Will there be a “state aid” investigation?

RTE is reporting that

[t]he European Commission is to open a formal investigation into Apple’s tax arrangements with Ireland.

An announcement is expected to be made by Competition Commissioner Joaquin Almunia tomorrow.

If the Commission decides not to progress with an formal investigation there would only be a limited reputational bump for Ireland but there would have been benefits in terms of reduced uncertainty.  If a formal investigation is announced it is bad news for the certainty of the Irish corporation tax regime.

The best outcome for Ireland would be a short (< 12 months) investigation.  The actual outcome would, perhaps surprisingly, not be the most important factor. 

If there was to be an investigation and it concluded with no negative finding against Ireland it would be a useful counter-punch to some of the accusations directed at Ireland but it would be far from the end of the mudslinging.  If there was to be a finding of improper state aid against Ireland then due process would need to be followed with whatever redress and rectifications required undertaken. 

An adverse finding on state aid could hardly make Ireland’s tax reputation worse.  The key is that Ireland needs any investigation to be quick.  This will not happen.  Any investigation, if undertaken, will drag on for several years.

RTE further report that any investigation is likely to focus on Apple.  If this is the case it suggests it will be a very narrow  investigation as Apple has limited operations in Ireland.  Apple does have Irish-incorporated companies as part of its global tax structure but those companies (ASI, AOI and AOE) have almost no operations in Ireland.  It is hard to see how Ireland can confer tax advantages on companies that are not subject to Irish Corporation Tax.  These companies were found to be ‘stateless’ for tax purposes but that is down to a mismatch between the residency rules of Ireland and the US rather than any unique advantage Ireland offered to Apple.

If the Commission is to investigate the taxation of Apple in Ireland it will likely relate to the Irish-source profits generated by Apple’s operations in Cork.  This is a relatively insignificant element of Apple’s overall global tax structure.    Apple Inc. does not have significant cost-sharing and/or transfer-pricing agreements  with its operations actually in Ireland. 

Apple does have such agreements with the Irish-incorporated companies at the centre of its tax structure but these companies operate out of Cupertino, California not Hollyhill.  The Revenue Commissioners have no jurisdiction over these agreements and only have jurisdiction over these companies to the extent they have operations, if any, in Ireland.

Unlike other US MNCs, Apple does not pass the revenue from its non-US sales through Ireland.  The 4,000 or so staff that Apple have in Cork do contribute to the company’s profits but they do not handle Apple’s global sales in the same way, for example, that the revenues from Google’s global sales are routed through Ireland.  The Revenue Commissioners do have jurisdiction over the profits sourced from Apple’s Irish operations but these are small in the overall scheme of the company.

Apple’s original decision to locate in Cork in 1980 was likely influenced by the particular tax advantages offered at that time and it has been reported that these were augmented by further changes when the original 10-year period expired in 1990.  It is not clear how the arrangements put in place in 1980 and 1990 are related to the Commission’s investigation which has the scope to look into the previous ten years.

The initial informal action by the European Commission was prompted by last May’s US Senate hearing on Apple’s global tax strategies.  The opening paragraph of the Senate report stated that:

The hearing will examine how Apple Inc., a U.S. multinational corporation, has used a variety of offshore structures, arrangements, and transactions to shift billions of dollars in profits away from the United States and into Ireland, where Apple has negotiated a special corporate tax rate of less than two percent.

A “special corporate tax rate of less than two percent” would be state aid.  But there is no special corporate tax rate of two percent.  It is unlikely that the Commission investigation relates to special rates for Apple but if there is to be an a formal state aid investigation announced then one would assume that there is something that concerns the Commission.  Whether this justifies a formal investigation remains to be seen.  It may also be the case that the scope will be broader than just a single company.

In reality it doesn’t matter what the investigation is actually about.  The mere announcement, and then the subsequent length of the formal investigation, matters.  A formal investigation will be a huge cloud over the Irish Corporation Tax regime and the uncertainty it generates will be a substantial stumbling block for anyone trying to promote Ireland as a potential FDI site. 

One would hope that the purpose of the announcement is backed by more than the desire to create such a stumbling block.  Of course, if there is more substance behind the possible investigation rather than pure idle speculation about ulterior motives then it means that Ireland may have a case to answer.  The problem is we will be waiting some years to find out if it does go ahead.

Comments

comments

58 thoughts on “Will there be a “state aid” investigation?”

  1. Apparently there will be a broad one.

    Out on Nasdaq:

    “BRUSSELS–European Union regulators are preparing to open a formal investigation into corporate-tax regimes in Ireland, Luxembourg and the Netherlands on Wednesday, according to a person familiar with the matter, amid concerns that multinational companies such as Apple Inc. enjoy sweeter tax deals than are permitted under EU law.

    The probe by the European Commission, the EU’s executive arm, follows criticism in Europe of low tax rates paid by global corporations such as Amazon.com Inc., Google Inc. and Starbucks Corp. at a time of widespread austerity on the continent.

