Friday 21 October 2016

Europe wants to get to the core of our Apple issue

Published 25/10/2015 | 02:30

'In truth there is so much hypocrisy about international tax avoidance that reputational damage on an Apple ruling won't matter that much'
'In truth there is so much hypocrisy about international tax avoidance that reputational damage on an Apple ruling won't matter that much'

The European Commission looks highly likely to make a finding against Ireland in relation to its tax arrangements with Apple, following two similar findings during the week involving Starbucks and Fiat.

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It is perplexing that the EC doesn't just come out and make the announcement. The delay is leading to some intrigue and speculation about how things will go.

Is the Ireland/Apple case more complex than that of Starbucks and Fiat? It certainly seems to be bigger and involves a lot more money. Starbucks and Fiat will each have to make up to €30m in tax repayments on the grounds they had received "selective" benefits from tax deals.

The Apple case involves one of the biggest companies in the world and what could be much larger sums of money. The Apple case is about tax decisions between the State and Apple Inc, dating from 1991 and 2007, about the tax treatment of a particular international corporate structure.

Luxembourg delivers letters of comfort to certain companies about how their tax arrangements will be treated, but Ireland has argued that no such legally binding letters are used here.

The Irish defence might even appear to be strong on technical legal grounds - but it is interesting how the cases announced last week move beyond technicality and into the spirit of the legislation.

If a finding is made against Ireland it won't necessarily lead to billions of unpaid tax arriving into our exchequer funds.

Any tax that has to be paid in Ireland will create tax credits elsewhere - and therefore end up costing some other exchequer, most likely the US. This would not play well across the Atlantic.

Some tax experts argue that a negative finding against Ireland will not be a terrible outcome. They point to the fact that the Apple tax structure is now largely historical.

Apple had an Irish-registered subsidiary with billions of euro passing through it, yet was not actually tax resident anywhere. Michael Noonan has implemented legislative changes which have brought these arrangements to an end. It seems everybody has to be resident somewhere from now on.

However, there is another matter. Each of these investigations may be different but they share a wider common thread. They involve international corporate structures aimed at tax avoidance, and governments around the world are getting more and more uneasy about this.

So too are the companies, who wonder how far the EC might go in any future probes. They want to know if they too might get caught in the tax avoidance crossfire.

All of these investigations involve subsidiaries of large multinationals buying products (or services, or paying to use intellectual properties) from another subsidiary of the same corporation registered in a different jurisdiction.

In international business some of these arrangements are necessary, inevitable and reflect real commerce across boundaries. But they are coming under increasing scrutiny, especially where the real commerce underpinning them looks a little thin. The very nature of cross-border transactions within large corporations is under the spotlight.

New initiatives will at least see greater disclosure by multinationals of their business activities in different countries. This is a positive first step. We don't know what will follow.

Michael Noonan has gone a long way towards shifting Ireland's image from being one of the bad boys down the back of the bus, to one who sits up the front in clear view. Do we still have something to hide?

The repositioning may not be enough. In truth there is so much hypocrisy about international tax avoidance that reputational damage on an Apple ruling won't matter that much. The big issue is whether we will lose some of our foreign investment.

Across Europe there are still many influential people who are deeply unhappy about practically every aspect of our corporate tax regime, from the 12.5pc to the double Irish and reversions, where one foreign company acquires an Irish registered company to reduce its tax bill.

We are heading towards a change which will not allow us to do some of our tax "rinky dinks" of the past. It will cost us in some areas, but as long as everybody else plays by the new rules, we might not do as badly as we originally feared.

Getting these companies to pay more tax, perhaps in Ireland as well as elsewhere, while not losing their investment here, is the ultimate goal.

If the Government can pull that off, it will have achieved something.

Nervous regulators must be kept happy at all costs

The troubles at insurer FBD may not be over, but we got a fresh glimpse of just how bad they have been in recent months.

Chief executive Fiona Muldoon told shareholders at the company's EGM that FBD had been in a "distressed" state and the Regulator was "getting nervous" about the company before its €70m bond deal to bolster its balance sheet.

FBD's losses clearly showed that everything was not well. Then the sudden resignation of its chief executive Andrew Langford, also pointed towards problems. But Muldoon's comments raise questions about exactly when FBD became distressed, when the Regulator became nervous, and just how nervous. It also raises questions of what the board knew about this situation and how quickly did it act.

Presumably FBD's troubles didn't just happen overnight, 24 hours before Andrew Langford resigned.

The "distress" has gone, thanks to the investment from Prem Watsa's Fairfax Group and now the sale of its property investments to its biggest shareholder Farm Business Developments.

Challenges remain. The Central Bank appears to be giving insurers a carte blanche to hike premiums as much as they want to bolster balance sheets. That will help FBD - but its loyal farmer customer base will take that hit through higher premiums. This is after the farmer-owned Farm Business Developments came to the rescue by buying FBD's Spanish and Irish property interests.

We have the tax, now we need to find the oil

Exploration companies might not be too happy about Michael Noonan's decision in the Finance Bill to increase the tax take from future oil and gas finds to up to 55pc.

At least the industry knew it was coming as it had been signalled last year. Exploration companies have argued that higher tax rates would deter investment. And it may well do over time, but the recent licensing round would suggest otherwise.

The State got 43 applications for licences in September - its highest ever number - despite participants knowing a tax hike was coming down the tracks.

Of course the debate about giving our natural resources away too cheaply will be completely redundant unless someone actually finds some oil.

Comparisons with Norway are made where the regime is tougher in terms of the tax take. But the Government indemnifies the cost of unsuccessful drilling. Plus, unlike Norway, we haven't had a single major oil discovery yet, despite some successes in gas.

Exploration companies are already grappling with the consequences of an oil price collapse and would argue that at least the tax rate gives certainty for them to make risk/reward calculations on future drilling.

But don't expect too much activity in Irish waters until oil goes back up to the $80 to $100 a barrel zone. And there is no sign of that happening any time soon.

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