the documents show, the company transferred some of its Irish subsidiaries to the Channel Island of Jersey, which taxes foreign companies at a rate of zero percent. Effectively, the company stayed one step ahead of regulators and lawmakers.

Apple disputed the findings, published by ICIJ in conjunction with the New York Times and other partners, and issued a written statement asserting that its corporate restructuring in 2015 was actually intended to “preserve its tax payments to the United States, not to reduce its taxes anywhere else.”

“The changes we made did not reduce our payments in any country,” the statement said. The company is also challenging the EU fine, which Ireland has not yet collected.

International tax experts said that Apple’s use of new structures may not lower its tax bill further but they will help preserve its already low rate by shielding its overseas cash and intellectual property.

“Apple doesn’t pay significant taxes in the U.S. on its foreign income,” said Ed Kleinbard, former chief of staff for the congressional Joint Committee on Taxation, who now teaches law at the University of Southern California. “Switching its subsidiaries to Jersey will allow Apple to continue its stateless income machinery.”

The fresh details about Apple’s tax strategies come as Congress is considering a House bill that would cut the top U.S. corporate rate from 35 percent to 20 percent. U.S. corporations have for years complained that the 35 percent rate, the highest among economically advanced countries, puts them at a competitive disadvantage.

The typical U.S. multinational pays far less, however, about 20 percent of its profit in federal corporate taxes. Companies that rely on intellectual property – especially tech and pharmaceutical concerns — can often reduce their effective rate to the single digits. The documents obtained by ICIJ, and shared with its media partners in 100 countries, also hinted at tax avoidance maneuvers by several other U.S. companies, including Nike, Uber and Allergan.

Some Washington Democrats, including Rep. Lloyd Doggett of Texas, a member of the House Ways and Means Committee, called on congressional Republicans to delay considering the tax bill until they know more about how the offshore maneuvers deprive the U.S. Treasury of corporate revenue.

Like many U.S. multinationals, Apple lowers its tax bill by booking a substantial portion of its profits overseas, where earnings aren’t subject to the U.S. 35 percent tax rate. By 2013, after media reports that it used a British Virgin Islands subsidiary to amass more than $100 billion in untaxed cash offshore, the Senate Permanent Committee on Investigations held public hearings that accused Apple of exploiting Irish tax law to create billions a year in “stateless income” – earnings not subject to tax by any country. 

Apple CEO Tim Cook defended the company angrily in his testimony. “We don’t depend on tax gimmicks,” he said. “We don’t stash money on some Caribbean island.”

The hearing nonetheless led to an EU investigation and stoked public pressure on Ireland to close the loopholes commonly used by Apple and other U.S. companies. In October 2013, Ireland changed the quirk in its law that had allowed companies like Apple to create subsidiaries that could avoid declaring themselves tax residents of any country. The following year, Ireland took steps to phase out the “Double Irish,” a strategy that had allowed Apple to funnel all its sales outside of the Americas through Ireland, where the tax bite was low.

With those changes approaching, Apple’s U.S.-based law firm, Baker & McKenzie, sent a 14-item questionnaire to the law firm of Appleby, according to the documents, asking about the tax advantages of havens like the Cayman Islands, Mauritius, Bermuda, the Isle of Man and the British Virgin Islands. Other emails published by ICIJ show that lawyers for the company were intent on keeping Apple’s tax moves secret.

A spokeswoman for Appleby said the firm was unable to comment on any matter regarding its clients. In a statement published on its website on Nov. 5, the law firm said of multiple articles published based on the data: “The journalists do not allege, nor could they, that Appleby has done anything unlawful. There is no wrongdoing.”

The company ultimately decided that the Island of Jersey would be the new tax home of two key Irish subsidiaries: Apple Sales International and Apple Operations International (AOI), which is believed to be the entity that controls Apple’s $252 billion in offshore earnings, largely out of the reach of U.S. tax authorities. David Kocieniewski, Bloomberg