    It is part of a broader crackdown on tax evasion and tax avoidance agreed to by EU leaders in the wake of the region’s financial crisis, aimed at boosting national budgets and soothing voter anger over cuts to welfare programs.

    The commission will announce a formal investigation into tax deals granted to multinationals at a news conference on Wednesday, the person familiar with the matter said Tuesday. The probe is likely to consider whether generous corporate-tax regimes in Ireland, Luxembourg and the Netherlands amount to illegal state aid.

    http://www.nasdaq.com/article/eu-to-investigate-corporate-tax-codes-in-ireland-luxembourg-netherlands–update-20140610-01272#ixzz34I2K4p80

  2. Should we also assume that an investigation into France’s corporate tax take of approx 8% is also imminent ?
    Only Ireland, Netherlands and Luxembourg to be investigated, and only multinational deals. That would rule out Bettencourt’s L’Oreal, I suppose.
    [Almunia and Barroso must be trying to get advocates for the next career move.]

  3. The question for many non-experts (such as me) is why is Apple permitted to incorporate companies in Ireland that have no operations here and which facilitate its avoidance of tax in the US?

  4. What is the net benefit to/ net risk position of Ireland regarding Apple’s ultra low tax rate ?

    It does look like an Apple TTAOOI (tearing the arse out of it) to me.

  5. @Ninap
    The US government either encourages or allows their major corporations to avoid (by delaying) US corporate tax by playing shell games and parking cash abroad. Ireland is a way point in the game which includes Ireland as the main transgressor with Luxembourg, Nederlands to play supporting roles in the EU. Tax havens such as Bermuda, Cayman Islands, Panama and others also play a role.

    When I say Ireland is the main transgressor I mean in terms of publicity in the main stream media and not just the rags but the NY Times, Financial Times, Economist, Le Figaro, Die Zeit, La Stampa, La Prensa and others. We have usurped Switzerland in the corporate tax evasion/avoidance game. Unfortunately we sowed the wind and are now reaping the whirlwind. Add dead babies in septic tanks to the recent film Philomena and we will yearn for our “drunken Paddy” image. So harmless and lovable in retrospect. The whole country participated willingly and enthusiastically, let us not forget that as the gov’t conducts the witch hunts that are sure to come.

  6. FT headline:

    “Brussels opens tax probe into Apple, Starbucks, Fiat
    Countries involved include Ireland and the Netherlands”

  7. @Ninap

    If you don’t mind, persuade yourself that that was just the result of a drafting oversight rather than a carefully planned facilitation.

  8. @Mickey Hickey
    “The US government either encourages or allows their major corporations to avoid (by delaying) US corporate tax by playing shell games and parking cash abroad. Ireland is a way point in the game which includes Ireland as the main transgressor with Luxembourg, Nederlands to play supporting roles in the EU. Tax havens such as Bermuda, Cayman Islands, Panama and others also play a role.”

    Not a bad summary, but why is the investigation to be confined to Ireland, Netherlands, and Luxembourg?
    Are we to assume that there are no loopholes at all, at all, in the corporate tax codes of the 25 other EU members that could facilitate tax avoidance or significant tax reduction, for either US corporates or, Dia linn, home grown corporates in the export business?

    That Ireland flogged this one-trick pony near to death is not to our credit, but the narrow focus of the investigation, means that the Commission, once again, is showing itself to be utterly partisan in favour of the larger states.
    Barroso putting the boot in before departing, while lining up the big boys support for his next sinecure.

  9. The Commission’s press release.

    http://europa.eu/rapid/press-release_IP-14-663_en.htm

    Notably;

    “Tax rulings are used in particular to confirm transfer pricing arrangements. Transfer pricing refers to the prices charged for commercial transactions between various parts of the same group of companies, in particular prices set for goods sold or services provided by one subsidiary of a corporate group to another subsidiary of the same group. Transfer pricing influences the allocation of taxable profit between subsidiaries of a group located in different countries.

    If tax authorities, when accepting the calculation of the taxable basis proposed by a company, insist on a remuneration of a subsidiary or a branch on market terms, reflecting normal conditions of competition, this would exclude the presence of state aid. However, if the calculation is not based on remuneration on market terms, it could imply a more favourable treatment of the company compared to the treatment other taxpayers would normally receive under the Member States’ tax rules. This may constitute state aid.”

    It seems to me that the excitement generated by this move by the Commission is not really justified. This is not new with regard to the issue of company taxation.

    The fact that infringement proceedings have been opened against Luxembourg for lack of compliance with the Commission’s requests for information may also be noted.

  10. Transfer pricing of course, where very far from market traded IP is involved, can be extremely difficult to demonstrate as either on ‘market terms’ or not…

    “Under the EU’s state aid rules, national authorities cannot take measures allowing certain companies to pay less tax than they should if the tax rules of the Member State were applied in a fair and non-discriminatory way.”

