Battle against Apple and other giants

Print edition : September 30, 2016

Margrethe Vestager, European Competition Commissioner, during a news conference in Brussels, Belgium, on Ireland’s tax dealings with Apple Inc. Photo: ERIC VIDAL/REUTERS

Apple CEO Tim Cook at the launch of the iPhone 7 in San Francisco, U.S., on September 7. Photo: Josh Edelson/AFP

Apple Sales International, Apple Inc’s facility in Cork, Ireland, which faces a tax recovery notice from the E.U. Photo: Patrick Bolger/Bloomberg

ON August 30, European Competition Commissioner Margrethe Vestager dropped a bombshell at the tax doors of the world’s leading multinational corporations. After a lengthy investigation she ruled that Ireland must recover from the local Apple subsidiary up to €13 billion ($14.5 billion) in unpaid past taxes. Adding on interest on delayed payments could take the total to as much as €19 billion ($21 billion). The ruling was based on a decision that tax benefits provided to Apple’s subsidiaries in Ireland through two tax rulings amounted to “state aid”, which was illegal under European Union rules. The penalty, though huge by past standards, is not the issue here. With as much as $230 billion in cash and liquid securities (which can be easily converted to cash) at hand, Apple would not have to stretch itself to meet this bill. The real issue is whether Apple’s tax accounting, which is considered legal by the Irish government, can be challenged by investigators acting on behalf of the European Commission. It is taken for granted by the world’s biggest companies that they can transfer profits earned anywhere to locations that are tax havens as part of their “tax planning” decisions.

The method through which this is often done is charging inflated book prices (“transfer prices”) for goods or services sold by the parent or a third country subsidiary (depending on which one is located in a country that imposes lower taxes) to the subsidiary in the country from which profits are to be transferred out. This inflates costs and reduces profits on paper in the country from which incomes are being siphoned out. The practice could mean both that the effective income tax incidence on these companies globally is less than that on smaller companies and even individuals and that some countries from where these multinationals earned profits would be deprived of tax revenues on those incomes.

These problems have been accentuated in the neoliberal era since countries pursuing neoliberal trajectories compete with each other to offer foreign investors in their economies a range of concessions, including concessions that facilitate this kind of tax avoidance, which is legal and does not constitute tax evasion.

Tax-avoidance accounting

The case of Apple’s Irish operations is an extreme example of such tax-avoidance accounting. It relates to two Apple subsidiaries, Apple Sales International (ASI) and Apple Operations Europe, based in Cork, Ireland. Apple Inc, U.S., has given the rights to ASI to use its “intellectual property” to sell and manufacture its products outside North and South America, and in return Apple Inc of the U.S. receives payments of more than $2 billion a year. The consequence of this arrangement is that any Apple product sold outside the Americas is implicitly first bought by ASI, Ireland, from different manufacturers across the globe and sold along with the intellectual property to buyers everywhere except the Americas. So, all such sales are by ASI and all profits from those sales are recorded in Ireland. Stage one is complete: incomes earned from sales in different jurisdictions outside the Americas (including India) accrue in Ireland, where tax laws are investor-friendly. What is important here is that this is not a straightforward case of exercising the “transfer pricing” weapon. The profits recorded in Ireland were large because the payment made to Apple Inc in the U.S. for the right to use its intellectual property was a fraction of the net earnings of ASI. Does this imply that Apple pays taxes, however high or low the rate, on these profits in Ireland? The European Commission found that it does not. In two rather curious rulings, first in 1991 and reiterated in 2007, the Irish tax authority allowed ASI to split its profits into two parts: one accruing to the Irish branch of Apple and another to its “head office”. That “head office” existed purely on paper, with no formal location, actual offices, employees or activities. Interestingly, this made-of-nothing head office got a lion’s share of the profits that accrued to ASI, with only a small fraction going to the Irish branch office.

According to Margrethe Vestager’s statement: “In 2011, Apple Sales International made profits of 16 billion euros. Less than 50 million euros were allocated to the Irish branch. All the rest was allocated to the ‘head office’, where they remained untaxed.” As a result, across time, Apple paid very little by way of taxes to the Irish government. The effective tax rate on its aggregate profits was short of 1 per cent. The Commissioner saw this as illegal under the European Commission’s “state aid rules”, and as amounting to aid that harms competition since it diverts investment away from other members who are unwilling to offer such special deals to companies.

