Friday 30 September 2016

Tax ruling a body blow to jobs strategy

The EU Commission's ruling that Apple must pay Ireland €13bn in back taxes is the latest round in its long campaign against our 12.5pc company tax rate and could seriously reduce our ability to attract foreign investment, writes Dan White

Published 04/09/2016 | 02:30

Taoiseach Enda Kenny and Apple CEO Tim Cook on a visit to Apple’s Cork facility in 2014.
Taoiseach Enda Kenny and Apple CEO Tim Cook on a visit to Apple’s Cork facility in 2014.

The EU Commission's ruling on Ireland's tax affairs wasn't as bad as had been feared - it was much, much worse.

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Announcing its finding that Apple had underpaid its Irish tax by up to €13bn, Competition Commissioner Margrethe Vestager gave it to this country with both barrels.

"Member states cannot give tax benefits to selected companies - this is illegal under EU state aid rules. The Commission's investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years.

"In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1pc on its European profits in 2003 down to 0.005pc in 2014".

The Commission then went on to detail how since 1991, Apple had used two Irish-registered subsidiary companies, Apple Sales International and Apple Operations Europe, to minimise its tax bill. The Irish Revenue Commissioners issued tax rulings to Apple in 1991 and 2007 allowing these two companies to allocate their profits to a "head office" which was not subject to tax in any country.

"The Commission's investigation has shown that the tax rulings issued by Ireland endorsed an artificial internal allocation of profits within Apple Sales International and Apple Operations Europe, which has no factual or economic justification.

"As a result of the tax rulings, most sales profits of Apple Sales International were allocated to its 'head office' when this 'head office' had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter".

According to the Commission, this "head office" was not based in Ireland, or in any other country, and had no premises or staff of its own.

Evidence presented to the US Senate's Investigations Sub-Committee in 2013 revealed that Apple Sales International recorded profits of $22bn in 2011 but that it only paid tax on about $70m of those profits.

Ireland was ordered to recover €13bn in unpaid taxes, plus interest, from Apple for the years 2003 to 2014. This was much more than had been predicted by even the most pessimistic observers in this country.

Up until last week's announcement of the ruling, it had been widely expected that the Commission would order the Irish Government to recover a couple of hundred million euro, perhaps a billion at most, in back taxes from Apple.

While the Commission's ruling has been justified on competition grounds, that the alleged tax deal done with Apple constituted illegal state aid and put competitor companies at an unfair disadvantage, it's hard not to suspect that it is also the latest manifestation in its long-running campaign against Ireland's 12.5pc company tax rate.

Indeed, the Commission seemed to come close to implicitly admitting as much when it stated that:

"In fact, the tax treatment in Ireland enabled Apple to avoid taxation on almost all profits generated by sales of Apple products in the entire EU Single Market. This is due to Apple's decision to record all sales in Ireland rather than in the countries where the products were sold. This structure is however outside the remit of EU state aid control.

"If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland".

Whatever one thinks of Apple's Irish tax arrangements, and they haven't always shown this country in the best light, serious questions need to be asked about the approach adopted by the Commission in reaching its decision. It is applying today's standards to decisions made up to 25 years ago. Most of the structures that permitted Apple to do what it did, most infamously the so-called "double Irish", have since been scrapped.

Last week's ruling had its origins in the 2013 US Senate hearings which laid bare Apple's Irish tax affairs and prompted the Commission to launch its own investigation in June 2014.

Ireland has been in the Commission's crosshairs ever since the Investigation Sub-Committee's then chairman Senator Carl Levin accused Ireland of having done "a sweetheart deal" with Apple that allowed the tech giant to avoid tens of billions of euro in taxes.

These allegations of "a sweetheart" deal have been strongly denied by Apple and the Irish Government.

Both Apple and the Finance Minister Michael Noonan came out fighting following the Commission ruling.

"The European Commission has launched an effort to rewrite Apple's history in Europe, ignore Ireland's tax laws and upend the international tax system in the process. The opinion issued on August 30 alleges that Ireland gave Apple a special deal on our taxes.

"This claim has no basis in fact or in law. We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don't owe them any more than we've already paid," said Apple in a statement.

"The Commission's move is unprecedented and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been.

"This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe. Ireland has said they plan to appeal the Commission's ruling and Apple will do the same. We are confident that the Commission's order will be reversed".

Our own Mr Noonan was equally emphatic in his rejection of the Commission's ruling.

"I disagree profoundly with the Commission's decision. Our tax system is founded on the strict application of the law, as enacted by the Oireachtas, without exception".