    Note the last line. It is not immediately obvious why that would cause a difficulty wrt Irish registered non-tax resident companies – that would be politics.

    “reports alleging that some companies have received significant tax reductions by way of “tax rulings” issued by national tax authorities”

    “The Commission will examine if the three transfer pricing arrangements validated in the following tax rulings involve state aid to the benefit of the beneficiary companies:

    (i) the individual rulings issued by the Irish tax authorities on the calculation of the taxable profit allocated to the Irish branches of Apple Sales International and of Apple Operations Europe;

    (ii) the individual ruling issued by the Dutch tax authorities on the calculation of the taxable basis in the Netherlands for manufacturing activities of Starbucks Manufacturing EMEA BV;

    (iii) the individual ruling issued by the Luxembourgish tax authorities on the calculation of the taxable basis in Luxembourg for the financing activities of Fiat Finance and Trade.

    The Commission has reviewed the calculations used to set the taxable basis in those rulings and, based on a preliminary analysis, has concerns that they could underestimate the taxable profit and thereby grant an advantage to the respective companies by allowing them to pay less tax. The Commission notes that the three rulings concern only arrangements about the taxable basis; they do not relate to the applicable tax rate itself.

    In parallel to these three formal investigations, the Commission will continue its wider inquiry into tax rulings, which covers more Member States.

  11. This is also noteworthy:

    “The Commission notes that although the transfer pricing rules have been tightened over the years, the tax administration had a significant degree of discretion in the past. The Commission has concerns that such discretion has been used in the case of Apple to grant a selective advantage to that company, reducing its tax burden below the level it should pay based on a correct application of the tax rules. The Commission notes however that the number of tax rulings issued in Ireland relating to transfer pricing arrangements is limited.”

  12. I hereby spin this as:

    a) Not relevant to Irish tax rates

    b) Not relevant to the facilitation of so-called tax avoidance via non-tax resident Irish companies, which the Irish government has in any case decided to curtail.

    c) Useful to the Irish government in persuading MNCs of the necessity to bring Irish corporate tax rules more into line with other European states.

    d) Only really of relevance to a limited number of old transfer pricing rulings, which the Irish think were correct anyway.

  13. @ UFC

    The initial extract I posted does two things (i) states what the issue under investigation is and (ii) the rules, in summary, that apply.

    What is relevant is the outcome of the process. Maybe there will be major damage as Seamus Coffey seems to think simply from the fact that it is taking place. I do not think so. (The lawyers on both sides – especially in the case of Apple and Starbucks – must already know each other rather well. And there is also the possibility of eventual recourse to the ECJ).

    I have little doubt, however, that the debate will range far and wide until the present excitement subsides.

  14. folks,

    the Obama regime threatened a 14 bn fine on BNP for keeping within French law but not US.

    In the well established tradition of e.g. the Barnier letter, the EU will exact tit for tat retaliation on American companies. Therefore the investigation must continue at least to inauguration day (Jan 2017) of whatever imperialist ilk comes after Obama.

    That is one of the very beneficial purposes of the EU and the Euro.

    Beating up the Richard Brutus clowns in the process is just an added benefit, but not the main interest : – )

  15. A “special corporate tax rate of less than two percent” would be state aid. But there is no special corporate tax rate of two percent.

    Seamus I am interested to know how you seem to know for certain that no secret written agreement on corporation tax was signed between Apple and the Irish Government?

    From what the headlines are saying they seem to be implying that there was some sort of special agreement between Apple and Ireland.

  16. Apple does have such agreements with the Irish-incorporated companies at the centre of its tax structure but these companies operate out of Cupertino, California not Hollyhill. 

    Seamus,

    I don’t have the time to check past threads but I have the impression that you downplayed reputational issues in the recent past.

    The Apple offshore companies using the name ‘Apple’, to the world operated as normal Irish companies with the Hollyhill address.
    This was critical to Apple’s manipulation in having the companies not tax resident anywhere.

    In effect coupled with unlimited status under Irish company law, it was able to conceal how it could have a foreign tax of 2% on about 60% of its revenues in 2012.

    It was important for Apple also to present its non-tax resident companies as normal Irish companies to avoid raising suspicions in other countries from where large sums were transferred to the Irish companies.

    Apple also used Apple Sales International as both stateless and Irish tax resident, for some transactions.

    It’s not strange that the buck stops nowhere but claiming to responsibility for these companies which had no tax domicile or had and hadn’t will look a little bizarre.

    @ eamonn moran

    Apple officials told investigators of the US Senate Permanent Subcommittee on Investigations, under oath, that it had a special agreed low Irish corporate tax rate of a max 2%.

    There maybe a confusion with a specific rate and an understanding that Ireland would not change its legislation in future that would result in a higher tax liability.

    The 10% manufacturing rate was introduced in 1980 the year Apple opened a small facility in Cork.

    Apple Sales International was created in 1990.
    Would it be a shock if Charles Haughey in the early 1990s issued a letter of comfort to Apple?

