More fishing expeditions into Ireland’s tax past?

Yesterday’s Sunday Business Post led with a story that the European Commission has started some “information gathering exercises” into tax arrangements put in place with MNCs in the 1980s and early 1990s.  The only company named in the piece is Pepsi.

There is a notable link between Pepsi and Apple.  John Sculley was vice-president of Pepsi from  1970 to 1977 and president from 1977 to 1983.  He was CEO of Apple from 1983 to 1993.  Last week he was in Dublin and gave an interview to RTE’s Science and Technology Correspondent, Will Goodbody.  The interview is available on this page and the relevant segment begins at around 08:45.  The short transcript and the rest of the post are below the fold.


Will Goodbody:  There has been a lot of focus on Apple in this country for the last couple of months because of the European Commission’s probe into the tax affairs of the company.  You were the Apple CEO in 1991 when it’s claimed Apple reached a tax – I suppose – agreement with Ireland. What is your understanding of that agreement?  Is it a special-case agreement that was made by Apple, I suppose, different to other companies that perhaps were operating here at the time?

John Sculley: That agreement really had a lot of precedent because when I was at Pepsi we actually had a somewhat similar agreement where Pepsi was the first consumer product to be part of that agreement years earlier. Apple had set up a similar type of agreement where we worked very closely with the Irish development board.  Our goal was to bring employment to Ireland of highly skilled workers and they even designed some courses for us at the university of Cork. So this was clearly a serious commitment to make an investment in Ireland. 

Now Ireland had, and still does have, a very favourable tax advantage and because the taxes are so in the United States and so much of the business for high-tech companies is done outside of the US it made a lot of sense to find a tax-friendly environment like Ireland that we also wanted to invest in.  So I think there was great precedent for the agreement we had with Apple in 1991.

I think what’s making it such an issue with politicians is that Apple is so outrageously successful, the most valuable company in the world and has so much cash and, of course, the US politicians would love the get that cash back and tax it at the high US tax rates. I think how that turns out, I’m obviously not familiar with, that’s twenty three/four years ago but I think the precedent for which it was put together was done for positive reasons with a lot of precedent.

Will Goodbody: Did Apple get a sweetheart deal, a secret sweetheart deal, at the time from the Irish government?

John Sculley: We never looked at it as a sweetheart deal.  We looked it as a deal that had a lot of precedent.  I knew the precedent because I had been there when we negotiated the deal decades earlier with  Pepsi.

This question was obviously expected and John Sculley clearly intended to use the word “precedent” as often as possible.  He managed it six times, including twice in one sentence.  His argument seems to be that an arrangement with precedent cannot be state aid.

Pepsi first established a manufacturing facility for their soft-drink concentrates in Little Island in 1974 so the arrangements in the information gathering exercise likely relate to this.  A shared-services centre was set-up  in the mid-90s and a second manufacturing facility was created around a decade ago.

In 1974, the Export Profits Tax Relief (EPTR) was still in place so a zero rate of corporate income tax would have been applied to the profits from Pepsi’s first manufacturing facility.  It seems John Sculley is referring to the arrangements put in place at that time (“decades earlier”). The EPTR was removed in 1980 with a 10-year grandfathering period allowed for companies then availing of it.  The replacement for the EPTR was the “special” ten per cent Corporation Tax rate on “manufacturing and internationally traded services” though the coverage of this rate was very loosely defined.

In the case of Apple, the European Commission is investigating the 1991 regime switch from the zero per cent rate of the EPTR to the 10 per cent rate when the EPTR grandfathering period expired in 1990.

The letter published by the European Commission detailed that the accounts for Apple’s Irish branch showed a “net profit” of $269 million in 1989 (most presumably taxed at zero per cent).  Minutes taken by a representative of the Revenue Commissioners show that it was agreed with the Revenue that from 1991 on the profits attributed to the Irish branch would be $30-$40 million (presumably to be taxed at 10 per cent).

It is pretty easy to make a case that one of these profit figures is inappropriate.  They can’t both be correct.  The EC are arguing that the profit figures from 1991 onwards under the 10 per cent regime are incorrect, rather the profits reported up to 1990 under the zero per cent regime. [Of course there is also the possibility that all the profit figures are problematic – “too high” when the tax was zero per cent; “too low” when the tax was 10 per cent.]

