Prof. Jim Stewart writes on the Apple judgement here.
Author: Seamus Coffey
A piece from the Irish Examiner today on the above is here. And below are some exhibits of the figures used in the piece.
1. Corporate Tax Revenues in the EU15 since 1965
2. Income Statements of Google, Apple, Facebook, Amazon and Microsoft in 2019
3. Profit and Tax of Apple Inc. from January 2010 to December 2019
4. Stateless Entities in the OECD’s Country-by-Country Statistics, 2016
5. Profit and Effective Taxes of Companies in Ireland by Jurisdiction of Ultimate Parent, 2016
Last week we wondered whether the General Court of the European Union would take a broad or narrow view of Apple Inc. In it’s state aid finding the European Commission took a narrow view. This is from the day the finding was announced:
As a result of the tax rulings, most sales profits of Apple Sales International were allocated to its "head office" when this "head office" had no operating capacity to handle and manage the distribution business, or any other substantive business for that matter. Only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.
The "head office" did not have any employees or own premises. The only activities that can be associated with the "head offices" are limited decisions taken by its directors (many of which were at the same time working full-time as executives for Apple Inc.) on the distribution of dividends, administrative arrangements and cash management. These activities generated profits in terms of interest that, based on the Commission’s assessment, are the only profits which can be attributed to the "head offices".
As we said last week, while the key decisions that drove ASI’s profits might not have been not documented in ASI’s board minutes they were made outside of Ireland. And here is segment of the courts’ ruling on this central matter:
(2) Decision-making by ASI and AOE
303 With regard to ASI and AOE’s ability to take decisions concerning their essential functions through their management bodies, the Commission itself accepted that those companies had boards of directors which held regular meetings during the relevant period, and reproduced extracts from the minutes of those meetings confirming that fact in Tables 4 and 5 of the contested decision.
304 The fact that the minutes of the board meetings do not give details of the decisions concerning the management of the Apple Group’s IP licences, of the cost-sharing agreement and of important business decisions does not mean that those decisions were not taken.
305 The summary nature of the extracts from the minutes reproduced by the Commission in Tables 4 and 5 of the contested decision is sufficient to allow the reader to understand how the company’s key decisions in each tax year, such as approval of the annual accounts, were taken and recorded in the relevant board minutes.
306 The resolutions of the boards of directors which were recorded in those minutes covered regularly (that is to say, several times a year), inter alia, the payment of dividends, the approval of directors’ reports and the appointment and resignation of directors. In addition, less frequently, those resolutions concerned the establishment of subsidiaries and powers of attorney authorising certain directors to carry out various activities such as managing bank accounts, overseeing relations with governments and public bodies, carrying out audits, taking out insurance, hiring, purchasing and selling assets, taking delivery of goods and dealing with commercial contracts. Moreover, it is apparent from those minutes that individual directors were granted very wide managerial powers.
307 In addition, with regard to the cost-sharing agreement, it is apparent from the information submitted by ASI and AOE that the various versions of that agreement in existence during the relevant period were signed by members of the respective boards of directors of those companies in Cupertino.
308 Moreover, according to the detailed information provided by ASI and AOE, it is the case for both ASI and AOE that, among ASI’s 14 directors and AOE’s 8 directors on their respective boards for each tax year during the period when the contested tax rulings were in force, there was only one director who was based in Ireland.
309 Consequently, the Commission erred when it considered that ASI and AOE, through their management bodies, in particular their boards of directors, did not have the ability to perform the essential functions of the companies in question by, where appropriate, delegating their powers to individual executives who were not members of the Irish branches’ staff.
And to repeat this is what we said on here in 2016:
Even if these companies are not deemed to be tax resident in Ireland can it be established that their profits should be taxable in Ireland? Is the presence of a branch enough to deem the profits of the parent taxable here?
There are a couple of ways of approaching this but the key aspect is the agreements granting the rights to use Apple Inc.’s intellectual property outside the Americas to these companies. All of the licensing and cost-sharing agreements were negotiated and signed in the US, at board meetings which took place in the US, and by directors and key decision-makers who were exclusively based in the US. None of the key risks, functions and assets that underpin the creation and ownership of the intellectual property had a connection with Ireland.
Q.E.D.
The ruling of the General Court is here (press release). The Commission statement is here.
Next Wednesday the General Court of the European Union will give the first judgement in the state-aid case against Ireland in relation to the taxation of Apple over the period 2005 to 2014. Yesterday, the OECD published the first set of aggregate statistics from the country-by-country reports (CbCR) that were introduced under Action 13 of the BEPS project. The data are for 2016.
These are linked as the subsidiaries at the centre of the state-aid case, in particular Apple Sales International, were stateless entities for the period under investigation. Changes to Ireland’s residency rules for companies introduced from the start of 2015 meant it was no longer possible to have an Irish-registered stateless company.
The data from the OECD show that in 2016 stateless entities continued to play a significant role in MNE tax structures. Here is all the data on stateless entities by the jurisdiction of the ultimate parent.
While stateless entities are a significant feature of the corporate tax landscape they really only arise from one jurisdiction: the US. In the OECD data for 2016, 99.8% of the profit linked to stateless entities is linked to companies with their ultimate parent in the US.
