The European Competition Commission has ruled that “Ireland granted illegal tax benefits to Apple” leaving the company facing an eye-watering €13 billion (£11.1 billion) tax bill.
This selective tax treatment is considered illegal as it provides Apple a significant advantage over businesses that are subject to the same national taxation rules. Ireland must now recover the unpaid taxes in Ireland from Apple for the years 2003 to 2014. Plus interest.
In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market. This is due to Apple's decision to record all sales in Ireland rather than in the countries where the products were sold.
Tax is complicated particularly in the modern, globalised economy so understanding Apple’s tax structure in Europe may shed some light on the Commission’s decision.
Apple Inc, in the US, is the top brass, the Big Kahuna. Apple Inc owns two smaller companies based in Ireland - Apple Sales International (ASI) and Apple Operations Europe.
These Irish companies hold the rights to use Apple's IP to sell Apple products outside America under a 'cost-sharing agreement'. They make yearly payments to Apple Inc to fund research and development efforts conducted on their behalf. In 2011 these payments amounted to about $2 billion and significantly increased in 2014. These payments are deducted from the profits recorded by these two companies in Ireland each year, in line with applicable rules. So far, so good.
ASI is responsible for buying Apple products from manufacturers and selling these products in Europe, Middle East, Africa and India. Customers don’t buy their products from the shops that physically sell them, rather from ASI itself. In this way Apple recorded all sales, and the profits stemming from these sales, directly in Ireland.
And this is where it gets interesting…
Two rulings by the Irish tax authorities, in 1991 and 2007, endorsed an allocation of profits away from Ireland to a “head office” within ASI, and this "head office" was not based in any country and did not have any employees or own premises. Its activities consisted solely of occasional board meetings (a nice example of transfer pricing). Therefore, only a small percentage of ASI’s profits were taxed in Ireland.
In 2011, ASI recorded profits of $22 billion with only approximately €50 million considered taxable in Ireland, leaving nearly €16 billion of profits untaxed. As a result, ASI paid less than €10 million of corporation tax in Ireland in 2011. In subsequent years, ASI’s recorded profits continued to increase but the profits considered taxable in Ireland under the terms of the tax rulings did not.
Apple’s response has been unequivocal with CEO, Tim Cook, insisting that the company is “not a tax dodger” and declaring that the Commission’s decision is “an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process" which will ultimately “have a profound and harmful effect on investment and job creation in Europe.”
Cook’s indictment may well prove poignant as it’s been rumoured that Britain could be the big winner from this particular tax feud. Indeed this ruling is the conclusion of a two-year investigation and following landmark cases against Starbucks and Fiat and probes into Google and Facebook/
A so-called hard Brexit for Britain, going it alone and not remaining a part of the single market, would mean state aid rules would no longer constrain UK tax policy. A more favourable rate could be implemented regardless of the terms of negotiating Brexit as tax regimes are set at member state level (despite proposals for a Common Consolidate Corporate Tax Base that have been tabled since 2011). This would mean that the UK could position itself as a more attractive destination than Ireland, the Netherlands and Luxembourg, where the majority of the biggest US tech companies are headquartered, away from the growing stranglehold of state aid laws and EU Commission, which both the Irish government and the US Treasury have accused of trying to influence tax policy.
Regardless, in today’s increasing global economy, the practice of taxing profits earned in one country but reporting them in tax havens through the use of contrived corporate structures seems obsolete - surely reform and massive simplification of global tax bases is the only viable solution for the future.