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.