It was May 2013, and Apple Inc. chief executive Tim Cook was angry.
He sat before the U.S. Senate permanent subcommittee on investigations, which had completed an inquiry into how Apple avoided tens of billions of dollars in taxes by shifting profits into Irish subsidiaries that the subcommittee's chairman called "ghost companies."
"We pay all the taxes we owe, every single dollar," Cook declared. "We do not depend on tax gimmicks. . . . We do not stash money on some Caribbean island."
Five months later, Ireland bowed to international pressure and announced a crackdown on Irish firms, like Apple's subsidiaries, that claimed that almost all of their income was not subject to taxes in Ireland or anywhere else in the world.
Now newly leaked documents shine a light on how the iPhone maker responded to this move. Despite its CEO's public rejection of island havens, that's where Apple turned as it began shopping for a new tax refuge.
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Apple's advisers at one of the world's top law firms, U.S.-headquartered Baker McKenzie, canvassed one of the leading players in the offshore world, another firm of lawyers called Appleby, which specialized in setting up and administering tax haven companies.
A questionnaire that Baker McKenzie emailed in March 2014 set out 14 questions for Appleby's offices in the Cayman Islands, the British Virgin Islands, Bermuda, the Isle of Man, Guernsey and Jersey.
One asked: "Confirm that an Irish company can conduct management activities . . . without being subject to taxation in your jurisdiction."
Apple also asked for assurances that the local political climate would remain friendly: "Are there any developments suggesting that the law may change in an unfavourable way in the foreseeable future?"
In the end, Apple settled on Jersey, a tiny island in the English Channel that, like many Caribbean havens, charges no tax on corporate profits for most companies. Jersey was to play a significant role in Apple's newly configured Irish tax structure. Meanwhile, the Irish government's crackdown on shadow companies has had little effect.
For years, the iPhone-maker has reported two-thirds of its profits were made outside U.S. and taxed at a low- or mid-single digit rates.
Despite a barrage of criticism, changes to Irish law and a European Union ruling against Apple's arrangements in Ireland, leaked documents show how Apple has been able to carry on paying taxes at ultra-low rates.
Multinationals that park assets in tax havens and take other aggressive avoidance strategies are costing governments around the world as much as $240 billion a year in lost tax revenue, according to a conservative estimate in 2015 by the Organization for Economic Co-operation and Development (OECD).
The new documents reviewed by the International Consortium of Investigative Journalists, in conjuction with CBC News, and other media partners provide insight into how those strategies work. They show the creative methods that advisory firms devise in response to attempts by regulators to crack down on such tax shelters.
"U.S. multinational firms are the global grandmasters of tax avoidance schemes that deplete not just U.S. tax collection but the tax collection of most every large economy in the world," said Edward Kleinbard, a former corporate lawyer who is now a professor of tax law at the University of Southern California.
The Trump administration and Congress are considering whether to grant a one-time tax break that would allow big multinationals to bring back home an estimated $2.6 trillion they have stowed in offshore subsidiaries, at a sharply reduced tax rate.
Kleinbard said the prospect of a big corporate tax break "simply begs companies to ramp up their tax avoidance strategy still further in anticipation of more holidays in years to come. And it removes pressure for genuine reform."
An Apple spokesperson declined to answer a list of questions about the company's offshore tax strategy, except to say it informed regulators in the U.S., Ireland and the European Commission of its reorganization abroad.
"The changes we made did not reduce our tax payments in any country," said the spokesman. He added: "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."
Apple is being pursued for $14.5 billion in Irish back taxes after European regulators ruled Ireland had granted illegal state aid by approving Apple's tax structure.
The leaked documents help explain how three small jurisdictions – the Netherlands, Ireland and Bermuda – have become go-to destinations for big corporations looking to avoid taxes on their overseas earnings. Between them these three spots hold less than one-third of 1 per cent of the world's population – but accounted for 35 per cent of all profits that U.S. multinationals reported earning overseas last year, according to analysis by Gabriel Zucman, an economist at University of California, Berkeley.
By the time the U.S. Senate's investigations subcommittee released 142 pages of documents and analysis for its public hearing on Apple's tax avoidance in May 2013, the world was paying attention. The subcommittee found that Apple was attributing billions of dollars of profits each year to three Irish subsidiaries that declared "tax residency" nowhere in the world.
Under Irish law, most firms incorporated in Ireland are required to pay taxes locally on their profits. But if the directors are able to convince the Irish tax authorities that a company is "managed and controlled" abroad it can often escape tax on all non-Irish activities.
For more than two decades, the directors of Apple's three Irish companies – including, for many years, Tim Cook – did just that. By running these subsidiaries from group headquarters in California, they avoided Irish tax residency.
At the same time, the directors knew their Irish companies would not qualify for tax residency in the U.S. because American tax law worked differently. Under U.S. rules, a company has American tax residency only if it is incorporated there.
"Apple sought the Holy Grail of tax avoidance: offshore corporations that it argues are not, for tax purposes, resident anywhere in any nation," then-Senator Carl Levin, the Senate subcommittee chairman, said at the 2013 hearing.
Ireland's finance minister at the time, Michael Noonan, at first defended his country's policies, saying: "I do not want to be the whipping boy for some misunderstanding in a hearing in the U.S. Congress." But by October 2013, in response to growing international pressure, he announced plans to require Irish companies to declare tax residency somewhere in the world.
At that time, Apple had accumulated $111 billion in cash almost entirely held by its Irish shadow companies, beyond the reach of U.S. tax authorities. Each year, the pile grew higher and higher as billions of dollars in profits poured into these low-tax subsidiaries.
