Vestager replies to Lew

The European Commission have responded to the recent interventions by the US Treasury into the tax related state-aid investigations with this letter from Margrethe Vestager to Jack Lew.

On one of the issues raised by the US Treasury the response is as would be expected:

I also hope we agree that the taxation systems of EU Member States entitle them to tax the profits generated by companies operating in their territory, including US companies.  The Commission has the duty to ensure that these rules are applied in a non-discriminatory manner by excluding preferential treatment in any form that constitutes incompatible State aid.  This does not put into question the US taxation system or go against double taxation treaties concluded by EU Member States.

So we await whether DG Comp are going to conclude that the estimated $120 billion of profits earned by Apple Sales International between 2004 and 2013 were generated in Ireland and so should be taxable in Ireland as opposed to only those profits earned by ASI’s branch in Ireland.  The Commission could also conclude that the allocation of profit to ASI’s Irish branch was “wrong” but if that was to be the case then this ongoing exchange of letters would have been wholly disproportionate.

The Commission are also investigating Apple Operations Europe (AOE).  AOE also has an Irish branch which undertakes manufacturing of a specialised range of computers.  However, ASI is the global hoover of Apple’s profits – it contracts with third-party manufacturers in China (with all agreements signed in the US) and sells on the products to Apple distributors at an “arm’s length price”.  The difference between the fee paid to the manufacturer and the price charged to the distributor is considerable.  Hence, the estimated $120 billion of profits earned by ASI between 2004 and 2013, with 90 per cent of that occurring in the final four years of the period.

ASI is a subsidiary of AOE so it is possible that the Commission could rule that the profits are taxable in Ireland when they are distributed as a dividend by ASI to AOE.  This could potentially bring our 25 per cent Corporation Tax rate into the equation.  But that seems very unlikely.  The focus will probably be on the trading profits earned by ASI, though if it ends up being a dispute over the profit allocated to ASI’s Irish branch we really will be left wondering what all the excitement was about.

How long more will they keep us waiting?  And if a decision is published by DG Comp is there a timeframe within which an appeal to the CJEU must be made?

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10 thoughts on “Vestager replies to Lew”

  1. Ireland should unofficially welcome an adverse finding against Apple and hope that there is a big tax windfall — even though it is akin to an accessory to a crime getting an award.

    Apple produces impressive products but it’s power enables it to get away with tax shenanigans that would risk others being in prison.

    Tim Cook and Eric Schmidt brag about complying with all laws and paying every penny due — well whatever the excuses, fake invoices for billions from Irish shell companies in Bermuda in the case of Google, with nothing but an address at a lawyers’ firm in Bermuda, is a form of fraud.

    A civilised society would not survive long if everyone just complied with statute law — Adam Smith makes the same point in the Wealth of Nations 1776.

    The positive development is that the type of regime that was operated by Ms. Vestager’s boss when he was PM of Luxembourg is no longer tolerated.

    You seem to be blind to the big issues and what Bernie Sanders would call a rigged system. I saw Hilary Clinton’s speech earlier and she called out Johnson Controls who plan a tax inversion.

    The Republican elite is shocked that Trump is also making similar points even though he’s a hypocrite.

    Imagine an Irish firm setting up a tax structure with a foreign holding company and shell companies with an address in Knocknaheeny, Cork, using charges to reduce tax visa fake invoices for “technical services” or IP, would a tax inspector who didn’t see the prospect of a job in a BIG 4 accounting firm, be sanguine about such an arrangement?

  2. A handy reference document, freely available.

    http://ec.europa.eu/competition/state_aid/studies_reports/sa_manproc_en.pdf

    At the risk of appearing pedantic, I would point out once again that the issue, insofar as state aid is concerned, relates solely to treating one firm more favourably than another in a comparable situation cf. previous thread for the conditions that have to be met. We know this because the Commission says so.

    On the question posed on the time-frame for a reference to the ECJ, the manual is silent but one would assume that this would be dictated by any time-limits for compliance set in any negative Commission decision.

    The only relevance of the exchange of letters Lew-Vestager lies probably in the fact that the Commission will have to devote a deal of time to the legal reasoning behind any decision (Section 1-7).

  3. A simple approach would be to judge that Apple products are sold at a given profit level in Europe, and tax is due to all EUMS on profits earned, based on sales, in European markets. The cost of intellectual property should be fully incorporated into the pre-profit net cost of the products, so should not overly concern European tax authorities.

