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.