    In its last consolidated accounts for foreign subsidiaries, that are publicly available, $21m was payable in 2004 to Ireland after offsets for foreign taxes.

    From 2006, it began an aggressive strategy to lower its foreign taxes.

    @ Joseph Ryan

    The standard French corporate rate is 33.33%.

    There is a rate of 15% for small firms.

    The 8% effective rate that Irish critics used was bullshit as it had no relevance for typical multinationals.

  17. @ Eamon Moran

    Even if there was a 2% tax rate, it would not, of itself, amount to a state aid. The deciding issue is whether there was discriminatory treatment between companies.

  18. @Michael Hennigan

    I will accept your point that the 8% French tax take quoted by some reports was not correct, and leave it to others to debate that one.

    However let us not assume, by virtue of having a log in own eye and not being able to see very well, that our ‘partners’ are not fully ready to take advantage of our blindness.
    For example the CCCT proposals doing the EU institutional rounds are heavily skewed in favour of countries whose home companies have significant research/ engineering or corporate payroll costs in the home country. Such countries will get the bulk of the European tax take on their total profits based on the payroll element of the formula.
    In effect the CCCT will allow countries with large chemical/engineering/ corporates to extract a disproportionate amount of tax from sales to non home countries.

    The formula is currently being sold on the basis of simplicity. It is simple all right. Simply skewed to favour strong research oriented exporting countries.

  19. Picketty talking about the structural effect on wealth concentration of taxes on capital income.

    “To simplify matters: assume initially that capital income was taxed at an average rate close to 0 percent (and in any case less that 5 percent) before 1900-1910 and at about 30 percent in the rich countries in 1950-1980 (and to some extent until until 2000-2010, although the recent trend has been clearly downwards as governments engage in fiscal competition spearheaded by smaller countries). An average tax rate of 30 percent reduces a pretax return of 5 percent to a net return of 3.5 percent after taxes. This in itself is enough to have significant long-term effects, given the multiplication and cumulative logic of capital accumulation and concentration. Using the theoretical models described above, one can show that an effective tax rate of 30 percent, if applied to all forms of capital, can by itself account for a very significant deconcentration of wealth”

    Capital in the Twenty-First Century, P.373

    Whatever the long-term solution, a global race to the bottom on corporate taxes doesn’t look like the way to go.

  20. Did anyone see the absolutely incredible employment data from the UK yesterday? 345k jobs added? Unemployment rate plummeting? Somebody please put the Keynesians out of their misery, at this stage it’s embarrassing to have to listen to them dredging up nonsensical reasons for why this is ‘not a real recovery’.

  21. @ DOCM
    If there was an agreement between apple and the government to cap at 2% (especially if written) than that would be discrimination.
    Seamus has said that “there was no special Tax rate of 2% agreed”.
    As Michael Hennigan pointed out “Apple officials told investigators of the US Senate Permanent Subcommittee on Investigations, under oath, that it had a special agreed low Irish corporate tax rate of a max 2%.”

    I am wondering how Seamus knows there is no agreement.

    I think its important to try and place this in a larger picture however.
    Its a little rich for large powerful countries who sell weapons to third world countries and rig markets in their favour to start trying to claim a moral high-ground when a small country on the west of Europe uses the small amount of leverage it has to attract thousands of jobs from the most cutting edge companies in the world.

    What started off as a clever move to attract these companies by being a low tax economy switched to Ireland becoming a conduit for mass tax avoidance due in many other countries. Some of whom are very poor. The Irish people haven’t realized that part yet. If they did I think most of them would not want it to continue.

  22. Mark Paul in the times has the low down.

    http://www.irishtimes.com/business/economy/apple-case-will-stand-or-fall-on-backing-up-claim-of-no-special-deal-1.1829039

    HMM it kind of looks like this case is going to come down to legality of the letters of comfort given to Apple by the revenue.
    Apple believed these letters were an agreement but

    “The department yesterday hinted that the fact that Revenue’s rulings to Apple “were not binding” will form part of its defense”

  23. There is no legal basis for Revenue agreeing a rate of corporation tax lower that the statutory rate, however, the issue is whether an advance opinion given by Revenue as to how intra-group transfer pricing would be viewed from a taxation perspective could effectively amount to the same as an agreed lower rate of tax. The (common) practice of tax authorities providing advance rulings to taxpayers can be considered to be a matter of State Aid where a ruling conveys a benefit on a taxpayer over its competitors in an equivalent position. So, was the relevant advance transfer pricing opinion consistent with the approach used for all other Irish transfer pricing opinions in allocating part of a company’s profits to an Irish ‘branch’ or ‘permanent establishment’??

  24. ‘Vigoursly defend’ with the help of a ‘powerful’ team is a lot shakier than the ministerial lexicon of the past 18 months.

    Last week’s trip to California by Kenny was interesting as it appears that most company chiefs didn’t wish to be photographed with him.