  4. Tim Cook claimed in an interview with Charlie Rose, shown on Bloomberg, that the deferred US tax rate on overseas profits not yet repatriated should be reduced to avoid double taxation “…because those profits have already been taxed overseas”.

  5. @ grumpy

    Participants in this debate need to consider which eyeglass they are looking through. The only one that matters, at least for the moment, is that through which the Commission is looking. It can only use the state aid one, the sole focus of which is on unfair discriminatory treatment between firms in the same objective position. The Commission has said so in all its comments, while attempting to imply that that the focus is wider cf.

    http://europa.eu/rapid/press-release_IP-15-5880_en.htm

  6. @grumpy

    This Charlie Rose interview?

    https://www.youtube.com/watch?v=C-guVDR-XjQ

    I’d be really surprised if he said that. But if you can find it I’d appreciate the reference.

    Before Xmas Cook gave an interview where tax was covered:

    National security isn’t the only battle Tim Cook has been fighting with Washington. Apple earns two-thirds of its revenue overseas. Rather than bring it back and pay hefty U.S. taxes, Apple, like many U.S. multinationals, parks billions of dollars in overseas income in subsidiaries in countries like Ireland. The practice is not illegal, but it’s at the heart of a battle that has been unfolding in Washington to reform the corporate tax code and bring that money home.

    Charlie Rose: How do you feel when you go before Congress and they say you’re a tax avoider?

    Tim Cook: What I told them and– what I’ll tell you and– and the folks watching tonight is we pay more taxes in this country than anyone.

    Charlie Rose: Well, they know that. And you should because of how much money you make.

    Tim Cook: Well, I don’t deny that. We happily pay it.

    Charlie Rose: But you also have more money overseas, probably, than any other–

    Tim Cook: We do.

    Charlie Rose: –American company?

    Tim Cook: Because as I said before, two-thirds of our business is over there.

    Charlie Rose: Yeah, but why don’t bring that home, is the question?

    Tim Cook: I’d love to bring it home.

    Charlie Rose: Why don’t you?

    Tim Cook: Because it would cost me 40 percent to bring it home. And I don’t think that’s a reasonable thing to do. This is a tax code, Charlie, that was made for the industrial age, not the digital age. It’s backwards. It’s awful for America. It should have been fixed many years ago. It’s past time to get it done.

    Charlie Rose: But here’s what they concluded. Apple is engaged in a sophisticated scheme to pay little or no corporate taxes on $74 billion in revenues held overseas.

    Tim Cook: That is total political crap. There is no truth behind it. Apple pays every tax dollar we owe.

    Maybe he is simplifying but by saying it would cost “40 per cent to bring it home” he is saying that little or now foreign tax has been paid on those earnings.

  7. The US are “reviewing” Section 891 in relation to the EC approach.

    https://drive.google.com/file/d/0B_p5wXj7Q88McjJDWVNrbkNTbDA/view?usp=sharing

    Section 891 has never been used. What is section 891?

    Section 891: Doubling of rates of tax on citizens and corporations of certain foreign countries

    Whenever the President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, the President shall so proclaim and the rates of tax imposed by sections 1, 3, 11, 801, 831, 852, 871, and 881 shall, for the taxable year during which such proclamation is made and for each taxable year thereafter, be doubled in the case of each citizen and corporation of such foreign country; but the tax at such doubled rate shall be considered as imposed by such sections as the case may be. In no case shall this section operate to increase the taxes imposed by such sections (computed without regard to this section) to an amount in excess of 80 percent of the taxable income of the taxpayer (computed without regard to the deductions allowable under section 151 and under part VIII of subchapter B). Whenever the President finds that the laws of any foreign country with respect to which the President has made a proclamation under the preceding provisions of this section have been modified so that discriminatory and extraterritorial taxes applicable to citizens and corporations of the United States have been removed, he shall so proclaim, and the provisions of this section providing for doubled rates of tax shall not apply to any citizen or corporation of such foreign country with respect to any taxable year beginning after such proclamation is made.

  8. @Seamus

    That isn’t the interview I saw on BBG a couple of nights ago – only watched a couple of minutes of it, by chance the content was about overseas tax and I was surprised to hear him come up with “already been taxed overseas” given what we know about how much tax Apple pay overseas.

    The discussion was about US corporate tax rates being too high (from Apple’s perspective).

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