http://en.wikipedia.org/wiki/Double_Irish_arrangement
Basically, sending the money from Germany (or wherever) -> Ireland -> Netherlands -> Ireland -> Cayman Islands results in no taxes being paid (or legally due).
The Irish company licenses intellectual property from an Apple registered company in the Cayman Islands, and of course the Royalties are so high that the Irish company makes no profit.
So all this money accumulates offshore and can't come back to the US unless some taxes are paid, which is why Tim Cook meets with Congress to try and lobby for a tax repatriation holiday.
Which is also why Tim Cook is raising money in the debt markets to pay shareholders dividends - it's cheaper to pay a tiny bit of interest than pay tax. Absurd that such a rich company is doing this.
Ironically, the money is already back in US - the Caymans entity invests the money in the US stock market via Braeburn Capital, a hedge fund based in Nevada and owned by Apple Inc!
Ironically a lot of this money would probably be repatriated tomorrow (with taxes fully paid) if Congress ruled out a tax holiday and committed itself to gradually raising rates.
It's just the tantalizing hope of a tax holiday that keeps it abroad.
Edit: how do they stay solvent now, when the money is periodically re-imported during tax holidays?
I imagine most of the boost in margins to be brought down increasing compensation or numbers employed so most of that gets brought in to tax coffers via personal income taxes.
[1]http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Doc...
The low corporate tax rates do not hamper the government's ability to spend, but they are inflationary (in a limited sense). The price of investment goods (property, shares, etc.) is driven way, way way way way up because most of the dividends are simply reinvested.
It drives up wealth inequality as well.
I am very surprised that other countries have left this situation to get this far..
We have mining companies in Australia playing this game essentially depriving the Australian public of their tax receipts. Some day these tax receipts will be enjoyed by US public.
An example of how this might work: A US tech company A, wants to sell to customers in the UK. They transfer the rights to their patents to a Bermuda "headquartered" but Irish incorporated company B. They set up a sales company in Ireland C (this one is Irish tax resident). They set up an IP company D in the Netherlands which has favourable tax treatment for income from intellectual property - the same reason that U2 transferred the rights to their music catalogue to a holding company there. They (may) set up a company E in the UK for doing support.
Now if you're in the UK and spend £1000 to buy a product from the company: 1) You buy from C which records revenue of £1000 2) C pays £990 in IP licensing fees to D in the Netherlands. 2b) After covering its sales costs from the remaining £10, C makes barely any profit so pays little tax at Ireland's low 12.5% corporate tax rate. 3) D transfers the money to B after paying a very small amount in Dutch taxes 4) B is incorporated in Ireland but tax resident in Bermuda. Since the money has come in as a transfer from a group company within the EU, there is no withholding tax to be paid. 5) Money is safely in Bermuda.
Of course if A ever wants to bring money back from B it will then have to pay US corporate income tax on it.
The authorities wrote the rules in the first place.
They shouldn't get to change them after the fact based on arbitrary whims, especially based on nebulous concepts like "spirit".