    Then wonder how naive it was to invite Jerry Brown, a seasoned politicain who was first governor of California after Reagan in 1975, to an event, when corporate tax avoidance was unlikely to meet his approval.

    If Apple used the guidance it got to come up with the stateless wheeze and given that there was no reaction from the Irish Revenue to it, how useful would ‘powerful’experts be?

  25. The issue of Revenue opinions is addressed in detail at http://www.revenue.ie/en/practitioner/tax-briefing/archive.html#year2002 in Tax Briefing No 48. Revenue states “Some opinions will arise from a unique set of circumstances. However, if an opinion is likely to have wider application Revenue will publish a practice note in Tax Briefing.” Tax Briefing is a (usually) quarterly publication from Revenue initially published in 1990.

    Was there a relevant practice note published in Tax Briefing?

    Tax Briefing No. 37 published in 1999 deals with the “problem” of Irish registered non-resident companies.

  26. @ eamonn moran

    The best approach, in my opinion, is simply to read the Commission press release which is very carefully phrased, including the quotations attributed to the two commissioners responsible. (The one in charge of competition was IMHO sailing pretty close to the wind in his Q & A responses. It is not the job of the Commission to pursue particular policies via the competition rules of the treaties but simply to ensure compliance with them. What the commissioner in charge of taxation was doing there is not entirely clear.)

    The relevant extracts;

    (Almunia) “Under the EU’s state aid rules, national authorities cannot take measures allowing certain companies to pay less tax than they should if the tax rules of the Member State were applied in a fair and non-discriminatory way.”

    (Text of press release). “Tax rulings as such are not problematic: they are comfort letters by tax authorities giving a specific company clarity on how its corporate tax will be calculated or on the use of special tax provisions. However, tax rulings may involve state aid within the meaning of EU rules if they are used to provide selective advantages to a specific company or group of companies.

    According to Article 107(1) of the Treaty on the Functioning of the European Union (TFEU), state aid which affects trade between Member States and threatens to distort competition by favouring certain undertakings is in principle incompatible with the EU Single Market. Selective tax advantages may amount to state aid. The Commission does not call into question the general tax regimes of the three Member States concerned.”

    “If tax authorities, when accepting the calculation of the taxable basis proposed by a company, insist on a remuneration of a subsidiary or a branch on market terms, reflecting normal conditions of competition, this would exclude the presence of state aid. However, if the calculation is not based on remuneration on market terms, it could imply a more favourable treatment of the company compared to the treatment other taxpayers would normally receive under the Member States’ tax rules. This may constitute state aid.”

    It could hardly be clearer. The Commission must know that it is treading on very sensitive ground here and must stick carefully to the rules. If it does not, the aggrieved party can go to the ECJ. And member states generally guard their sovereignty in relation to tax matter religiously.

    It is worth mentioning, and as is well known, that the Competition Directorate is the big beast in the Commission – on a par with the US Justice Department – and has been since the latter came into existence. The chapters in the treaties on which its actions are based have come through various revisions of the treaties virtually unchanged since the Treaty of Rome. This, one assumes, is attributable to both the clarity with which they were written and the extensive case law that has developed on the basis of them.

    All that being said, the comment by francis above also seems to me to be an element worth considering. The EU and the US competition authorities have been entangled in numerous rows relating to their respective roles – especially on the issue of extra-territoriality – for decades.

    It is not, despite the inability of the Irish media to either recognise or get the point across, all about Ireland.

  27. @ DOCM

    With respect, you have entirely evaded the critical and accurate political point made by Eamonn about in his last paragraph, and focussed instead on the European legalities.

    There are real economic activities and there are financial/speculative/tax-related manoeuvres. The balance has been allowed to get completely out of whack in Ireland. It’s lovely for the private vested interests and facilitators, but our sovereign knickers are in plain view.

  28. @ PQ

    What political point? I must have missed it.

    If the question is what will come out in the wash when the process initiated by the Commission reaches its conclusion, I do not see the point in speculating on it as, in logic, it is somewhat pointless to do so if one is not a party to the exchanges between the parties.

    It is all about the European legalities insofar as action by the Commission is concerned. As to what the collateral impact will be, my own view, as I stated earlier, is that it will be limited, especially as Ireland is not the only country in the firing line.

    I am no fan of our national policy with regard to attracting FDI, especially as it cultivates what what has been accurately descri

  29. bed by MH as a kind of cargo cult. But that is not what is under discussion.

    As to media reaction, there seems to be only two settings (i) complacency (ii) shock horror. I recall a contribution some time ago attributing this to the fact that no media outlet was following EU business on a coherent and consecutive basis. I think the IT is now beginning to do so.

