There is lots of excitement this morning about a story in the Financial Times about the European Commission state-aid investigation into Apple’s tax arrangements in Ireland. The story first appeared online under the headline “Apple hit by Brussels finding over illegal Irish tax deals”. When put on the front page of today’s print edition the headline was “Apple hit by Brussels findings over Irish backroom tax deals”. The story begins:
Apple will be accused of prospering from illegal tax deals with the Irish government for more than two decades when Brussels this week unveils details of a probe that could leave the iPhone maker with a record fine of as much as several billions of euros.
Preliminary findings from the European Commission’s investigation into Apple’s tax affairs in Ireland, where it has had a rate of less than 2 per cent, claim the Silicon Valley company benefited from illicit state aid after striking backroom deals with Ireland’s authorities, according to people involved in the case.
The headline and story resulted in widespread opprobrium from the usual sources being directed at Ireland. The reality is that the headline is nonsense and the presentation of the story in the text was misleading (at best). Anyone with even a summary understanding of the issue would immediately see that, but there are plenty who love jumping to and jumping on adverse conclusions about Ireland’s corporation tax regime.
The errors include:
- there are no “fines” in state-aid cases
- the case does not involve “billions of euros”
- there are no “preliminary findings”
- there is no “rate of less than 2 per cent”
And that’s just the first two paragraphs!
At present Apple pays very little corporate income tax on its profit earned on sales made outside the US. These profits will be taxed based on the source-location of the risks, assets and functions from which the profits are derived. The risks, assets and functions that generate Apple’s profits are mainly in the US and under current rules the US is granted the taxing right for the bulk of Apple’s profits. The fact that the US allows Apple to defer the payment of this tax until the profits are transferred to a US-incorporated company is a matter for the US.
Sometimes we tend to use the word “repatriate” when it comes to these profits. But Apple’s non-US profits don’t have to be repatriated to the US; they go there directly and there is no stop-off in Ireland. Yes, Apple’s non-US profits are accumulated in Irish-incorporated companies but almost everything about these companies happens in the US. Using US rules, Apple was able to create this situation and maintain that these companies did not have a taxable presence in the US. The EC investigation will examine none of the headline issues about these companies highlighted in the US Senate Report last May.
The EC can only investigate the taxing of activity that happens in Ireland and decisions that are made in Ireland. In its June announcement, the EC said the Irish element of its investigation relates to:
the individual rulings issued by the Irish tax authorities on the calculation of the taxable profit allocated to the Irish branches of Apple Sales International and of Apple Operations Europe;
It is the profit attributed to just the Irish branches of the companies that is in question not the entire profits of these companies. In his opening statement to the US Senate hearing last May, Sen. Carl Levin (D) said: Continue reading “Barking up the wrong Apple tree”