Thursday 29 September 2016

If Apple is forced to pay billions in tax, the Government should accept

Ireland is in a vulnerable place when it comes to global tax avoidance, but silver linings beckon, writes Dan O'Brien

Published 10/04/2016 | 02:30


When small countries make international headlines it is usually for bad reasons. Last week a small North Atlantic island nation made international headlines. Revelations about the tax affairs of the prime minister of Iceland emerged from the massive Panama Papers data leak. The revelations brought his political career to an end. The saga did not reflect well on Iceland.

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Our North Atlantic island nation was also making international headlines last week because of tax avoidance matters. The issue of the amount of tax multinationals pay in Ireland garnered attention as European authorities slugged it out with their American counterparts on the issue.

Gaining even more attention last week was the entirely separate, and quite extraordinary intervention by the Obama administration aimed at scuppering an attempt by a giant US pharmaceutical firm, Pfizer, to relocate to Ireland in order to cut its tax bill.

What made the White House move so extraordinary was that it might not even have been legal. The targeting of a company, which was not breaking any laws, may not have withstood a challenge in the courts. But it was clear that Pfizer could ill-afford the years of uncertainty that such a challenge would entail. Hence it abandoned its efforts. This was the White House playing hardball.

From an Irish perspective, this is actually good news. But before examining that issue, consider why Pfizer was trying to merge with another pharma company, Allergan, which is nominally Irish.

The attempted deal was to allow the merged company to shift its formal residency to Ireland purely for profit tax purposes. That would have saved Pfizer billions of dollars in US corporation tax because the American rate is one of the highest in the world and Ireland's is one of the lowest.

If the merger had gone ahead, it would have been the largest ever tax inversion - a wheeze which allows US companies to avoid high American corporation tax rates.

While it seems likely that the practice contributed to the huge increase in Irish corporation tax revenues last year (other factors are probably contributing too), the gains are outweighed by the costs in ill will and reputational damage. That the Obama administration has moved so aggressively to kill off the Pfizer deal, and in the process signalling strongly to other companies not to use the wheeze, means that the current wave of inversions has probably been killed off too. That should come as a relief to the mandarins of Merrion St.

The same cannot be said of the entirely different tax controversy around foreign companies based in Ireland. That relates to US companies who are currently based here but appear to pay less tax on their profits than might be warranted at first sight.

Ireland and the biggest corporation in world history - Apple - are at the centre of this particular storm, as the European Commission prepares to issue its findings on whether the Irish State colluded with the tech giant to allow it to avoid tax on its international sales over decades.

The transatlantic political dynamic in this case is utterly different from that of the inversion issue. Here, Brussels is very much pitted against Washington - because the latter claims that the European Commission is using tax issues unfairly to target American companies. In this case, US companies have the backing of their own government.

At the end of last week, Margrethe Vestager, the European Commissioner in charge of the case, was in Washington meeting Barack Obama's finance minister and many others in positions of influence in the US capital. The Apple case was high on the agenda. The two sides didn't make progress on the matter. The Treasury Department issued a statement on Friday afternoon in which it "urged the European Commission to reconsider its approach".

That won't happen, and if the Commission does find that Ireland colluded with Apple, the consequences will be big, if not enormous. Given that Ireland's low profit tax has long raised hackles in some of the most powerful EU member countries, a finding against Ireland would reinforce the view that Ireland is siphoning off other EU countries' tax revenues, and being used as a Trojan horse for corporate America to boot.

An adverse finding would also damage this country's reputation around the world. It would allow the many NGOs which campaign against corporate tax avoidance to claim (whether justified or not) that Ireland is a tax haven, or, at the very least, is not being a good international citizen.

Given the way global public opinion appears to be moving, as highlighted yet again last week by the reaction to the Panamanian revelations, this is not a place a small, open economy wants to be in.

The challenge facing whoever is in government in Dublin will be daunting if the commission finds against Ireland. The outgoing administration has long said it would challenge such a finding in the EU's highest court, even if that meant appealing a finding that would have Apple hand over potentially massive back taxes to the exchequer (estimates range from a low of hundreds of millions to a high of €19bn).

Despite the populism of Sinn Fein and the viscerally anti-business stance of the hard left, the outgoing government's stated position (that it will take a legal challenge) is certainly logical. It would be very hard for the Irish state to strongly protest its innocence, as it has done consistently, and at the same time say that it would not take every measure possible to prove its innocence.

Another reason the government has said it would fight any negative decision by Brussels is because not doing so would, it believes, spook many foreign companies located here, thereby undermining Ireland's attractiveness as a place to locate multinationals' subsidiaries.

But a new administration, which may well be in place by the time the ruling is made over the next few months, would be less bound by the earlier commitment, particularly if Enda Kenny isn't taoiseach and Michael Noonan isn't finance minister.

Not challenging the finding would certainly not go down well with Apple, and it might seek to punish Ireland.

But meting out retribution would further damage the company's own reputation, particularly if any actions were big enough to be hard to attribute to commercial logic.

As for claims that not taking a challenge would undermine Ireland's attractiveness more generally, I am unconvinced. The way the wind is blowing on tax avoidance has changed globally. Companies know this well.

It would seem, when all the factors are weighed, that the Irish state should not take a challenge to such a finding and take the back taxes.

As Apple is sitting on an off-shore untaxed cash pile estimated at more than $200bn, paying even one twentieth of that to the Irish exchequer would hardly dent the firm.

It would do quite a bit for the state's finances.

Twitter: @danobrien20

Sunday Independent

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