Business Irish

Monday 26 September 2016

Why Apple's €13bn isn't really ours or theirs to spend

Published 04/09/2016 | 02:30

Apple CEO Tim Cook. Photo: AP
Apple CEO Tim Cook. Photo: AP

IT will be politically very difficult to turn down €13bn plus interest that could accrue to the Irish exchequer from the Apple tax ruling. Aside from the many useful things we could do with the money, we have to ask ourselves, whose money is it anyway? Well, obviously it is Apple's. But is it?

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Under US corporate tax law multinationals do not have to pay the American revenue authorities 35pc corporation tax on these kinds of profits as long as the money is held in offshore subsidiaries.

This was an incentive to help American multinationals in the past to re-invest the money in international expansion. It is assumed by the US tax authorities that it will be brought home at some point in the future and will then incur tax.

The corporations themselves, who hold an estimated $2 trillion in overseas profits, are hanging on for as long as they can.

They are waiting for the US tax system to change so when it is finally repatriated, it will incur a lower charge. Back in 2005 the US government tried to encourage them to bring the money home by charging just 5pc tax, instead of 35pc tax, on overseas profits held through the likes of Cayman Islands subsidiaries.

Instead of using the money to stimulate investment at home, corporations which brought profits back, used them for dividends and share buybacks, which bolstered the value of shares held by executives at these companies.

US president Barack Obama suggested in 2015 that there could be a one-off 15pc tax placed on all of this overseas money regardless of whether it was taken home or not. He hasn't mentioned it since.

The Americans need to change their tax system. Apple Inc and many others are waiting to see what happens there.

The tax authority that lost out from the Apple/Ireland corporate structure could ultimately be the US.

Why should we care? It isn't like they need the money. However, if the ruling survives the appeals process, and we spend the money, the European Commission will become the foremost investigative tax authority in Europe which could crack open dozens of deals on a retrospective basis.

US multinationals might want to invest in Ireland but simply will not know what the future holds. If we lose the appeal, that may happen anyway. In which case, Ireland will have done its best to honour the commitments it entered.

The Apple Inc money never would have been booked in Ireland as a taxable profit unless the Irish Revenue Commissioners had agreed to the structure.

In that sense, the €13bn was never going to go to Ireland.

The tourism sector and regional VAT rates

Every year since Michael Noonan cut the VAT rate for the tourism and hospitality sector to 9pc, trading in the sector seems to have gone up and up. So every year, when we hear about rising room rates and profits in the hotel sector, questions are asked about whether the minister should hike it back up to 13.5pc again.

The latest figures come from the Crowe Horwath annual hotel survey which found that hotel profits are up 30pc on the back of rising hotel prices and an increase in tourist numbers.

The problem is that Dublin is booming, particularly the high end of the hotel sector. However, outside the capital, profits are rising but not as uniformly.

The average profit per room for a hotel in Dublin last year was €16,913, compared to €13,797 the year before. Revenue per available room (RevPar) was €65.52 nationally, but it was €90.25 in Dublin.

In the Midlands it was €54.73, where average profit per room is around €10,628.

So, who needs a special lower VAT incentive and who doesn't?

We have to be careful with averages. The figure for the average Dublin hotel profit or room rate combines the Four Seasons in Ballsbridge or the Shelbourne with other cheaper hotels.

But in the capital, it is becoming more difficult to get a room in any hotel at certain times of the year.

Dalata Hotel Group, the biggest hotel chain in the country has around 20pc of all the hotel rooms in Dublin. According to figures from STR Global, average revenue per room at its Dublin hotels was running at €127.56 in July, an increase of 19.4pc on a year earlier.

A room at a three star Dalata hotel in Dublin (not even in the city centre) last Friday night was €149 without breakfast. Not cheap.

Of course hoteliers will argue that prices are not so high all year round; that the lower VAT rate brought our tourism rate closer to other countries; and the net cost of the VAT reduction is more than covered by a larger spend, more jobs and more visitors.

The stark reality is that Dublin no longer needs a lower VAT rate and there is a case that the subsidy it delivers is effectively going straight into shareholder pockets.

However, the picture is not so clear cut in other parts of the country. Hotels took a huge hammering during the crash. While some have turned into little gold mines between the two canals in Dublin, it isn't true of the whole sector.

There is a real problem with putting the VAT price back up. We don't do regional VAT rates in Ireland so having one rate in Dublin and others elsewhere seems unlikely.

In Dublin, the demand for hotel rooms is so great that prices are likely to keep rising anyway. Punters would simply end up paying higher prices, which would reduce the city's competitive position at a time when things are going well.

Fewer visitors from the UK, on the back of a weaker sterling, would hit non-Dublin hotels harder than those in the capital. Dublin hotels have wider sources of revenue.

Some have even argued that putting the VAT rate back up to 13.5pc would deter new hotel builds in Dublin, which should bring the new supply to lower prices in the first place. With average annual profits of €16,913 per room, I think that is stretching it a bit.

Ryanair resumes hostilities with DAA

It was a real case of déjà vu this week as Ryanair decided to blame the Dublin Airport Authority for its decision to reduce capacity out of the airport next summer. The 3pc cut will see 1,900 fewer Ryanair flights out of Dublin.

Michael O'Leary blamed the DAA for not saying if it was renewing its growth incentive scheme. This was a three-year programme aimed at providing rebates to airlines that grow their passenger numbers out of Dublin.

But Ryanair alluded to the possible negative impact Brexit and the subsequent fall in the value of sterling could have on UK visitor numbers to Ireland next year, while also pulling capacity out of Dublin.

It raises the question of whether Ryanair knew it wouldn't grow passenger numbers next year out of Dublin anyway, which meant it wouldn't have qualified for the rebate incentives anyway.

"I'm not sure if we've topped out in terms of growth at Dublin," O'Leary said.

It is a bit of a chicken-and-egg situation around exactly what triggered the capacity cut.

It might seem better from Ryanair's point of view to blame the DAA for a capacity cut that was coming anyway.

O'Leary used another opportunity this week to accuse the airport authority of building a gold-plated runway at a cost of over €300m. Sounds like Terminal Two all over again.

Does it herald a resumption of old hostilities with the DAA or it is just fun and games? We shall have to wait and see.

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