Following the publication on Tuesday by the European Commission of its initial findings of its state aid probe of Ireland's tax deals with Apple Inc. in 1991 and 2007, there has been speculation that the US electronics giant could be forced to pay Ireland billions of euros in tax covering the past ten years. However, as per the chart above from the Commission's document, the tax implications in respect of an adverse findings relating to Irish branches of Apple Operations Europe and Apple Sales International would not be significant - - but an extension of the investigation to beyond the Irish branch transactions could result in big claims from other countries.
In 2011 the combined turnover of the Irish branches was €620m-€680m with taxable profits of €60m-€80m and tax paid of €2m-€20m - - a multiple based on what should be charged would not be material.
However, in 2011 ASI, an Irish offshore company, paid $10m in taxes on $22bn in income at a tax rate of 0.05%, according to the US Senate Permanent Subcommittee on Investigations.
The Commission has sought information on financial accounts, cost sharing and intellectual property and this is where the relevance to other jurisdictions arises.
Last March The Australian Financial Review reported that "Apple...shifted an estimated A$8.9bn in untaxed profits from its Australian operations to a tax haven structure in Ireland in the last decade...Last year Apple reported pretax earnings in Australia of only $88.5m after it sent an estimated $2bn of income from its Australian sales to Ireland via Singapore, where Apple negotiated a secret tax deal in 2009."
In 2012 an estimated A$2.3bn (€1.6bn at current rate) was diverted tax-free to Apple Sales International.
Apple Inc.'s subsidiary Apple Pty Ltd sells the firm's products and it is a highly profitable operation.
Apple has a world price for the iPhone, but there are variations and the price of the new iPhone 6 (ex-sales tax) is 9% higher than the US market price.
Apple Pty Ltd has annual revenues of about A$5bn, transfers about A$2bn to the Irish company Apple Sales International to cover a charge for "intangibles" and reports a net margin of less than 2%.
The Australian Tax Office (ATO) thinks the level of the transfers to ASI is a scam and it has been aggressively investigating eight e-commerce firms since 2013. It has sought information from clients such as banks, retailers and telcos to test claims made by the companies.
The Australian Financial Review reports that the ATO is expected to put its staff members permanently in the offices of companies such as Apple and Google and it is also expected to issue new assessments for several of the eight e-commerce companies by early 2015, covering the past four tax years.
Complaints that have been made to the US Treasury by companies have had no impact as the government strongly supports the ATO.
In summary, Apple's foreign sales net profit margin in 2012 was 39% but in Australia, it was less than 2% as was the total foreign tax rate, which applied to 61% of global revenues of $157bn.
Apple has said “The foreign provision for income taxes is based on foreign pre-tax earnings of $30.5bn, $36.8bn and $24.0bn in 2013, 2012 and 2011, respectively.”
See foreign rates over past decade here.
Apple’s global profit per employee before tax in 2012 was one of the highest in the world for a listed company at $725,000.
How could Apple achieve a foreign rate of 1.9% in 2012 when the effective corporate tax rates in the big foreign markets where it operated was in the 20s?
The Senate panel said that ASI also claims to have no tax residency in any jurisdiction, "despite receiving over a four year period from 2009 to 2012, sales income from Apple affiliates totaling $74bn," while "the principal Irish subsidiary Apple Operations International's (AOI) net income made up 30% of Apple’s total worldwide net profits from 2009-2011, yet Apple also disclosed to the Subcommittee that AOI did not pay any corporate income tax to any national government during that period (it did pay taxes in Ireland up to 2006)."
So while Australia is prepared to issue revised assessments covering the past four years, depending on the extent of the EU probe, tax jurisdictions in the big markets in Europe would be expected to claim part of any tax bonanza pie.
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