Company officials wanted to keep it that way.
So Apple sought alternatives to replace the tax shelter arrangements that Ireland would soon shut down. At the same time, however, the iPhone-maker wanted its interest in the offshore world kept quiet.
As Cameron Adderley, global head of Appleby's corporate division, explained in an email to other senior partners: "For those of you who are not aware Apple [officials] are extremely sensitive concerning publicity. . . . They also expect the work that is being done for them only to be discussed amongst personnel who need to know."
For Appleby, Adderley explained, this was "a tremendous opportunity for us to shine on a global basis with Baker McKenzie." Baker McKenzie's role in setting up offshore structures for multinationals, and then defending them when challenged by tax regulators, is legendary.
The law firm has also been involved in lobbying against proposals to crack down on tax avoidance by technology giants. It has 5,000 attorneys in 77 offices around the world.
Jersey is a crown dependency of the U.K., but it makes its own laws, sets its own tax rates and is not subject to most European Union legislation, making it a popular tax haven.
As Apple's plans to use an offshore island progressed, another potential problem emerged. In mid-2014, again under pressure from other governments, Irish ministers had begun exploring a ban on a tax shelter known as the "Double Irish," an avoidance strategy used by scores of companies, including Google, Facebook, LinkedIn and other tech companies as well as drugmakers such as Abbott Laboratories.
The Double Irish allows companies to collect profits through one Irish unit that actually employs people in Ireland – then route those profits to a second Irish subsidiary that claims tax residency in a low-tax island like Bermuda, Grand Cayman or the Isle of Man. This crackdown could have interfered with Apple's new plans in Jersey before they had gotten off the ground.
Although it was aimed at Double Irish structures, the potential rule change would ban all Irish companies from claiming tax residency in a tax haven. While the iPhone maker was not in a position to protest loudly, others spoke up.
The lobbying seemed to work. Ireland included a generous grandfathering clause for Allergan and other multinationals using Irish tax structures. "For existing companies, there will be provision for a transition period until the end of 2020," Noonan declared on Oct. 14, 2014.
More precisely, the fine print of policy documents revealed, the grandfathering provisions would apply not just to companies in existence when the finance minister spoke, but also any new ones created by the end of 2014. That gave Apple just enough time.
By the start of 2015, it had restructured its affairs in Ireland, including securing tax residency in Jersey for Apple Sales International and Apple Operations International, two of the three Irish shadow companies highlighted in the U.S. Senate investigation a year earlier.
For the previous five years, Apple Sales International had been Apple's biggest profit generator, churning out more than $120 billion, or close to 60 per cent of Apple's worldwide earnings. Meanwhile, much of those profits were transferred as dividends to Apple Operations International, described by Cook as "a company set up to provide an efficient way to manage Apple's cash."
Before their move to Jersey, the two subsidiaries had played a leading role helping Apple accumulate and hold $137 billion in cash – almost all of which came from non-U.S. profits barely taxed by any government in the world.
Latest figures indicate that since Apple's reorganization of its Irish companies this sum has almost doubled, though Apple won't confirm which of its foreign subsidiaries own this cash. This pile of money has inadvertently made Apple one of the biggest investment funds in the world, and its offshore cash reserves have been put to work in a portfolio that includes corporate bonds, government debt and mortgage-backed securities.
Appleby declined to answer questions but said on its website: "We are an offshore law firm who advises clients on legitimate and lawful ways to conduct their business."
The iPhone-maker has refused to answer ICIJ's questions about its new setup, but it appears to give a key role to another of Apple's Irish subsidiaries, a company called Apple Operations Europe. Together with Apple Operations International and Apple Sales International, the company made up the three Irish firms criticised by U.S. senators in 2013 for being "ghost companies," not tax resident anywhere in the world.
By 2015, tighter Irish laws had forced all three to find a new tax home. But while the other two took up residency in Jersey, Apple Operations Europe became tax resident in Ireland. A clue as to why multinationals might want to have have subsidiaries in Ireland can be found, once again, in Irish finance minister Noonan's budget announcement in 2014.
While media headlines focused on his decision to crack down on Double Irish arrangements, less attention was paid to other measures not mentioned in his budget speech but contained in accompanying policy documents. In particular, the paperwork revealed plans to expand an already generous tax regime for companies that bring intangible property into Ireland.
The incentive, known as a capital allowance, meant that if a multinational bought its own intangible property through an Irish subsidiary, the cost of that purchase would generate many years of tax write-offs in Ireland.
The arrangement was especially attractive to those multinationals who could sell their intangible property into Ireland from a subsidiary in a tax haven, where the gain from the sale would go untaxed. Even before Noonan sweetened the terms of this tax regime, some experts suggested multinationals switching intangible property to Ireland could achieve tax rates as low as 2.5 percent.
Governments ordinarily design capital allowances to encourage companies to make expensive investments in new factories or machinery that will help them expand. They are not usually designed for multinationals transferring an asset they already own from one company to another.
Apple refused to answer questions about whether it has taken advantage of this tax break by selling certain rights to use its intangible property from Jersey to Ireland.
However, in October 2017, Ireland reversed the sweetened terms Noonan had added to the tax break three years earlier. Apple says that following its reorganization it pays more Irish tax than before.
"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."
But the iPhone maker still won't say how much profit it makes through its Irish companies — making it impossible to gauge whether $1.5 billion is a lot of tax to pay in three years or not.
Apple's own financial statements indicate, though, that it has continued to enjoy a low tax rate on its international operations. The Macbook-maker made $122 billion in profits outside the U.S. during the three-year period Apple cites, on which it was taxed $6.6 billion – a rate of 5.4 per cent.