  30. Corporate tax rates are exceedingly complex in most countries. The headline corporate tax rate represents about double the actual rate in most countries.
    Government contributions include but are not limited to the the following:
    Health care insurance.
    Unemployment insurance (including subsidies to short time employment).
    Accident Insurance schemes
    Export (Development bank) Financing
    Accelerated depreciation rates on production machinery (infinitely expandable).
    CO-Op education including College and university departments tailor made to serve exporting manufacturers.
    Large sum low cost loans in recessions.
    Legal systems that facilitate bankruptcy and allow the company to continue minus liabilities. (Irish banks e.g., spilt milk).
    Roads
    Railways
    Ports
    Water
    Power
    Last and probably most important, stable government. We live by our wits alone not being endowed with natural resources that gave many countries a built in advantage. If that wit fails us we have no safety buffers.
    Being competitive on world markets requires in depth knowledge and nimble minds. Plus an ability to evaluate the competition. Gov’t is a major player in that most countries can be described as Japan Inc (The first and most successful) now followed by Korea, China, Sweden, Germany, Brazil, Russia……. .

  31. @JF

    I wasn’t aware that a central tenet of Keynesianism was that there was only one way to skin a cat…

  32. @ PQ

    I now see that you were referring to the earlier post by Eamonn Moran. I agree with the view he expresses. However, if anything is to be done about it, we need first to get agreement to (i) reverse out of the situation and (ii) plan how to do it. In the meantime, those working on the dangerous deck of the aircraft carrier US FDI Hibernia hope to hang on to their jobs and pay the mortgage.

    (Incidentally, I also concur with the trenchant view he expresses at the end of the thread dealing with the IT article that there will be no increase in public service salaries for 70 years (!). It is amusing to note that the Reform Alliance in its recent policy document suggests that the salaries of politicians should be linked to averages in the private sector!).

  33. @Ninap

    Non-resident companies can be incorporated in a number of countries. Ireland is unusual in this regard but not unique. There can be Irish-incorporated companies that are none resident but the trading exemption only applies to companies that are related to a company that has a presence of substance here. Ireland’s residency rules are not central to the tax structures of US MNCs; the US deferral provisions are. More.

    @eamonnmoran

    Of course, absence of evidence is not evidence of absence. If a special two per cent rate for Apple was found by the Commission investigation then we really are heading for a fall. The kerfuffle over the two per cent rate emerged from the Senate investigation but there it is likely that an effective rate was confused with an applied rate. Apple achieved an effective rate of two per cent (and much much lower in some years) because the profits were deemed “stateless”. There weren’t subject to tax in Ireland because they were “non-resident” and the tax due in the US wasn’t paid because they were “offshore” and the profits weren’t repatriated. Ultimately the tax is due to the US not Ireland. The two per cent rate was achieved by the stateless companies. The Commission are not investigating this. It seems there are investigation a small number of transfer pricing agreements (possibly one) between an Irish branch of one of these companies and a stateless company. The profits of the Irish branch should be subject to the 12.5 per cent. The tax due profits on the stateless company won’t be paid until (and it may never happen) Apple formally repatriates the money to Apple Inc. The Commission are investigating whether “too little” of the profit was attributed to the Irish branch and “too much” of the profit was attributed to the stateless company. We do not know what the Irish branches of these companies do. From the Senate investigation we know a good deal about the stateless element of them but the Commission investigation is focussed solely on their Irish branches.

    On the goods side of Apple’s business (iPhones, iPads) it does not appear that ASI, AOE do a lot in Ireland. There is manufacturing of some iMac versions. It is not clear how much of Apple’s service business (iTunes, apps etc.) is routed through Ireland. It could relate to these as little detail is available on the c.€35 billion of “Computer Services” exports that, by and large, are only channelled through Ireland. It could be that one of the Irish branches paid “too much” too one of the stateless holding companies for the right to sell some of Apple’s services. In my opinion the two per cent refers to the effective rate that results from one of these types of transactions rather than an actual rate that is applied in Ireland.

    @MH

    I don’t think I have played down the reputational side of things. I may disagree agree with many of the accusations that have generated reputation harm (many of which have originated from Ireland) but reputation is one of the strongest selling points of the Irish CT regime – a reputation for stability. The constant noise and now this formal investigation are a threat to that reputation even if there is nothing uniquely malignant about the Irish CT regime.

    The damage to prospective investment caused by the Commission investigation may be as large as the OP suggests because of the narrow and very specific nature of the investigation. In fact as the rate and regime are not under scrutiny it could be possible to spin it as a positive! There have already been examples of this.

    @eamonnmoran

    If the DoF argues as the IT piece says that “[t]he department yesterday hinted that the fact that Revenue’s rulings to Apple “were not binding” will form part of its defense” it would not be a very good defense. The binding/non-binding nature of the rulings (or interpretations as they might be called) is irrelevant. What matters is their effect. If an Irish branch has a transfer pricing agreement in place with a foreign related party it doesn’t matter that the agreement can be challenged at any time by the Revenue. The point is that they likely didn’t challenge it and allowed it to be used. I don’t think we will hear much of this defence and the argument will be that the TP agreement satisfies the “arms-length principle”. It will also be an issue of whether this agreement, if it was advantageous to Apple, was hidden from other companies so as to prevent them from knowing such terms were possible.

