By Carol Matlack
May 22, 2013

Apple (AAPL) has a deal with Ireland granting it an effective 2 percent tax rate on tens of billions of dollars in profit at the company’s Irish affiliates, according to a U.S. Senate report released on May 20.

Ireland, though, says that isn’t true. “There is no special deal for Apple or any other company,” Barry O’Leary, the head of Ireland’s inward investment agency, said today in an interview with Irish broadcaster RTE. O’Leary and other Irish officials say the country applies its 12.5 percent corporate tax rate equally to all companies.

Who’s right? Technically, they both could be. The explanation may lie in a tax shelter called the “double Irish.” This two-step technique involves exploiting loopholes in the Irish tax code—first, to shelter profits from U.S. taxes, and then to provide additional shelter from Ireland’s already low corporate rate.

It works like this: First, the U.S. company attributes profits to an offshore subsidiary—generally in Ireland, although the technique has been used in some other countries. The company then sets up a second Irish subsidiary, nominally managed and controlled from a jurisdiction, such as the British Virgin Islands or Bermuda, that has no corporate income tax. Intellectual-property rights are transferred to that subsidiary, which then receives royalty payments from the Irish-based subsidiary. The Irish subsidiary, in turn, claims the royalty payments as tax deductions in Ireland. Google (GOOG) has used such an arrangement with a Bermuda subsidiary.

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