At its meeting on Friday, the Cabinet agreed with Mr Noonan to appeal the Commission's ruling to the European Court.

"I believe that there are some very important principles at stake in this case and that a robust legal challenge before the Courts is essential to defend Ireland's interests.

"The full amount of tax was paid in this case and no state aid was provided. Ireland did not give favourable tax treatment to Apple. Ireland does not do deals with taxpayers," said Mr Noonan.

Regardless of the eventual result of any such appeal, the Commission's ruling comes against a background of growing concern at the aggressive tax-avoidance strategies pursued by many multinationals. It is not just Apple's tax affairs that have been put under the microscope.

France has slapped a €1.6bn demand for back taxes on Google, Starbucks has "voluntarily" agreed to pay more tax in the UK after the revelation that it had paid just £8.6m British tax over the previous 14 years while former UK Chancellor of the Exchequer, George Osborne, introduced a new diverted profits tax, quickly dubbed the "Google tax", in his 2015 budget.

The Google tax was quickly followed by a deal between Google and HMRC under which Google agreed to pay £130m in back taxes in the UK.

At the same time the rich countries' organisation the OECD has been introducing new global rules designed to crack down on tax avoidance by the multinationals. Its BEPS (base erosion and profit shifting) proposals were published in October 2015 and approved by the G20 leaders the following month.

The OECD estimates that "profit shifting" by multinationals is costing between $100bn and $240bn in lost tax revenue every year. Those are taxes that have to be paid by other taxpayers instead.

When it is fully implemented, BEPS will tighten up the rules on "transfer pricing", the practice by which multinationals maximise the profits of their subsidiaries in low-tax countries and minimise the profits of their subsidiaries in high-tax countries by having the subsidiary in the low-tax country bill the subsidiary in the high-tax country an artificially high amount for goods or services it has supplied.

BEPS will force companies to report on a country-by-country basis, detailing profits, sales, employee numbers and assets for each country in which they operate.

This will make it much, much more difficult for companies to "shift" profits to more fiscally-benign locations. From now on the underlying principle will be "the economic rather than the paper reality", according to the OECD.

So what implications does the Commission's ruling have for us in Ireland? Ireland is more dependent on foreign direct investment than any other EU country. There were over 187,000 people directly employed by IDA-supported companies at the end of last year with almost as many more jobs in supplier companies.

What this means is that close to 350,000 jobs, over a fifth of all private sector employment, are either directly or indirectly dependent on the multinationals.

Despite last June's Brexit vote, the IDA had been predicting that it would match its 2015 performance, when almost 19,000 new jobs were created by the multinationals and net employment at these companies increased by almost 12,000, this year.

Will the Commission ruling create uncertainly and undermine our ability to attract FDI? IDA chief executive Martin Shanahan doesn't think so.

"I don't think it creates huge uncertainty. The Government has decided to appeal. It will now be decided by the courts. We have moved on to a new stage in a process that has already gone on for three years. The Commission is saying one thing. The company and Ireland are saying something different," he says.

Clearly anything that reduces Ireland's attractiveness as a location for foreign direct investment is potentially very bad news for this country.

Ironically, Ireland has almost certainly benefited, at least so far, from the international crackdown on tax avoidance by the multinationals. Company tax revenue jumped 49pc to €6.9bn in 2015 and by a further 13pc to €3.3bn in the first seven months of this year.

This sharp rise in company tax revenue seems to have been caused by multinationals responding to the crackdown on tax avoidance by shifting some subsidiaries to politically less contentious locations such as Ireland.

But can we rely on this trend continuing?

Almost certainly not.

Regardless of the outcome of any appeal against the Commission's ruling in the Apple case, the tide of public and political opinion is now running strongly against perceived tax avoidance by the multinationals. For Ireland to be seen to be swimming against this tide is almost certainly not a good idea. The introduction of country-by-country reporting will further increase the pressure on this country.

That's not how Martin Shanahan sees it:

"I'm not disputing that there is greater awareness of this issue. I don't agree that we are on the wrong side of it. We have one of the most transparent tax systems in the world. It is written into law. The Revenue Commissioners have no discretion in how they apply it".

Shanahan also insists that Ireland's success in attracting FDI isn't just about tax.

"It is also about our talent, access to the EU market and our pro-business environment. We should not be apologetic about our competitive tax rate. All countries compete on tax. Some do it better than others"

Even so, the Commission's ruling represents a body blow to Ireland's efforts to attract foreign direct investment. Given the Commission's long-standing hostility to our 12.5pc company tax rate it almost certainly won't be the last.

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