Apple tax ruling not a sound basis for tax policy

If Apple wasn’t the most profitable company in the world, it is likely its tax arrangements would have attracted little attention, writes Seamus Coffey.

THE European Commission’s extraordinary ruling means it believes 60% of Apple’s profits should be taxed in Ireland. Apple does have significant functions in Cork, but there is no way it contributes more than half of its profits.

Apple is hugely profitable because it designs a phone in California that is manufactured in China and branded all around the world that people want to buy. None of those activities are based in Cork.

If Apple was declaring 60% of its profits in a Caribbean island, there is no doubt the European Commission would be accusing it of using a tax haven. But yesterday the commission decided that Apple should be declaring 60% of its profit in a European island. It’s as if it wants us to be tax haven.

This decision runs counter to moves, albeit slow ones, that international organisations such as the OECD have been making to try to align company profits with their substance.

Almost all of the activity that makes Apple so profitable takes place in the US, and it is not surprising that the immediate reaction of the White House press secretary was that this is “a transfer of revenue from US taxpayers to the EU”. The research that leads to Apple’s products takes place in the US. The contracts that control their manufacture in China are negotiated in the US. And the price the company charges for its products is decided in the US. Without these key inputs, there would be no sales for the staff in Ireland to administer.

Apple tax ruling not a sound basis for tax policy

Of course, the US corporate tax regime is no shining light, and many of the current problems stem from the US tax code. If US companies were not provided with provisions that allow them to defer the payment of much of their US tax, then many of these issues would not arise in the first place.

Since Apple came to Ireland in 1980, its interaction with the Revenue Commissioners has been about determining the profit that should be attributed to the operations in Ireland.

There never was a “special 2c rate” that got a lot of reaction when first raised at the US senate, but there were parameters set down about how much of Apple’s profits would be taxed in Ireland. In the lead-up to yesterday’s announcement, it was predicted the commission’s case would be a re-examination of the arrangements put in place to assess Apple’s Irish profits. Such predictions proved to be well wide of the mark. The commission did not propose a different formula for Apple’s Irish profits; it baldly stated the profit from Apple’s sales made everywhere outside the Americas should be subject to Ireland’s 12.5% rate of corporation tax. If anyone from Revenue had approached Apple and suggested the company’s global profits were subject to Irish tax, they would have gotten short shrift, and rightly so.

It is difficult to see how the selectivity requirement that is necessary for a state aid case can be met in this instance. There was no special deal for Apple. In fact, the commission points out that the tax outcome was achieved “under specific provisions of the Irish tax law, which are no longer in force”.

The provisions of Irish tax law are enforced by the Revenue Commissioners on all companies. Maybe there were problems with the law or with the legal interpretation of it, but it must be remembered that this was a competition investigation not a tax investigation. A provision that is available to all companies cannot distort competition.

And if Apple knew this is how the provision would be interpreted, there is no way it would have put its divisions handling the logistics and administration behind the sale of its products in Ireland.

If this wasn’t the most profitable company in the world it is likely that the arrangements in place would have attracted little attention. If this was a company that had large sales but low profit margins, then the profit attributed to the Irish branches would seem generous and the tax payments more than adequate.

Apple tax ruling not a sound basis for tax policy

However, the tax payments in Ireland are being judged against the overall profits of the company. It is as if the commission has decided Apple should pay more tax in Ireland simply because it is successful. That is not a sound basis for any tax policy.

So where to from here? Regardless of what the Government does, the ruling will be appealed by Apple to the European Court of Justice.

Whether the Government itself wishes to be part of that process will have little impact on whether any of this money is ever actually paid to Ireland. But given the its importance, it is much better to be a participant than a spectator.

More on this topic

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'No doubt' many countries would claim part of Apple's €14bn in back taxes, says Donohoe     'No doubt' many countries would claim part of Apple's €14bn in back taxes, says Donohoe

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