In the books, however, taxes due on the “head office” profits of Apple are reportedly treated as including a component of deferred taxes. The claim is that these profits will finally have to be repatriated to the U.S. parent, where they would be taxed as per U.S. tax law. But it is well known that U.S. transnationals hold large volumes of surplus funds abroad to avoid U.S. taxation and the evidence is they take very little of it back to the home country. In fact, using the plea that it has a “permanent establishment” in Ireland and, therefore, is liable to be taxed there, and benefiting from the special deal the Irish government has offered it, Apple has accumulated large surpluses.

A study by two non-profit groups published in 2015 has argued that Apple is holding as much as $181 billion of accumulated profits outside the U.S., a record among U.S. companies. Moreover, The Washington Post reports that Apple’s Chief Executive, Tim Cook, told its columnist Jena McGregor that “the company won’t bring its international cash stockpile back to the United States to invest here until there’s a ‘fair rate’ for corporate taxation in America.”

U.S.’ concern

This has created a peculiar situation where the U.S. is expressing concern about the E.C. decision not because it disputes the conclusion about tax avoidance, but because it sees the tax revenues as due to it rather than to Ireland or any other E.U. country. U.S. Treasury Secretary Jack Lew criticised the ruling saying, “I have been concerned that it reflected an attempt to reach into the U.S. tax base to tax income that ought to be taxed in the United States.” In Europe, on the other hand, the French Finance Minister and the German Economy Minister, among others, have come out in support of Margrethe Vestager, recognising the implication this has for their own tax revenues. Governments other than in Ireland are not with Apple, even if not always for reasons advanced by the E.C.

Expectedly, Tim Cook launched an attack against the E.C. decision. He described its ruling as “total political crap” and argued, “In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe.” Holding that the E.C. “is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been”, he argued that “a fundamental principle is recognised around the world: A company’s profits should be taxed in the country where the value is created,” and that “Apple, Ireland and the United States all agree on this principle.” Since “in Apple’s case nearly all… research and development takes place in California, so the vast majority of… profits are taxed in the United States”. Unfortunately, that is not true, as yet, and is unlikely to be in future, if Apple has its way. But the fault lies with the Irish political elite as well. The €13 billion figure illustrates how much the Irish government gave up over the 2003-2014 period to have a bit of Apple on its soil. The E.C. did not call for data from years prior to 2003. Yet, the benefits that Ireland derived from Apple’s presence seem meagre. Direct employment by Apple in Ireland provides only 5,500 jobs, though Apple claims that employment in services associated with its operations adds another 2,500. Even then the benefit does not seem to be much from a company that has been running operations in Cork, Ireland, for more than 35 years. On the other hand, the €35 billion that Ireland “gave up” to have the privilege of hosting Apple would have been enough to do away with the government’s deficit and almost equals what the Irish government spends on health care for its 4.6 million inhabitants. There are surely many areas where the additional money can be fruitfully put to use.

Yet, the Irish government is sticking by its decision to give Apple the concessions it has. The Irish Cabinet has decided to appeal against the E.C. ruling, though a few of the independent legislators whose support is crucial for the survival of the minority government of Enda Kenny initially expressed some reservations. The argument, as expected, is that this kind of retrospective tax demand in violation of the rulings of previous governments would not only upset Ireland’s relationship with Apple but damage its image as a superior investment destination for multinational enterprises in general. That image has been cultivated, Niall Cody, the chairman of Ireland’s tax collection agency, the Revenue Commissioners, argues, by giving similar tax concessions to around 1,000 other multinationals, mostly American. On the Apple case, he says: “Full tax due was paid in accordance with the law.”

Thus, the power of the multinationals comes not just from their own size and reach, and from the support that their own governments afford them, but from their ability to divide desperate countries seeking the presence of global giants to make a small difference to their economic conditions. The costs of garnering that difference are, therefore, often missed. Reuters reports that an investigation conducted by it in 2013 found that around three-fourths of the 50 biggest U.S. technology companies use practices that are similar to Apple’s to avoid paying tax. So Margrethe Vestager has taken on not just one giant, but the world’s corporate elite. She should not lose. But even if she does this time, this is a battle well begun.

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