Sunday 25 February 2018

Apple issue goes to the core of tax matters in Ireland

Pimp my taxes: Taoiseach Enda Kenny and Apple CEO Tim Cook in Cork this year
Pimp my taxes: Taoiseach Enda Kenny and Apple CEO Tim Cook in Cork this year
Richard Curran

Richard Curran

FROM the moment Apple CEO Tim Cook told a US Senate Committee last year that it received a "tax incentive arrangement" when coming to Ireland in 1980, an EU Commission investigation was on the cards. How could such a comment be ignored?

From an Apple point of view, Cook had chosen his words badly.

Either, they were completely precisely accurate, and Apple got an "arrangement", or he spoke too loosely and wrongly gave the impression that some kind of unique deal had been struck with the Irish tax authorities.

Bear in mind that Cook's comments came as the company disclosed that it paid tax of just 2pc on two subsidiaries that are registered in Ireland.

The key issue for the EU Commission and for the Irish Government is whether Apple's tax structure here constitutes a special deal or "arrangement", or whether it is based on a particular corporate structure that is available to anybody else who might want to do the same thing.

The Revenue Commissioners operate a system where a company can come along and propose a certain structure to the tax authorities and receive a ruling that such an approach is acceptable.

In the past, greater discretion was applied by the Revenue Commissioners to these proposals.

We will get to find out more about the precise details of the Apple set-up as the investigation progresses. But it will take somewhere between three and five years before we have a final outcome on whether the arrangement constitutes an illegal state aid.

If it does, the EU Commission may decide that it is totally historical, no longer applicable and therefore we shouldn't have to pay over any money. Alternatively, it could decide that very large sums of money are owed by the Irish State for breaching state aid rules.

If so, there is one body of legal opinion that suggests the Irish Government could probably recoup the money from Apple. We will have to wait and see on that one.

By the time that happens, many of these issues should actually be redundant. This EU Commission investigation may well be the second leg of a three-legged stool aimed at resolving the controversy around Ireland's corporate tax structures with global multinationals.

The first leg came in last October's Budget, when Noonan closed down the rule which allowed some subsidiaries of multinationals to be registered in Ireland but not actually tax- resident anywhere.

The second is the EU investigation into one case, namely Apple. The third leg could well come in this October's Budget, where some tax experts believe Noonan will change the corporate residency rules.

This would tighten up the rules about where subsidiaries are formally resident. In other words, if it is doing business here, then it is resident here.

The big question is how will multinationals react in the face of these three measures and what might it cost us.

The first measure has effectively done away with the so-called "double Irish" structure used by some companies. This reduces part of Ireland's taxation edge and could encourage some companies to look elsewhere for a structure that would give them the same result.

The corporate residency change, if it comes, could result in even more nerves among global corporations. Those that are here, would probably be given a period of three years – known as "grandfathering" – to change their structures.

This would ensure there isn't a large overnight exodus. But it would also give time for other countries, including the US, to change their tax rules. If more countries moved in tandem to tighten their rules, it would reduce the options available on where to go.

Global corporations want stability and certainty. If the tax advantages of other countries were curbed at the same time we curbed ours, then Ireland would still stack up very well as a very attractive place to register and locate these subsidiaries.

There is no doubt the Irish Government is under pressure to voluntarily make changes. The approach in Merrion Street is that it is better to move with the tide than try and fight against it.

An understanding may have been reached with the EU on this three-phased arrangement. If so, that will be the end of it and the EU will get off our backs on this issue.

We are likely to see some multi-national wobbles in the next couple of years as some corporations weigh up the implications of dismantling these tax structures. It might cost the exchequer money in the short term. Nobody can say how much.

Each corporation would have to assess its structures here, what it actually does here, and what its options are for going somewhere else.

We have one big advantage. Many multinationals availing of our tax structures actually do things here. Unlike some tax havens, they have large operations in Ireland and employ a lot of people doing real business from here. Apple employs nearly 4,000 people in Cork. That helps.

On the other hand, in the long run, there is a wider international initiative to make these companies pay more tax somewhere. The more countries that make similar moves, the more attractive Ireland will look over the long term.

But in the short term, there is isn't a lot of room for manoeuvre. Last year the State took in €37.8bn in taxes and duties. The biggest slice came from income tax which was up slightly at €17.8bn. Corporation tax was the fourth biggest earner and brought in just under €5bn. This was down slightly on the previous year.

With Ireland's interest repayments on national debt due to gobble up nearly half of all the income tax collected, even a temporary fall in the tax take from businesses is something we simply can't afford.

Sunday Indo Business

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