Apple's ability to shelter billions of dollars of income from tax has depended on an unusual loophole in the Irish tax code that helps the country compete with other countries for investment and jobs.
A US Senate investigation revealed Tuesday that Apple, maker of iPhones, iPads and Mac computers, channeled profits into Irish-incorporated subsidiaries that had "no declared tax residency anywhere in the world.
Apple said on Tuesday that the arrangements dated back over 30 years and had been negotiated with Ireland's government, which has long angered European economic peers such as France and Germany by helping multinationals to avoid paying tax on sales it makes to their citizens in their domestic markets.
Apple's annual reports show that over the past three years, Apple paid taxes worth 2 per cent of its US$74 billion in overseas income.
Apple now channels most of its overseas sales through three companies that are incorporated in Ireland but for tax purposes are resident in no jurisdiction. US rules that allow companies incorporated abroad not to pay US taxes complement that arrangement.
Apple tax head Phillip Bullock told the US Senate Permanent Subcommittee on Investigations on Tuesday that one of these three subsidiaries, Apple Operations International (AOI), had not submitted a tax return anywhere for five years.
All three were registered in Ireland in 1980 and reregistered as unlimited companies in 2006, which means under Irish law that they do not have to publish annual accounts, so the subcommittee's report was the first time the current structure had been publicly revealed.
Peter Vale, tax partner at accountants Grant Thornton in Dublin, said it was unusual for companies incorporated in Ireland not to be tax resident there, but it is legal.
Apple relies for tax benefits on contrasting approaches to determining tax residence in Ireland and the United States.
Vale said that if a group has at least one trading Irish subsidiary - as Apple does, in the form of units that employ 4,000 staff - it can establish a corporation that will not be deemed tax resident in Ireland providing this unit's "central management control" is outside the country.
The subcommittee said AOI and Apple Sales International (ASI) held board meetings in the United States and most board members were based there. That means the units would not be deemed to have Irish management control, accountants said.
Apple documents released by the subcommittee showed that current Chief Executive Tim Cook and current Chief Financial Officer Peter Oppenheimer were board members of all three Irish units during the late 2000s, typically holding their meetings at Apple headquarters in Cupertino, California.
Apple told the subcommittee that AOI has no employees and no physical address. Its assets are managed by employees at a subsidiary, Braeburn Capital, located in Nevada, while the assets are held in bank accounts in New York. Primary accounting records are maintained at Apple's US shared service centre in Austin, Texas.
Despite this, AOI did not have tax residency in the United States, because, said Lyn Oates, professor of tax and accounting at the University of Exeter Business School in the UK, the United States determines tax residence on the place of incorporation only.