Stateless entities are a feature of the US tax code. See the second paragraph of this IRS note on its own CbCR statistics. As the figures above show stateless entities do not pay significant amounts of tax and the taxation of their profits can be viewed in a number of ways.
From the US perspective, the tax is due to the US and is merely deferred by being located in a stateless entity. A formal repatriation would have triggered the tax due to the US (with offsetting credits for any tax paid to other jurisdictions). Under the 2017 Tax Cuts and Jobs Act a “deemed repatriation tax” was introduced and the tax became payable to the US regardless of whether the profit was formally repatriated or not (albeit at a lower rate). This is one of the reasons Apple’s cash tax payments rose in 2019.
Central to the Commission’s state-aid case is Apple Sales International (ASI). For the period in question this was a stateless entity with a branch in Ireland. It had an effective tax rate similar that shown in the aggregate OECD figures for stateless entities (<1%). The Commission’s state-aid finding was not linked to the stateless status of ASI; it was linked to the allocation of profits between the company’s head office in the US and branch in Ireland.
In a summary of the possible outcomes posted here in early 2016 we said:
Even if these companies are not deemed to be tax resident in Ireland can it be established that their profits should be taxable in Ireland? Is the presence of a branch enough to deem the profits of the parent taxable here?
There are a couple of ways of approaching this but the key aspect is the agreements granting the rights to use Apple Inc.’s intellectual property outside the Americas to these companies. All of the licensing and cost-sharing agreements were negotiated and signed in the US, at board meetings which took place in the US, and by directors and key decision-makers who were exclusively based in the US. None of the key risks, functions and assets that underpin the creation and ownership of the intellectual property had a connection with Ireland.
With the benefit of the subsequent ruling by the Commission we know that all of this is true. However, there is one qualification that should be added to the above extract – the board meetings where the key decisions were made were not the board meetings of ASI. And this is the central argument of the Commission’s state-aid finding as set out in this paragraph:
285 The minutes of board meetings provided to the Commission demonstrate that the boards did not engage in any detailed business discussion before the discussions on Apple’s new structure in Ireland, as a result of which, according to Apple, the 2007 ruling ceased to be applied to determine ASI’s and AOE’s yearly taxable profits in Ireland. The summary of the minutes presented in Table 4 and Table 5 illustrates the discussions over the period January 2009 to September 2011 for ASI and December 2008 to September 2011 for AOE. With the exception of one business decision to transfer assets from AOE’s Singapore branch to another Apple group company, those minutes show that the discussions in the boards of ASI and AOE consisted mainly of administrative tasks, that is to say approving accounts and receiving dividends, not active or critical functions with regard to the management of the Apple IP licenses.
And that is essentially the case in a nutshell. Ireland’s position is that none of the key risks, assets and functions that made ASI hugely profitable were located in Ireland. The Commission went looking for them but all they could find outside Ireland were the minutes of board meetings where it was decided what bank account to put the profits into.
De facto, the key decisions were made by Apple Inc but they were not documented in the minutes of ASI’s board. The appropriate allocation of profits would see the profits attributed to the ASI head office attributed to Apple Inc. This is the view of the OECD.
But Apple Inc. was not part of the Commission’s investigation. The Commission looked only at the allocation within ASI and determined that “only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.”
The Commission has actually made a pretty strong case (aided by Apple’s poor documenting of decisions) but it only holds if you limit your view to ASI. If you consider Apple Inc. as a whole you would not allocate 60 percent of the company’s profit to the activities that happen in Hollyhill on the northside of Cork City.
And that is where we are. If the court limits its view to ASI then the Commission’s state-aid finding probably has a good chance of holding up. If the court takes the broader perspective of Apple Inc. as a whole then that probability is reduced but remains above zero. The EU courts don’t have jurisdiction over the actions of the IRS.
Will any of this result in Apple paying more tax? No. If Apple has to pay more tax to Ireland then the “deemed repatriation tax” due to the US under the TCJA will be reduced by a commensurate amount.
Robert Stack, former Assistant Secretary at the US Treasury said the following to a Congressional Committee about what would happen if the state-aid decisions are upheld by the courts:
“Now if we were to determine that those payments are in fact taxes and we were to determine that they are creditable under our rules, now when that money comes home from those companies in addition to the credit they got for the tax they originally paid in those jurisdictions they get an extra credit. And that credit to this taxpayer you asked me about means in effect the US Treasury got less money and in effect made a direct transfer to the European jurisdiction that is getting the ruling from the Commission.
So if these turn out to be creditable taxes it is the US taxpayer that are footing the bill for these EU investigations.”
But it was the US tax system that allowed this profit to be deemed “offshore” in the first place through the licensing and cost-sharing agreements provisions of the US tax code. The IRS has challenged several of these, including Facebook and Amazon, in the US tax courts but has yet to be successful.
The US might be happy to accommodate stateless entities within its tax framework to try and limit the harm of its approach to transfer pricing. We know that the European Commission has not been so accommodating. On Wednesday we’ll get a look at what the courts think.