Apple Finds Out It Took the Tax Game Too Far 37 Aug 30, 2016 10:43 AM EDT By Justin Fox You want your multinational corporation to be seen as a good corporate citizen. But you also feel obliged to your company’s shareholders to keep it from paying a cent more in taxes than it is required to. So what’s the dividing line beyond which responsible tax management turns into poor citizenship? Well, for the moment it appears to be somewhere between this: Apple set up their sales operations in Europe in such a way that customers were contractually buying products from Apple Sales International in Ireland rather than from the shops that physically sold the products to customers. In this way Apple recorded all sales, and the profits stemming from these sales, directly in Ireland. And this: Under the agreed method, most profits were internally allocated away from Ireland to a "head office" within Apple Sales International. 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. Only a fraction of the profits of Apple Sales International were allocated to its Irish branch and subject to tax in Ireland. The remaining vast majority of profits were allocated to the "head office", where they remained untaxed. Those passages are both from the news release issued Tuesday by the European Commission announcing that it was ordering Apple to pay 13 billion euros ($14.5 billion) in back taxes plus interest. The decision will surely be fought over for a while yet; U.S. officials have already been complaining that the European Union is unfairly targeting American companies in its tax crackdown. But it seems pretty clear that the devices used by U.S. tech giants to shift their European income not just to low-tax jurisdictions but to nonexistent ones are proving to be a step too far. As a single market with a lot of different tax systems, Europe already provided ample opportunity for corporations with operations in multiple countries to reduce their taxes. The initial setup described above shifted Apple’s income from big, relatively high-tax markets such as France (33.3 percent corporate tax rate) and Germany (a 15 percent official rate with a bunch of surcharges and municipal taxes that bring the effective rate somewhere between 30 percent and 33 percent) to low-tax Ireland (12.5 percent). But that wasn’t enough for Apple and other U.S. multinationals. Google famously used something called a “Double Irish” with a “Dutch Sandwich” to reduce its overseas tax rate to 2.4 percent. Starbucks avoided corporate income tax in the U.K. for several years by paying royalties to a Dutch subsidiary, buying coffee beans in Switzerland and other tactics. This “stateless income,” University of Southern California law professor Edward D. Kleinbard argued in a 2011 article, was becoming a “pervasive presence” that “changes everything” about corporate taxes. Since then, the Organization for Economic Cooperation and Development (the club of the world’s wealthy nations) has started a “base erosion and profit shifting” project meant to curtail such practices. And the EU and individual European countries have been using various tactics to get companies to pay up. A big hurdle in collecting back taxes is that the past tax avoidance was generally allowed by the letter of European countries’ various laws. And so in Apple’s case, the EU’s charge is that Ireland gave it a sweetheart deal that it did not offer to other companies. It’s an alleged violation of EU competition rules, not strictly a tax case. Still, I do think there’s a lesson in it for corporate executives deciding how far to push their tax avoidance. When the corporate structures you devise cross the line from frugality into utter absurdity -- and a “head office” with no employees or premises is pretty absurd -- you are asking for trouble. Or, to put it another way, when tax planning transmutes your corporation into a citizen of no country at all, you're not being a good corporate citizen.
We may lose the appeal in the Apple case, if we proceed and appeal. The Irish Government today delayed a decision on whether they will be appealing until they receive further legal clarification. Win or lose the appeal, I can guarantee you one thing. Ireland will not be leaving the EU any time soon.
No, I'm sure you're right, Ireland is a big EU fan and fair enough. But I could see a situation where tables are turned between Ireland and the UK, where Ireland is forced to apply a common Euro corporate tax rate, and the UK undercuts them and takes MNC head offices, pretty much like Switzerland has done with all taxes historically. As Stroller said earlier, it's not necessarily healthy that the UK is in the tax haven business, and it will depend on the terms of Brexit. Possibly a bargaining chip for the UK in its efforts to stay in the single market without free movement of workers.