  34. @ All

    FYI

    ftp://ftp.repec.org/opt/ReDIF/RePEc/mpi/wpaper/Tax-MPG-RPS-2011-08.pdf

    This is the best commentary on the obviously rather complicated legal background that I have been able to find on the Web and to which the Commission, presumably, will have to have regard in terms of dealing with the three cases on which it has chosen to act.

    This item from today’s IT is also of interest.

    https://www.irishtimes.com/business/economy/fight-against-aggressive-tax-planning-key-issue-for-eu-says-rehn-1.1830506

    The departing Commissioner, and soon to be MEP, must know that the European Parliament has zero right of initiative, its job being to agree legislation in co-decision with the Council on the – usually sole – basis of a Commission proposal. The fact that he is joining the EP does not change this situation.

  35. @ All

    Also of interest in this context, the intervention in various mainstream European media of Cameron.

    https://www.irishtimes.com/news/world/uk/invented-process-to-appoint-president-of-european-commission-is-damaging-to-democracy-1.1830355

    Notably;

    “It would politicise the commission – a risk Giscard d’Estaing warned of when the suggestion that MEPs should select the commission’s president was rejected over a decade ago.

    It would imperil the commission’s credibility in the exercise of its regulatory and dispute-resolution powers.

    And, most importantly, it would be a green light for those who want to breach the EU’s rules by the back door. Rules that have been ratified by our national parliaments and laid down in international law.”

    He happens to be right. Unfortunately, he is not the right messenger.

  36. @Seamus

    “If the DoF argues as the IT piece says that “The department yesterday hinted that the fact that Revenue’s rulings to Apple “were not binding” will form part of its defense” it would not be a very good defense. The binding/non-binding nature of the rulings (or interpretations as they might be called) is irrelevant. What matters is their effect. If an Irish branch has a transfer pricing agreement in place with a foreign related party it doesn’t matter that the agreement can be challenged at any time by the Revenue. The point is that they likely didn’t challenge it and allowed it to be used.””
    Indeed But unless the Irish Times are being given completely wrong information those three words “Were not binding” are very worrying. Doesn’t it lead one to believe their were written agreements?
    And that the commission have a copy and that the new legal team being put together by Ireland have some serious work to do?

  37. @ eamonn moran,

    There are agreements in place that will be reviewed by the Commission. These are the transfer pricing agreements that Apple has in place between various subsidiaries. The agreement is not between Apple and Revenue it is between the subsidiaries, or more likely between the Irish branch and it’s parent subsidiary. The Commission will review this agreement between the Apple companies. The role of the Revenue will have been in allowing the transfer pricing agreement through a non-binding ruling/interpretation.

  38. The problem with Revenue rulings is that they commit to interpreting the law in a particular way that is advantageous to the taxpayer, in what are usually very specific circumstances. In the early days of the 10% tax rate for manufacturing and the IFSC, they were very commonly relied upon as the relevant legislation in Ireland was in its infancy. So it may very well be that there is some damning tax ruling available to the Commission from back then.

    However, even many years later, I can remember one employer being given a CT tax ruling which no one else in Ireland had…..because the underlying product was designed to very particular local and international circumstances. The end result though is that we had an international finance product that no one else had, and we subsequently wrote many hundreds of millions of business via that particular SPV.

    There is also much talk about Ireland being the bastion of “fiscal substance”. However, this is an area which has been significantly diluted over time. For instance, when there was an opportunity years ago for Ireland to allow zero taxed CIUs invest into certain Asian countries using Ireland’s DTA network. The highly technical definition of “trading” (aka substance) in tax was completely diluted to facilitate this, and we have seen that this particular dropped standard subsequently spread to allow brassplate, tax structured avoidance schemes.

    It is clear therefore that standards have slipped over time. Ireland is not the only location where that happened. Tax rulings in Luxembourg were a different animal altogether, which no doubt is why the revenue in that country is reluctant to “come out” e.g. imputed tax deductions on interest free loans is the one that comes to mind specifically (Ireland had its own version of the same for a short while). Also, agreed low % taxable income /rates, etc. In the Netherlands, their tax authorities always were relatively conservative by comparison with both Luxembourg and Ireland.

    In the end though, this is political. So what is Ireland’s political plan? If I remember correctly, back in 2010 /2011, at the annual Business & Finance bash at the NYSE in NYC, John Bruton lead an Irish campaign saying that the 12.5% tax was inviolate and that the EU and others could effectively piss off if they thought they could dictate our tax rate or system….”Dublin’s way”. I remember saying to two senior tax partners at two different Irish firms (but Big 4) whether it was wise to be so abrassive on the subject. The reply was that “We are fed up with being bashed around in the last few years…..we have to stand up for ourselves.”

