Ireland's defence of Apple in EU state aid tax case is a sham
The news that the European Commission's competition unit has requested more information on Apple Inc.'s special tax arrangements with Ireland means that the ongoing state aid investigation will not be concluded until 2016. Ireland would gain billions of euros from an adverse finding but the Irish Government says it would appeal such a ruling to the European Court of Justice — this is what Americans would call political Kabuki, evoking the classical Japanese dance-drama. However, in deference to the people of Japan, Kabuki has substance behind the elaborate moves.
The indignant lawyer proclaiming a corporate or celebrity client's innocence to the media and promising to vigourously fight charges, is familiar as is the subsequent plea bargain or jury verdict of guilty.
“If it’s adverse," Michael Noonan, finance minister, said in 2014 in response to the Commission's investigation. "We think it’s based on very thin legal grounds and we’ll have it before the European Court of Justice" — note here he is referring to legal issues about state aid not denying special deals as he and other ministers did in 2013.
Ireland stands to gain about $6bn in back taxes if the Commission demands that Apple pay Ireland 3 years of underpaid taxes or $19bn if Apple has to pay 10 years in underpaid taxes according to JP Morgan Chase — the irony of this is that the payments would be due to Ireland because Apple siphoned off profits from other countries — it's a form of theft!
Beyond the sophistry of the case, the facts are clear: Apple had a special or unusual 1991 arrangement through a tax ruling with the Irish authorities to keep its effective Irish tax rate at a very low level. In 2006 Apple established an investment company, Braeburn Capital, in Reno, Nevada. In the same year Apple began discussions with the Irish authorities on a new tax ruling and the electronics giant declared its Irish offshore companies "stateless" for tax purposes — not tax resident anywhere. Apple Operations International (AOI), Apple's principal Irish offshore/ shell subsidiary, formerly known as Apple Computer Inc. Limited, was incorporated in 1980 with an address at the Cork, Ireland campus. It both paid taxes in Ireland and published audited accounts in Ireland until 2006 — there had been apparently no objection from the Irish authorities to Apple's bizarre claim that its Irish companies had no obligation to pay taxes anywhere after 2006. The distinction between an offshore shell company and an inshore company was also blurred by Apple and it booked a number of low value transactions in the shell companies and paid tax on them.
The Irish Revenue issued Apple with a new tax ruling in 2007.
The US Senate Permanent Subcommittee on Investigations said in a report in May 2013 (linked to in Finfacts article above) in 2013:
Apple told the Subcommittee that, for many years, Ireland has provided Apple affiliates with a special tax rate that is substantially below its already relatively low statutory rate of 12%. Apple told the Subcommittee that it had obtained this special rate through negotiations with the Irish government. According to Apple, for the last ten years, this special corporate income tax rate has been 2% or less: "Since the early 1990s, 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." The rate has varied from year to year, but since 2003 has been 2% or less. Other information provided by Apple indicates that the Irish tax rate assessed on Apple affiliates has recently been substantially below 2%. For example, Apple told the Subcommittee that, for the three year period from 2009 to 2011, ASI paid an Irish corporate income tax rate that was consistently below far below 1% and, in 2011, was as low as five-hundreds of one per cent (0.05%).
Note here how Enda Kenny, taoiseach, responds below 1) with a defence of the official corporation tax rate of 12.5% when the issue raised by the US Senate committee is the effective rate i.e. the tax paid or provided for as a ratio of taxable income 2) he complains about using profits shifted to Irish shell or offshore companies in determining the effective rate. Ireland's Department of Finance also called the recognition of profits shifted to Irish offshore companies as a "flawed premise" and commissioned a report that suggested several effective corporate tax rates for Ireland.
Ireland does not —I will repeat — does not do special tax rate deals with companies, we don't have any special extra-low corporate tax rate for multinational companies.
Reports of a lower effective tax rate appear to arrive at their figures by lumping together the profits earned by companies in Ireland and other jurisdictions and incorrectly suggests that the Irish tax does, or should, apply to both.
Five months later his government and in particular the Department of Finance that claimed a "flawed premise" at the request of the politicians, announced that the "stateless" loophole , which was used by Apple would be abolished from 1 Jan, 2015 and the Double Irish tax dodge where Irish shell companies with addresses in Ireland and locations such as lawyers' office in places like Bermuda, would be phased out by 2020.
Claims made by Kenny and ministers that Ireland's corporate tax system was “statutory based,” “ethically implemented,” "rules-based," and transparent were contradicted by the evidence
In May 2013 when the Irish Government instructed the Irish ambassador in Washington DC to write a letter to the ranking senators of the US Senate Permanent Subcommittee on Investigations, senators Carl Levin and John McCain, rejecting their claim that Ireland was a tax haven, there was a curt reply:
Most reasonable people would agree that negotiating special tax arrangements that allow companies to pay little or no income tax meets a common-sense definition of a tax haven.
European Commission preliminary ruling
In September 2014 the European Commission in a preliminary ruling said citing minutes of a meeting with Apple, that Irish officials in 1990/91 had "reverse-engineered so as to arrive at a taxable income of around $28m-$38m, even though according to the [note of the tax meeting] the figure of $28m-$38m does not have any economic basis.”