At this stage it is difficult to know where the information gathering into Pepsi, and other companies who made the switchover from the zero rate under the EPTR to the 10 per cent rate will lead. We also do not know whether the State will co-operate as fully as it did in the case of Apple.  The European Commission have gone to great lengths to highlight Ireland’s full co-operation and willingness to provide all available documents and the Commission included many company details in their recently published letter in the Apple case.  The willingness of Ireland to provide the documents and of the EC to publish details from them will not have gone noticed among MNCs who would prefer to avoid the negative glare that such probes bring.

Given the nature of the minute taking by Revenue officials in their dealing with Apple 25 years ago it is likely that other damning documents with employment considerations, discussions about not prohibiting the expansion of Irish operations and reverse-engineered profit figures exist for other MNCs.  Again though it must be remembered that this is a state aid investigation; not a tax investigation.  The fact that 25 years ago Ireland had a Corporation Tax regime that was, at best, ad hoc when administering the end of the EPTR does not mean that state aid was granted to companies.

The Minister for Finance was straight-up on Saturday when he said, in the case of Apple, that “it’s more likely that that investigation will be dropped than there will be further investigations.”  Maybe with Pepsi the Commission have just decided to go fishing somewhere else.

Comments

comments

10 thoughts on “More fishing expeditions into Ireland’s tax past?”

  1. “and they even designed some courses for us at the university of Cork.”

    What were the courses, Seamus?

    Who paid for their design?

    Were they advertised as financially supported by Pepsi?

    Do you think it is right that third level institutes in general and the University of Cork in particular should deliver courses which would not otherwise exist without corporate sponsorship (genuine question)?

    What happens if those courses produce students who prefer Coke?

    By implication were those courses dependent on what would prove to be an advantage to Pepsi and would/could they be taken away if this did not prove to be the case?

    Do they still exist?

  2. @GK
    It doesn’t say the courses were “financially supported by Pepsi”
    Its far more likely that courses were designed to produce employees that would be valuable to Pepsi as part of luring Pepsi and giving them compfort that there would be suitable employees in Cork. Another lure used by the IDA is agreeing to do science R and D in third level institutions that benefits the company you are trying to attract.

  3. There is very little to fear in this investigation. The Apple investigation has effectively collapsed (according to Michael Noonan). This one will too. The Apple one was all hype and propaganda which was stirred up by the London media when the Scottish referendum was going on, and Alex Salmpnd was saying that in a free Scotland he would follow Ireland’s example in relation to Corporation Tax. For the longer-term it is essential that the UK government allow N. Ireland to reduce its Corporation Tax rate to 12.5 per cent too. As well as the benefit to N. Ireland, It will be much easier for R. Ireland to defend its 12.5 per cent Corporation Tax rate if both parts of Ireland have it. The latest rumours are that it will do just that next month. In fact, there is a rumour that, because the unionists don’t like the idea of harmonising with the Republic, they may get Corporation Tax reduced to 12 per cent, rather than 12.5 per cent, just to be different. If so, the Republic should immediately follow suit.

  4. @ JTO

    The distinctive characteristics of the EU are (i) it is made up of democracies (ii) it has a rule-book and (iii) they respect it. If NI is to get a different regime to the rest of the UK (one of the democracies; at least until further notice), it will have to be found in this section of the rule book (Treaty on the Functioning of the European Union).

    http://www.stateaidlaw.eu/46_68_news_232.php

  5. @DOCM

    Although I don’t speak a word of lawyerese, and will bow to your superior legal knowledge, I can see nothing in your link to stop the British-controlled part of Ireland having the same Corporation Tax rate as the free part. Especially as GNI per capita in said British-controlled part is only about 70 per cent of that of the free part and among the lowest in the entire EU.

    Guido Fawkes seems to think its a done deal.

    http://order-order.com/2014/10/13/tories-love-bomb-irish-northern-ireland-corporation-tax-cut-a-done-deal/

    Only time will tell if he’s correct. Of course, the British government has frequently broken its promises to Ireland and Scotland in the past, so I am not banking on it.

    But, if it happens, it greatly reduces the pressure on the Irish government to change its Corporation Tax rate.

  6. It would certainly make NI a very attractive place for investment; especially by other UK firms! This should make Cameron more popular than he already is.

  7. @ Gavin,

    I think John Sculley was referring the Apple when talking about links with UCC. I don’t know the details but I guess it could be a redesigned module or two in the Computer Science programme. I don’t know if any financial assistance was provided by Apple (I doubt it). Given the nature of the area it would be the case the modules/programmes would have to be redesigned on a regular basis anyway and doing so with some input from companies might be beneficial. It will take some investigation to determine if the corporate involvement had any impact on the student’s preferences for Coke and Pepsi!

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