Thursday 27 October 2016

Apple ruling shows we made far too many enemies with our 'clever' tax tricks

Published 01/09/2016 | 02:30

Ceo Tim Cook launches Apple Pay in 2014: ‘If Apple pays the €13bn or more, it will be able to claim a tax credit in the US’
Ceo Tim Cook launches Apple Pay in 2014: ‘If Apple pays the €13bn or more, it will be able to claim a tax credit in the US’

There is an easy tendency to present the €13bn Apple tax ruling from the European Commission as a transatlantic battle between the US and the EU, with little Ireland caught in the crossfire.

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It may become that from here on, but Ireland Inc firmly put itself in the line of fire a long time ago with the tax structures for multinationals that it decided, not only to tolerate, but to construct and market abroad.

Yet, was Ireland's tax arrangement with Apple legal, above board and in compliance with all laws at the time? It most likely was and that is why the Irish government has a duty to appeal the finding.

At the heart of the European Commission's ruling is the idea that the corporate structure put in place by Apple in 1991 and renewed in 2007 "had no factual or economic justification". In other words it did not reflect economic reality.

The EC is not empowered to make a decision or ruling on whether a particular piece of tax avoidance, designed in 1991, represented economic reality or was simply an artificial construct. Those are decisions for the Irish Revenue Commissioners to make.

The EC is failing to acknowledge with this judgement, the powers of sovereign states and their tax authorities to make findings on these issues. It has overstepped the mark.

But there is a slight problem. To most people, the arrangements put together by Apple, or in fact by very wealthy international tax advisers in Ireland as well as in the US, don't appear to reflect economic reality.

Apple managed to avoid paying tax anywhere on the profits of almost its entire EU iPhone sales according to the EC. It did this by recording those profits in an Irish-registered head office company, that had no employees, wasn't controlled in Ireland and wasn't registered to pay tax anywhere. Yet, our government and tax authorities felt that was OK?

Michael Noonan oversimplified it during the week when he questioned how an iPhone that was designed in California and made in China should rack up taxes in Ireland. The answer is because the company that made the profit from the sale of the iPhone to customers is an Irish company. But one that was not tax resident here or anywhere.

This corporate structure became a broad template for many other multinationals locating their European headquarters in Ireland. It used what was euphemistically known as the "Double Irish" tax structure.

Channelling profits from sales elsewhere through Ireland and eventually on to Bermuda, Cayman Islands or wherever, has been a staple of foreign direct investment.

In Ireland we didn't care because we got the jobs and it complied with tax law. And we really did need those jobs. However, it was through the use of very aggressive tax avoidance measures, conjured up by and flogged around the world by highly paid Irish tax experts, that we simply went too far.

Ireland was prepared to forgo possible Corporation Taxes, in return for high quality employment. The problem was that billions in US corporate profits were not being taxed anywhere. This meant we were facilitating a loss of tax revenues in other jurisdictions. We made too many enemies.

It also gave US multinationals using these structures a financial advantage over the likes of EU multinationals that didn't apply them.

This has annoyed our EU "partners". The $1.7 trillion of untaxed profits held offshore by US corporations has also annoyed the US political establishment. We haven't broken any laws and Michael Noonan's assertion that it didn't constitute illegal state aid may well be right and borne out by an appeal in the European courts.

But the question of fairness is quite different to the question of legality. We have been a major hub of global corporate tax avoidance. We are not alone in this by any means. The Netherlands and Luxembourg have questions to answer. What about the UK? It has the largest wealth management industry in the world which relies on its crown dependencies and overseas territories such as the Isle of Man, Jersey, the Cayman Islands and the British Virgin Islands.

Apple may have enjoyed an excellent tax efficient arrangement with Ireland but its smartphone competitor Samsung enjoys an incredible low tax regime in its home country of Korea.

In Europe, the Finnish company Nokia could hardly blame Apple's tax arrangements for its deterioration in market position. It was blown out of the water by the sheer innovation, creativity and marketing skills behind the Apple iPhone. Ireland's problem has been that we got too good at this sort of thing and believed we were being too clever. We didn't stop at the Double Irish, which at times was accompanied by real jobs created in Ireland in parallel to an efficient low tax arrangement.

Tax advisers have been successfully lobbying Irish politicians to sanction ever-more innovative corporate structures under the guise of attracting investment and creating jobs.

These have ultimately done more damage to Ireland's reputation than good to its economy.

It was the obscenity of inversions, where giant corporations took over smaller ones registered in Ireland to save billions in tax, which drew President Obama's attention, when he called us a tax haven.

We have had tens, if not hundreds, of billions of euro worth "inversion mergers" located in Ireland which have created just a handful of jobs for solicitors and tax advisers. When pressure came on Ireland arising from the Apple deal, Michael Noonan was able to abolish the Double Irish with a stroke of a pen in a Finance Bill. Ironically, the global tax arrangements of multinationals are set to become more transparent and fairer. New international rules co-ordinated under an OECD initiative will go a long way towards ensuring corporations pay closer to their fair share. Even the tax arrangements that underpinned the Apple inquiry have already been dismantled. Instead of this scaring off Apple from Ireland, it has prompted the tech giant to locate more intellectual property here, pay more Corporation Tax here and it has announced massive future investment. Perhaps this is simply because they owe us big time.

The EC's decision is purely historical and retrospective and does not reflect Apple's current corporate and tax structure. The fact that the EC invited other jurisdictions to have a go and claim some of the €13bn in back taxes showed the extent to which it really was gunning for Ireland as much as Apple.

The US needs to change its own archaic corporate tax structure otherwise its global businesses will be incentivised to hold overseas earnings abroad. They only pay US tax on these overseas profits when the money is brought home.

If Apple pays the €13bn or more, it will be able to claim a tax credit in the US. This will reduce America's tax take from Apple even further.

Ireland's reputation has been damaged in the eyes of governments and the public on both sides of the Atlantic. US Corporations won't care a jot. They will love us for it and continue to love us if we launch an appeal. They would be spooked if we didn't.

The jig is up anyway on many of the opaque and shambolic tax structures used by corporations across many countries.

The EC has been waiting on this one for a long time. Even if there is a successful appeal, politicians in places like Berlin, Paris and Helsinki have, through the EC, made their point.

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