It added that the drop in margin to 20%, according to the note, “would have been motivated by employment considerations, which is not a reasoning based on the arm’s length principle”.
The arrangement remained in effect until the 2007 ruling despite the huge change in both Apple's business and the digital technology market over 15 years. The Commission said that typically such rulings applied for 3 to 5 years.
In respect of the 2007 ruling, the Commission said that a mark-up of 8-18% was agreed, a range that it said was termed as “meaningless in relation to the computer industry” in the minutes of the 1991 meeting. It also notes that "the profit allocation to the ASI (Apple Sales International) Irish branch, agreed in the 2007 ruling, does not factor in the evolution of sales. In fact...the sales income of ASI increased by 415% over the three years 2009-2012 to $63.9bn. For the same period, the operating costs as reflected by the taxable income (which represents around [8-18]% of operating costs of the branch according to the ruling of 2007) increased by [10-20]%."
The Commission finding says:
The Commission is of the opinion that through [tax rulings in 1991 and 2007] the Irish authorities confer an advantage on Apple . . . that advantage is also granted in a selective manner... “at this stage, the Commission has no indication that the contested measure can be considered compatible with the internal market.
It cannot be a surprise to most Irish people that ministers and officials would do their outmost to bend the rules to accommodate an American company like Apple compared what it would do for a typical indigenous SME — the directors of such a small firm would risk imprisonment if they took advantage of the type of tax dodges that were available to a company like Apple.
Does the Irish Revenue audit companies such as google and Microsoft?
The European Commission has asked the Irish Government to "provide the number of full time equivalent employees (hereinafter “FTE”) of ASI (Apple Sales International) and of AOE (Apple Operations Europe) over the same period (each end of reporting period). Provide the FTE of the Irish branch of ASI and of AOE for the same period (each end of accounting period)."
These offshore companies are mainly used for tax avoidance/ evasion and generally do not exist in a real world sense or have any staff. Apple uses its Cork address to give the impression that its Irish offshore shell companies are typical Irish onshore companies.
Michael Noonan, finance minister, told the Dáil in 2013 that the Irish authorities haven't a clue as to how many of these entities exist.
Apple's Irish windfall thanks to US Senate
Apple's foreign tax rate has increased from 2% in 2012 to 6% in 2015 and the provision for foreign taxes rose $1.5bn from 2014 — the Irish Government would not have challenged Apple on its tax arrangements and it appears that it was Apple who sought an adjustment in the tax ruling after 15 years. Most of the rise in the 2015 tax provision was likely paid to Ireland and that is due to the work of the US Senate Permanent Subcommittee on Investigations.
The threat by the Irish Government to bring the case to the Court of Justice is grandstanding to placate Apple.
Luca Maestri, Apple's CFO, told the FT after the European Commission's preliminary hearing:
When we were having those discussions they were exclusively to have a very firm understanding of how we would be taxed. We’ve always been very transparent with the Irish government that we wanted to be a good corporate citizen. Over the years we have grown our presence in Ireland.
Apple said in a statement:
Apple has received no selective treatment from Irish officials over the years. We’re subject to the same tax laws as the countless other companies who do business in Ireland. Since the iPhone launched in 2007, our tax payments in Ireland and around the world have increased tenfold. To continue that growth and the benefits it brings to the communities where we work and live, we believe comprehensive corporate tax reform is badly needed.
A "good corporate citizen" with a global tax rate of 2% in 2012 on the profit of 60% of your revenues? As for the claim of no selective treatment from Irish officials, that is likely correct but it doesn't excuse massive tax avoidance by Apple and other giant companies.
Apple Sales International had revenues of over $63.9bn in the fiscal 2012 year, according to a US Senate report. It declared taxable income in Ireland of just €40-€50m for that year, and paid less than €10m in Irish tax.
This is Apple's idea of "good corporate citizen" cited by The Wall Street Journal:
Take a consumer who walks into the Apple Store in Munich to buy an unlocked iPhone. That roughly €500 ($629) goes to Apple Retail Germany GmbH, which pulled in revenue of €268 million ($337 million) for the year ended Sept. 2012, according to a corporate filing. But Apple Retail Germany doesn’t pocket the money. It in turn paid €205 million for goods in 2012, and actually posted a €18 million loss after staffing and other costs, the filing says. Instead, much if not all of that revenue appears to go to Apple Sales International, which buys the Apple products, like that new iPhone, from contract manufacturers in China, and resells them to retail outlets, according to the European Commission's report to the Irish Government in September 2014 — Official Journal from Page 22.
Ireland will likely get more windfalls thanks to the European Commission but the Government wants to show Apple it is defending its interest.
It's well to make use of the windfalls because the racket of engineering losses in the biggest markets such as Apple is doing and as Facebook did in the UK in 2014 when it also manufactured losses is not going to last — Ireland wanted EU solidarity on bank support but depending on siphoning off tax revenues from other countries, is cheating that could not last forever.
Irish political leaders and policy makers find it more convenient to facilitate foreign firms than address the poor indigenous performance over the past half-century. The first step would be to understand what the term "strategy" really means:
Image on top: Pixabay