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The Paradise Papers: What Are Your "Fair Share” of Taxes?

Nov 28, 2017

November 2017 saw another leak of financial documents that shed some light on the world of offshore finance. The "Paradise Papers" followed the "Panama Papers" in revealing investment strategies by individuals and corporations in low-tax jurisdictions (tax havens) resulting in significantly lower effective tax rates.

A key revelation from the "Paradise Papers" is how Apple sidestepped a 2013 crackdown on its controversial Irish tax practices by actively seeking a new tax domicile. The papers show that Apple moved the firm holding most of its untaxed offshore cash, now $252 billion, to the Channel Island of Jersey, arguably a tax haven.

After the 2013 investigation of Apple's Irish arrangement, the Irish government decided that firms incorporated there could no longer be stateless for tax purposes. In order to keep its tax rates low, Apple needed to find an offshore financial center that would serve as the tax residency for its Irish subsidiaries. In March 2014, Apple's legal advisors sent a questionnaire to a leading offshore finance law firm inquiring as to the benefits of offshore jurisdictions: the British Virgin Islands, Bermuda, the Cayman Islands, Mauritius, and the Isles of Man, Jersey and Guernsey.

The questionnaire asked “was it possible to obtain an official assurance of tax exemption" and “could it be confirmed that an Irish company might conduct management activities … without being subject to taxation in your jurisdiction?"

Apple chose Jersey, a U.K. dependency that makes its own tax laws and has a 0% corporate tax rate for foreign companies. The “Paradise Papers” show Apple's two key Irish subsidiaries, Apple Operations International (believed to hold most of Apple's overseas cash holdings of $252 billion) and Apple Sales International, were managed from the offshore finance law firm's office in Jersey from 2015 until early 2016.

There were accusations that Apple's Jersey structure enabled the company to continue avoiding billions in taxes around the world. Apple responded that the new structure had not lowered its overall tax and it remains the world's largest taxpayer, paying about $35 billion in corporation taxes over the past three years. Further, Apple stated that it had followed the law, and its changes "did not reduce our tax payments in any country." The company also stressed that no operations or investments had been moved from Ireland.

However, Apple's 2017 accounts showed it made $44.7 billion outside the U.S. and paid an effective tax rate of approximately 3.7%, which is less than 1/6 of the world’s average corporate tax rate.

Even though structures like the one utilized by Apple are legal under the current tax laws, they often carry a negative connotation to the public, which may view them as "tax avoidance schemes." Revelations such as the "Paradise Papers" and the "Panama Papers" have accelerated the public's desire to crack down on low-tax jurisdictions that are considered tax havens.

Politicians are pressed by constituents to support the notion that individuals and corporations should pay taxes that are fair and commensurate with their income levels, and they should not be able to utilize loopholes allowing them to legally erode their tax burdens. However, a counter argument is that taxpayers should not be penalized for availing themselves of legal nuances in a tax code that is considered by many to be too complicated to safeguard against such perceived abuses. Moreover, tax planning based on business objectives and supported with real business and economic substance should be distinguished and considered to result in taxes that are fair and commensurate.

In light of these developments, it has never been more prudent to align the value chain of a business with its tax structure to ensure that value creation by jurisdiction is aligned with taxes paid by jurisdiction. The OECD recommendations on its Base Erosion and Profit-Shifting Action Plan will become more firmly embedded into member countries' domestic laws, and heightened levels of transparency will force the alignment of substance, value creation and taxes paid globally.

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Henric Adey

Henric Adey is a Director in the firm’s Transfer Pricing Practice. Henric is responsible for advising clients over a wide span of industries concerning both international and multi-state transfer pricing matters

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