Apple has operated almost tax-free in Ireland since 1980, welcomed by a government keen to bring jobs to what was then one of Europe's poorest countries, former company executives and Irish officials have said.
Chief Executive Tim Cook faced criticism from a Senate subcommittee in Washington on Tuesday over the iPad and iPhone maker's tax practices, which had been shrouded from full view behind secretive tax-exempt Irish-based corporate entities.
Apple , one of Ireland's top multinational employers, denied avoiding billions of dollars in U.S. taxes and said its arrangements helped fund research jobs in the United States.
The committee revealed that Apple's Irish companies, some of which are not tax resident in any jurisdiction, allowed the group to pay no tax on much of its overseas earnings in recent years.
Senator Carl Levin, chairman of the subcommittee, said Apple had sought "the Holy Grail of tax avoidance".
A former company executive and Irish officials told Reuters the almost tax-free status dates all the way back to Apple's arrival in County Cork 32 years ago.
Apple must have seemed attractive to Ireland and to Cork. Amid a generally moribund Irish economy, Cork had been hard hit by the closure of its shipyards and a Ford car plant, and in 1986 nearly one in four were out of work in the city.
In the early days, Apple's staff sat down to meals together. Now the company employs 4,000 in Ireland and is the country's biggest multinational employer.
"There were tax concessions for us to go there," said Del Yocam, who was Vice President of manufacturing at Apple in the early 1980s. "It was a big concession."
In fact, the deal was about as good as a company can get.
"We had a tax holiday for the first 10 years in Ireland. We paid no taxes to the Irish government," one former finance executive, who asked not to be named, said.
Apple wasn't an exception, although it was among the last to enjoy such favourable treatment. From 1956 to 1980, Ireland attracted foreign companies by offering a zero rate of tax, according to the Irish government's website. Eligible companies arriving in 1980 were given holidays until 1990.
"Any multinational attracted into Ireland that was focusing on the export market paid zero percent corporation tax," said Barry O'Leary, CEO of IDA Ireland, which is charged with attracting investment into Ireland.
Apple said it pays all the tax due in every country where it operates. It declined to comment on the tax treatment it received in the 1980s.
As part of Ireland's accession to the European Economic Community, precursor to the European Union, in 1973, it was forced to stop offering tax holidays to exporters.
From 1981, companies arriving in Ireland had to pay tax, albeit at a low 10 percent rate, providing they qualified for manufacturing status.
Apple's investment was a major coup for Ireland. At the time, the country was struggling with high and rising unemployment, double-digit inflation and a brain drain of the young and educated through emigration.
"We were the first technology company to establish a manufacturing operation in Ireland," recalled John Sculley, Apple's CEO from 1983 to 1993. He said government subsidies had also played a role in deciding to set up a base in Ireland.
Ireland also offered low wage rates - a big attraction when it came to hiring hundreds of people for the relatively low-skilled work of assembling electronic equipment.
Apple told the subcommittee it could not answer questions about why it chose Ireland as a base since it had lost the paperwork from the period.
The operation in Cork built the company's Apple II computer and would later build disc drives, 'Mac' computers and others. These would be sold in Europe, the Middle East, Africa and Asia.
But having a tax holiday in Ireland would not, in itself, have allowed Apple to operate tax free in these markets.
Equipment assembly is not the kind of activity that economists or tax authorities usually credit with generating a large share of a technology company's profits.
More value has been associated with generating the intellectual property behind the technology - which Apple did in the United States - and with the selling of goods, which was to be done on the ground in France, Britain and India.
But none of these countries offered the tax advantages Ireland did. The key to minimising Apple's tax bill was maximising the amount of profit that could be ascribed to Apple's Irish operations.
This task fell to Mike Rashkin, Apple's first tax director, two executives from the period said. One called him "the father of it all".
Rashkin arrived at Apple in 1980, from computer pioneer Digital Equipment Corp (DEC) in Massachusetts, where he had learnt about tax-efficient corporate structuring in tech companies.