    More recently, the approach appears to be to deny that things are any different to how they have always been….these kinds of issues have been there for Ireland “for 30 years or more”. So business as usual has appeared to be the strategy, with the likes of Fergal O’ Rourke talking up the positive consequences of the likely consequences of BEPS, etc. However, that defence of the Irish system is always on the basis that others are “flawed” in their arguments…..

    http://www.irishtimes.com/business/economy/why-ireland-should-address-corporate-tax-residency-rules-before-we-re-forced-to-1.1814159

    Beyond frowning on tax inversions in particular (which continue), no one has changed anything…..no reform in reality has been the approach, which seems to be the “Irish way” under many headings. Fear of being branded a traitor is very real. Given that, the future is certainly looking less bright…..

  39. By the way, Seamus, even when Irish legislation evolved and changed the law “against” what was granted in the ruling, many of the previously granted rulings were allowed to continue ie were grandfathered. I am aware of many such rulings being still in place (10-20 years later….I was part of the IFSC from 1989).

  40. @Paul W,

    Yes, grandfathering is likely to be an issue, though relatively minor, in this investigation. Ireland has introduced the OECD standard rules for transfer pricing but only in 2010. These standards only apply to new or amended transfer pricing agreements after this time. Existing agreements prior to 2010 were grandfathered (and many were likely rushed through in advance of that). Most of the period in question is pre-2010 so whether Ireland applies the OECD standards on transfer pricing is largely irrelevant.

    And as above whether these rulings/interpretations were binding or non-binding is irrelevant; it is their effect that matters. Whether some of these were uniquely advantageous to Apple is what we will find out – in a few years!

  41. In a parallel universe ….

    Spose an EU Commission Investigation into Irish ‘State Aid’ to odious elements of the ‘financial system’ is out of the question ….?

    Sadly, rhetorical …

  42. @Seamus Coffey

    44! I should be stunned! Ta.

    Spose that ‘decision not to raise objections’ says is ALL.

  43. Seamus
    A point I make though is that many of the favorable grandfathered rulings were ‘unique’ and certainly not widely available. Conferred very siloed benefits. EU Commission has a significant opportunity to prove how individual MNCs were directly supported (by the taxpayer in reality…..or rather initially by the taxpayers in other countries).

    Dumb denial about this will not get rid of the increasing problem…..The effective tax rate discussion is also highly naive. I can tell you that accounting profits were vastly higher than taxable profits in many /a huge number IFSC institutions…..and not just American MNCs. Very often, this is disguised by local non accounting consolidations, among many other techniques.

  44. By the way, it was essentially the EU that initially sanctioned the Irish 10pc rate for The IFSC. I wonder what the correspondence between Haughey’s govt and the EU was at the time……were there “constitutional” lines drawn that carry forward to today?

  45. @ Paul W,

    I agree that for companies tax a proportion of accounting profit is the best measure of the effective tax rate. There is little dispute of that even if there can be minor quibbles over the precise numerator and denominator used.

    The problem in determining an effective tax rate for a country is that accounting profit does not respect national boundaries. And it shouldn’t. Companies can, by and large, operate where they wish. For a country measure you need to find some measure of profits within jurisdictional boundaries. Operating surplus from national accounts and taxable income from revenue statistics are as good an approximation as is available.

    The IFSC is a feature of these statistics in Ireland – or at least it is in the national accounts version of them. It is correct that a lot of the income of IFSC companies does not appear in the measure ‘Taxable Income’ produced by the Revenue. It does appear as part of the ‘Entrepreneurial Income’ measure produced by the CSO. The companies might be able to use techniques to “disguise” it from a tax perspective but it is not hidden from the national accounts. I guess there are reasons, and possibly international agreements, as to why it is not subject to tax in Ireland but it’s beyond me to know what they might be.

  46. @seamus Coffey

    “The problem in determining an effective tax rate for a country is that accounting profit does not respect national boundaries.”

    Fully agree. This is the nub of the issue …. solution at the level of the ‘state’ is impossible …. supra-national global agreements would be required – and when did homo sapiens (sic) last experience one of those ….?

    @all

    Explanation!

    Global Imperialism and the Great Crisis

    The Uncertain Future of Capitalism

    by Ernesto Screpanti

    In this provocative study, economist Ernesto Screpanti argues that imperialism—far from disappearing or mutating into a benign “globalization”—has in fact entered a new phase, which he terms “global imperialism.”

    This is a phase defined by multinational firms cut loose from the nation-state framework and free to chase profits over the entire surface of the globe. No longer dependent on nation-states for building a political consensus that accommodates capital accumulation, these firms seek to bend governments to their will and destroy barriers to the free movement of capital.

    And while military force continues to play an important role in imperial strategy, it is the discipline of the global market that keeps workers in check by pitting them against each other no matter what their national origin. This is a world in which the so-called “labor aristocracies” of the rich nations are demolished, the power of states to enforce checks on capital is sapped, and global firms are free to pursue their monomaniacal quest for profits unfettered by national allegiance.

    http://monthlyreview.org/press/books/pb4475/

    Who do I phone in Global?

Comments are closed.