Insights into Editorial: The Apple ruling aims at the wrong problem
The European Commission has finally revealed its findings in the Apple-Ireland case. The Union has hit Apple with a record-breaking tax bill of €13 billion ($14.5 billion) plus interest, after finding that Ireland granted the company illegal state aid over many years.
Why has the European commission ordered Ireland to claw back up to €13bn in tax from Apple?
The commission has found that Apple benefited from a sweetheart tax ruling granted by Ireland decades ago, saving the iPhone-maker huge sums in taxes over many years. The ruling was not only generous but gave Apple special tax treatment unavailable to competitors. This amounted to unlawful state aid under EU rules. The sweetheart deal allowed Apple to shift up to two-thirds of its global profits through a handful of Irish-registered companies that routinely paid less than 1% tax.
What is state aid?
The Treaty on the Functioning of the European Union prohibits government subsidies to private industry and state-owned companies like airlines and steel manufacturers. The treaty has been interpreted to prohibit financial assistance by means of tax breaks to specific taxpayers or selected classes of taxpayers like multinationals. Prohibited state aid involves a subsidy (advantage) directed to a particular class (selectivity). A discretionary tax break for a specific multinational is state aid. That is black-letter law in the EU.
What’s Going On With Apple and Ireland?
Apple set up a factory in Cork, Ireland, in 1980 and now employs nearly 6,000 people across the country where it bases its European headquarters. It is now revealed that Apple channeled all its profits from all over the EU to Ireland, where it paid very low rates of tax.
The arrangement with the Irish revenue authority dates to a 1991 tax ruling, replaced by another in 2007. Such rulings are essentially letters of comfort to provide clarity on tax questions to a business. Although they are usually kept confidential, the Apple letters came to light after EU officials delved into the work of a US Senate subcommittee.
What is the main issue here?
At issue in the EU inquiry is the favourable tax treatment in Dublin of two Apple subsidiaries and whether the advantages they received were available to any other business.
- One subsidiary is Apple Sales International (ASI). It was structured so that all the profits on the sale of the iPhone and other Apple products in Europe, the Middle East, Africa and India were recorded in Ireland. The other subsidiary is Apple Operations Europe, which manufactured certain computer lines.
- When it came to tax, each operated in much the same way. The rulings of 1991 and 2007 meant that almost all profit was allocated to a “head office” which had no employees or premises and existed only on paper.
- The particular advantage of the structure was that the head office was considered “stateless” for tax purposes, with no tax to be paid anywhere on profits attributed to it.
- Apple Sales International (ASI) recorded a €16bn profit in 2011. All but €50m of the profit was allocated to the head office, and Apple paid €10m tax in Dublin on that. The tax rate on the €16bn profit was in effect 0.05% in 2011 and the rate in effect declined to 0.005% in 2014 even as profits grew.
- This arrangement allowed an “artificial” allocation of profit to enable Apple, in defiance of EU law, to pay substantially less tax than other companies.
Implications for Apple:
For Apple, the implications of the decision go well beyond taxes due to Ireland. The commission also declared open season for tax collectors across Europe to relook at how Apple’s business activities are treated. The scramble to retax Apple may have only just begun.
- Once the ruling is published, other European authorities may look at the investigation and see whether Apple was right to record most of its non-US sales profits in Ireland, rather than the country where sales were booked.
- If they conclude that Apple should have recorded its sales in those countries instead of Ireland, they could require Apple to pay more tax locally. That would reduce the amount to be paid back to Ireland.
- It may also increase Apple’s overall bill. If France (with a corporate tax rate of up to 33%), Sweden (22%) or Germany (about 30%) decide that sales were actually executed in their jurisdictions, Apple may face a worse bill than Ireland’s levy.
How this will affect Ireland?
In the first instance, Ireland would be expected to review all its tax rulings to ensure EU compliance.
If the commission’s decision is not overturned on appeal, then Ireland will have to recalculate years of back taxes and send Apple a large bill. That will boost Ireland’s public purse, but in the longer term it may damage its reputation as one of the most attractive places for multinational companies such as Facebook and Google to locate their operations.
Will Ireland cease to be a tax haven for multinationals?
Ireland has been under pressure to ditch its most aggressive tax deals for multinationals for many years. Pressure comes not just from other European countries, but also from the US, where Ireland has been heavily criticised for helping big businesses hoard profits offshore, beyond the reach of the US tax authorities. The so-called “double Irish” tax structure, which has been used by Google, Facebook, Microsoft and Apple, is being phased out. However, Ireland has made sure it has other replacement tax breaks to keep multinationals from moving elsewhere.
What else made Ireland attractive for multinationals like Apple?
The state of corporate tax regulations in developed economies is the main reason here. Take the US, for instance. Its excessively high corporate tax rate and thicket of mitigatory provisions such as deferral (US firms don’t have to pay tax on foreign income until it is brought back home) and check-the-box (US multinationals can designate foreign subsidiaries as being disregarded for tax purposes) incentivize companies to funnel revenues elsewhere. And countries like Ireland welcome them with tax regimes that are the equivalent of a wink and a nudge.
The decision, made by the European Commission’s competition department, is hugely controversial. Apple will appeal and Ireland is likely to do so too, although it will have to recover the money from Apple in the interim period anyway—probably holding it in escrow.
Brussels has set a precedent that could ensnare other multinationals relying on similar tax rulings. The decision sets EU law, even while the appeal is pending. In other words, it clearly establishes that any tax ruling allocating profits to a non-existent entity is a form of illegal state aid.