Apple had already decided to establish its base in Ireland when Rashkin moved to Silicon Valley, but he used his experience at DEC to set up a tax structure that took advantage of Apple's base in the country, the executives said. Rashkin declined to comment.
The Senate subcommittee's report reveals how the arrangement was structured. In 1980, Apple entered into a deal with its Irish operation, whereby the latter would share the cost of funding Apple's research and development. In return, the Irish unit would be able to enjoy rights to Apple's intellectual property for goods sold outside the Americas.
Apple secured the blessing of the U.S. tax authority, the Internal Revenue Service, for the deal, one executive said. The IRS gave Apple an advance pricing agreement, or APA, an agreement which establishes how the IRS will treat a transaction between affiliates for tax purposes, before it is entered into.
Many countries' tax authorities offer APAs, and companies say they are necessary to facilitate international trade and investment. Tax campaigners say tax authorities have been too ready to accept the pricing proposed by companies which apply for APAs.
The New York Times reported last year that Apple's low taxes were at least in part due to the confidential technology transfer arrangement.
The terms of the deal and subsequent cost-sharing deals were favourable for Apple's Irish unit. In effect, the Irish unit paid much less to its U.S. parent for the use of Apple intellectual property than it made from selling that property on to affiliates.
"Apple's cost sharing agreement (CSA) with its offshore affiliates in Ireland is primarily a conduit for shifting billions of dollars in income from the United States to a low tax jurisdiction," the subcommittee's report said.
Meanwhile, Apple also constructed a system whereby the affiliates which were actually selling the finished equipment would earn minimal profits.
The techniques Apple used over the years included selling goods to affiliates at prices which generated little profit at the retail level, or by paying sales affiliates commissions which are just about enough to cover their operating costs.
Rashkin's work and Ireland's accommodating approach had the desired result for Apple.
"We're very, very pleased," Apple's then-President A.C. 'Mike' Markulla said in 1981. "The Irish have really lived up to their promises."
Indeed, the accounts for Apple's main Irish unit, then known as Apple Computer Inc. Ltd, for 1989, the earliest year for which detailed accounts were filed, show exactly how effective the arrangement was.
The subsidiary paid $500,000 in income tax on profits of $317 million, a rate of 0.2 percent.
End of the holiday
In 1990, Apple's tax holiday came to an end, and in that year, the Irish operation's tax rate hit 4 percent, accounts from the period show.
At the same time, Apple's Irish manufacturing activities came under question as the company looked to cut costs by outsourcing. In 1992, the company announced plans to cut hundreds of jobs after deciding to shift some work to Singapore, which at this time was attracting increasing investment by offering tax holidays.
"They nearly left Ireland altogether," O'Leary said.
By this stage, the European Community had banned tax holidays of the kind given to Apple, so the company and Dublin negotiated an arrangement which had a similar outcome but fell within European rules.
The precise details of the arrangement were not disclosed, but Phillip Bullock, Apple's head of tax operations, indicated that it was linked to minimising taxable profit.
"Since the early 1990's, the Government of Ireland has calculated Apple's taxable income in such a way as to produce an effective rate in the low single digits," he told the subcommittee.
The deal didn't stop Apple from shifting manufacturing work to Asia, but in the years that followed new jobs were created in Cork, in sales and administrative support for the European operation, the accounts of the Irish units show. Some manufacturing remains in Ireland, the subcommittee said.
An Irish government spokesman declined to even confirm it held discussions with Apple regarding tax, citing rules on taxpayer confidentiality.
From 1996 Ireland phased in a 12.5 percent tax on all corporate trading income, although foreign companies often pay effective rates lower than this by shifting money into tax havens such as Bermuda.
Apple's Cook told the Senate panel on Tuesday that Apple does not hold money on a Caribbean island or divert profits from sales to U.S. customers to other jurisdictions to avoid U.S. taxes.
© Thomson Reuters 2013