Yet again, the Irish tax system comes under scrutiny. This time, the country might pay a big price, writes Europe Correspondent Ann Cahill.
THE European Commission’s investigation of Apple’s arrangements with Ireland could turn out to be a very simple case of this country missing out on a few million euro of a potential tax take from the multinational.
Or it could explode and become a cataclysmic issue that involves the US in a tug-of-war over exactly who is entitled to billions of euro worth of tax from one of the world’s biggest companies.
Whatever the outcome, it will hang over Ireland’s reputation as a straight dealer for at least the next 18 months, worrying foreign investors who would normally be assured that Ireland’s tax system is writ in stone and bankable.
On a political level, too, it reopens all the old combat points, leaving the country fighting a rearguard action to ensure its tax rate is not touched, that it is not seen as a dirty tax haven, and that it remains an attractive place to do business.
There are few clues in the 21-page ‘letter’ the European Commission has released as to what outcome we should expect. But it does point out breathtakingly simplistic methods the Revenue Commissioners use to arrive at arrangements that essentially deprive the State of income. It has overtones of a deal done in a pub over a pint on the back of a drip mat.
The commission notes the way the figures were arrived at was a matter of ‘reverse engineering’ to agree that one of Apple’s Irish companies would have a taxable income of around $28m-$38m — although the figure does not have any economic basis.
What amount of profit would be taxed at which rate would apparently depend on employment considerations, the letter notes. The sum charged for depreciation was not based on any accepted methodology either, it says. It “does not seem justified by any actual plant or machinery expenditures, but was rather the result of negotiations”.
The letter goes into some detail on why, if the sales in one company increased by 415%, its operating expenses increased by no more than 20% in the same period. These details — composed from documents including minutes of meetings between Irish officials and Apple — are in the letter the commission has just released, and which they are asking anybody interested — including the Government and Apple — to comment on.
The letter is an account of what it is investigating and why it finds some of the dealings between Ireland and Apple suspicious, specifically two companies, Apple Sales International and Apple Operations Europe.
Apple Inc, while incorporated in Ireland, has its operations based in the US and so that is where it should pay its tax.
But it only pays the 35% tax in the US when Apple brings the money into the US — and thanks to the US tax rules, a company can hold the money offshore for as long as it wants, and only has to pay tax when it is repatriated.
CURRENTLY, Apple has about $136bn off shore, and this is annoying the US Senate, which held hearings on the issue last year. While Apple Inc is incorporated in Ireland, senator Carl Levin said that it is fully American, with its board, management, and assets all based in the US — so that is where they should pay their tax, he argues.
This could yet turn out to be a very important issue for Ireland — and the US. The commission says it now wants the Irish authorities to provide it with the intellectual property details. Apple’s profits are all about intellectual property, as Seamus Coffey of University College Cork points out. You are not just buying any old phone when you buy an iPhone — you are buying a brand, the marketing, the design and the patents that are behind all that; and that is all its intellectual property.
Ireland did not seem to know which company has the intellectual property rights. But if it turned out that Apple has assigned these to an Irish company, then the commission could find that Ireland is due the tax.
But Ireland would have competition trying to collect. “It’s not Ireland that would be appealing that to the European court — the US would,” says Mr Coffey.
What exactly the commission is investigating is difficult to pin down. Officially it is state aid: Whether Ireland gave an unfair advantage to a specific company that as a result was in a better position to compete with its competitors in Ireland or elsewhere in the EU.
How precisely this was done will be forensically investigated by the commission’s experts. The central issue is of transfer-pricing — where a company moves costs and profits between their companies to offset what they might owe in tax either in Ireland or to another country where they also have a company.
“They can exaggerate the price of goods sold by a subsidiary established in a low-tax jurisdiction to a subsidiary established in a high-tax jurisdiction,” the letter states — and the higher profit would be subject to tax in the country with the lowest tax rate.
The letter notes that no transfer-pricing report was provided by the Irish authorities to support their calculation of taxable profits for Apple.
The judicious use of transfer-pricing by Irish-based companies irritates countries like France and Germany in particular, and has given rise to much of the pressure Dublin comes under regarding the corporation tax rate and structure.
Ireland is not the only place where these arrangements occur but the allocation of profit must be according to the “arm’s length principle” as set out in the OECD model tax convention.
But as tax expert Peter Vale at Grant Thornton says: “What muddies the water is that Ireland had no general transfer-pricing legislation in place at the time. This is likely to make it more difficult for the commission to prove that state aid rules were breached.”
Normally, an investigation looks at comparable companies and sees if they got the same kind of tax breaks — and if they didn’t then it was unfair. But in Apple’s case, the commission will not look at peers but will use the OECD guidelines on making such a judgment.
Mr Coffey sees a difficulty in this, too, since Ireland’s tax arrangement with Apple goes back to 1991, but the OECD code is new. “The rules were different in 1991 — saying it does not comply with the recent OECD code is not a good basis for judging this,” he says.
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