The company created Irish subsidiaries and attributed billions of dollars of profits made outside the US to them. It then avoided paying large amounts of taxes in the country by making it appear that the subsidiaries were being operated from California. In the US, such a scheme works, because the government allows taxes on income produced by multinational corporations' foreign units to be deferred indefinitely.
In 2013, however, Apple faced inquiries from a US Senate committee that lambasted the company for exploiting a system that saved it billions of dollars in taxes. A year later, the European Union investigated Apple's activities in Ireland and ordered the company to pay $14.5 billion in back taxes. That's the same year Apple first emailed Appleby asking about possible alternative arrangements.
Based on the documents leaked as part of Paradise Papers, Apple asked the Bermuda-based law firm what different offshore jurisdictions, including the British Virgin Islands, Bermuda, the Cayman Islands, Mauritius, the Isle of Man, Jersey and Guernsey, have to offer. When Ireland changed its tax laws in 2015, it gave companies operating out of the country the right to continue with their arrangements until December 2020. That gave Apple enough time to begin processing the change in residency of its two biggest Irish subsidiaries to Jersey, which eliminated corporate taxes (sans some exceptions) in 2008, with Appleby's help.
Why is this such a big deal? Well, Apple said 70 percent of its profits come from outside the US, yet its foreign tax rates typically fall between two to five percent only. In the US, it would have paid a 35 percent tax rate on those profits.
Republican senator John McCain once said:
"Apple claims to be the largest US corporate taxpayer, but by sheer size and scale it is also among America's largest tax avoiders... [It] should not be shifting its profits overseas to avoid the payment of US tax, purposefully depriving the American people of revenue."
Apple, however, defended its practices and its decision, insisting that the move "did not reduce [its] tax payments in any country." It said it decided to hold overseas cash in Jersey, "specifically to ensure that tax obligations and payments to the US were not reduced." Apple explained that it "paid billions of dollars in US tax" to establish its Jersey subsidiary, and that it gets no tax benefit from the change. The company also boasted that it's the biggest taxpayer in the world, and its "worldwide effective tax rate is 24.6 percent, higher than average for US multinationals."
The tech giant also promised to comply with any change in the tax system for multinational corporations in the US in case the administration's tax reform plan goes through. The current proposal suggests cutting multinational companies' taxes to 20 percent from 35 percent, though it will also impose minimum taxes on all foreign earnings and will no longer defer taxes earned by businesses' foreign divisions.
Part of Cupertino's statement reads:
"The debate over Apple's taxes is not about how much we owe but where we owe it. As the largest taxpayer in the world we've paid over $35 billion in corporate income taxes over the past three years, plus billions of dollars more in property tax, payroll tax, sales tax and VAT. We believe every company has a responsibility to pay the taxes they owe and we're proud of the economic contributions we make to the countries and communities where we do business.
Under the current international tax system, profits are taxed based on where the value is created. The taxes Apple pays to countries around the world are based on that principle. The vast majority of the value in our products is indisputably created in the United States -- where we do our design, development, engineering work and much more -- so the majority of our taxes are owed to the US.
When Ireland changed its tax laws in 2015, we complied by changing the residency of our Irish subsidiaries and we informed Ireland, the European Commission and the United States. The changes we made did not reduce our tax payments in any country. In fact, our payments to Ireland increased significantly and over the last three years we've paid $1.5 billion in tax there -- 7 percent of all corporate income taxes paid in that country. Our changes also ensured that our tax obligation to the United States was not reduced.
We understand that some would like to change the tax system so multinationals' taxes are spread differently across the countries where they operate, and we know that reasonable people can have different views about how this should work in the future. At Apple we follow the laws, and if the system changes we will comply. We strongly support efforts from the global community toward comprehensive international tax reform and a far simpler system, and we will continue to advocate for that."