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Competing tax values

31 October 2016 by Russell Cockburn

Competing tax values - read more

The Apple-Ireland case is the latest example of competing stances on what is considered acceptable by tax authorities

In recent months the media has frequently commented on the ruling of the European Commission that computer giant Apple owes around €13 billion to the Irish government in back taxes – although the exact amount seems unclear even now.

The ruling is essentially based on an interesting decision about the arrangements that Apple had agreed with the Irish government some years previous about the calculation of its taxable profits in Ireland. It was decided this arrangement was basically ‘illegal’ under European competition law because it represented unfair state assistance to Apple. Apple must now pay the taxes to the Irish government that it allegedly ought to have paid in the first place.

However, the Irish government does not want the taxes to be paid to it and even appears to be heading towards joining Apple in disputing the ruling in court. The prospect of a government refusing a sum so large that it potentially represents a substantial part of its annual fiscal budget might be regarded as counter-intuitive, but this is what, in essence, is happening.

The ruling raises many fascinating issues, not least of which is whether or not the ruling of the European authorities should be allowed to overrule the sovereign decisions of a member state about how it organises its tax regime, and the agreements it comes to with businesses and other taxpayers operating within its jurisdiction.

EU paramountcy

It has not been suggested (as far as I know) that these arrangements operated by Apple were anything but legal at the time under Irish law. Whether they should have been legal is perhaps a different question. What is at stake here, however, is the paramountcy of the rulings of EU authorities under various treaties agreed among member states or, whether within those treaties, member states have absolute authority to organise their individual tax regimes as they see fit.

Although the exact details of what Apple did during the years in question are byzantine to say the least, some things are clear. It appears firstly that Apple was permitted to move large chunks of its profits out of Ireland to other jurisdictions – in particular, to the US as royalty payments for the use of intellectual property rights in Ireland, thereby leaving significantly reduced taxable profits there.

Double Irish strategy

Furthermore, it also appears that the use of this ‘double Irish’ strategy also involved Apple paying much of its profits to an entity (or possibly entities) that had no real existence. Although the former is, in the opinion of many tax practitioners, a well-established part of international tax planning for many multinational corporations, and always vulnerable to challenge under each state’s domestic transfer pricing rules, the latter has raised more than a few eyebrows.

The ‘double’ element in the strategy refers to the movement of profits, arising from business effectively done by Apple in other EU states, but legally finalised and contracted in Ireland so that these profits were arguably generated in Ireland rather than elsewhere in the first place.

One might also point out that the normal rate of corporation tax that Apple faced during the years in question – i.e. if it had not operated these additional arrangements – would probably have been only a maximum of 12.5% anyway. This rate is significantly below that payable in most other EU states and far below the rate of tax it probably faced in the US. Apparently, Apple was not content with that lower rate.

The availability of this double Irish tactic was effectively ended in Ireland a couple of years ago, since when there has been no sign of Apple indicating that it might relocate its activities elsewhere – so far.

Apple employs a significant number of people in the Irish Republic and makes a presumably highly valued contribution to the domestic economy in employment taxes, wages and financial investment in and involvement with its supply chain. Its continued presence there is clearly very attractive to the Irish government, the people it employees and the businesses in that domestic supply chain.

Moving profits

The second tranche of profits extracted as mentioned above seems, however, to have gone to an entity that (if one believes the flimsy evidence that has been published in the press so far), that had no physical existence anywhere except on paper. I should mention that Apple disputes this interpretation – and this is apparently what the EU authorities found particularly unacceptable.

This is perhaps not surprising but need not necessarily be improper – and it clearly had the agreement of the Irish tax authorities at the time. Some might suggest that moving profits out of one jurisdiction in this particular manner to somewhere else, where they apparently were not to be subject to taxation at all (although again this is far from clear), smacks of something rather more adventurous than just strategic international tax planning.

However, without access to the full details of what was discussed and agreed between Apple and the Irish government at the time these arrangements were put in place, it is difficult to make anything other than some opinionated comments.

If an ordinary Irish company was to set up an entity that apparently only existed somewhere in cyberspace – and proceeded to pay its profits over to that entity, thereby removing them from the scope of Irish taxation – would this have been accepted?

Both parties have been at pains to suggest that yes, indeed it would, and that these arrangements were generally available to other companies that could have asked to use them during this period. On the other hand, it does not seem that they were in fact in general use, apart from among the other members of the large multinational business community.

To take the argument a little further, I suspect that if I were to set up such an entity that existed only on paper (if this is indeed what happened), and proceeded to pay it all my business profits out of the UK as some sort of inter-business charge for services rendered, the tax inspector might well come down on me heavily. However, if he was told by those in authority above him that this was acceptable, he would presumably accept it without further query.

Unacceptable avoidance

In essence, this is a clear example of a dispute over where the boundary between tax planning and unacceptable tax avoidance lies. If a business enters into legal arrangements for the reduction of its tax liabilities with a domestic tax authority, why should those arrangements be disturbed later on at the behest of the EU tax authorities?

There is a strong argument for saying that if this ruling is allowed to stand, it will in future be even more difficult for large companies to plan their tax affairs legitimately without first having to seek recourse to the EU tax authorities, under what would surely become an ever-increasingly complex and convoluted tax clearances regime. This cannot be in the interest of good business practice and certainty in the business world.

To set against this, many ordinary taxpayers will perhaps look askance at what went on during the years the double Irish strategy was available. They might take the view that this just was some cosy deal struck in order to attract Apple to the country in the first place.

The US government is likely to take an aggressive stance against this EU ruling; it apparently sees this as an EU attack on some of its largest companies. That in itself is an interesting stance, given that it is not so long ago that the US tax authorities themselves were publicly upset about the ‘reverse takeover’ of a very large US company by a much smaller Irish one. They viewed this as an essentially unacceptable move of head office address in order to remove taxable profits from the scope of US corporate taxation to the Irish ‘low tax’ regime.

Whatever happens, yet again we have a large company embroiled in a dispute over the organisation of its multinational tax affairs. The outcome of this case will be fascinating.

More on the Apple-Ireland case

Read about the competition law implications of the EC’s decision against Apple in ‘Widespread repercussions’.

Russell Cockburn is an independent tax consultant

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