It seems to me that Apple might be able to hide behind the skirts of the Irish government on this one. They are the people who set the tax rate and decided to accept tax based purely on Irish sales and not elsewhere. Apple may have been morally wrong (and I think so) but it's the Irish government who facilitated it. The only EU regulation that has been broken relates to the favourable treatment Apple got from the Irish government which was not equally made available to other companies. Might some of those companies be taking Ireland to court over this in the near future? What a mess.
According to what I'm reading, Apple sold everything from Ireland - there was no turnover "in the UK" - but Ireland allowed Apple to just declare only sales to Irish customers into their Irish company accounts. That means there won't be any UK turnover to tax. I understand (and agree with) the principle of the idea you're suggesting, but it needs to measure something more bulletproof than turnover. We might be in with a better chance once we leave the single market and sales from Ireland (etc) are classed as imports. Which is fine if physical goods are being shipped in or fulfilled from UK depots, but what about all those Apps, music and films we buy or rent that are downloaded and never see a customs official? That needs covering off, too.
That is definitely not the case as Google has been found guilty of doing similar and I expect there are dozens more just like there are in every country. Why would these companies take Ireland to court for doing them a favour?
That is definitely not the case as Google has been found guilty of doing similar and I expect there are dozens more just like there are in every country. Why would these companies take Ireland to court for doing them a favour?
The loss of revenue would mean the government pushing up other taxes like VAT. Wouldn't go down well at present.
We are used to taxes increasing. As part of austerity measures, the Troika forced us to increase taxes all over the place. One more increase wouldn't make much difference.
I think it would here. There are already a number of strikes planned for the autumn. It's going to be like the 1970's
I don't understand why Apple is legally guilty of using a device agreed with and provided by the Irish government. Morally guilty 100%, but what they've done wasn't illegal in Ireland, was it? So, if the EU fines Apple, and payment is forced in some way, maybe they'd like to get that money back from somewhere... I guess I don't understand why the Irish government isn't also facing some consequences as well. Can you enlighten me?
US corporate tax rate 40% which is why their corporations try to get out of paying it, Germany nearly 30%, UKs 20% and on the any down if Hammond sticks to Georgies promises, Ireland's whatever you can get away with. I'm pretty sure the reason Apple chose Ireland is 1) cheaper taxes, 2) cheaper property, 3) well educated and cheaper workforce. In that order. Tax is a national not EU issue. Which is one of the reasons the eurozone is dysfunctional. I think the EU is out of order on this one, but not impressed with the Irish government policy. Wouldn't expect anything else from Apple and their ilk. The US reaction has been hysterical.
Largely true Stan with one exception. Our labour is not cheap. Average industrial wage is 35k euros. I think only Luxembourg is higher in the EU.
Is that for everyone or are there age limits like here? €9.15 is I think higher than ours for 25 year olds and over, but only since Brexit and impact on £. My daughter is delighted to be getting £7.30 for her Saturday job, when by rights as a 16 year old she could be offered a pathetic £3 something. Mind you in some US states the minimum wage is completely pathetic, hence the tipping culture.
Looks like I will owe you a pint if I read between the lines of May's rather unspecific sound bites correctly Col. The Times rates every member of the cabinet out of 5 for how 'hard' they are on Brexit. Only 'Dr' Fox and Priti Patel rate 5/5. May and Johnson rate 2/5. Strange to have gradations on a binary choice. Just heard John 'Mimi, it's all about me' Humphreys on the wireless on the new alleged 'Alzheimers breakthrough'. Why do the media get so carried away with this stuff? It's a phase one safety trial. The results show changes in a scan result, not in the way people function. Hopefully it goes on to deliver but the chances are slim. Lots of drugs fail in phase 2 and 3 trials. Also diagnosis relies on a PET scan which is not available to the vast majority of people in this country, and won't be without a lot of capital investment. It's all over the front page of the Times as well. All the treatments in the pipeline are aimed at people with mild disease, which means an early (very early) diagnosis is needed. Given the frequency with which I forget where things are and call my kids by my dogs name I should get myself tested. Most likely effective treatments will be a cocktail of drugs, like what has worked with HIV. Sorry to go on about this, but dementia is my greatest fear plus I have a professional interest.
