Some take outs from the Apple ruling

Lots to muse over in the €13 billion tax ruling from the European Commission in the Apple case today.  And that’s just the tax.  Add the Revenue Commissioner’s 8 per cent per annum simple interest bill on top of that you’re probably looking at something close to €19 billion.  I didn’t think they’d do it but they have. 

Here are some extracts from the Commission Press Release in the order they appeared:

These profits allocated to the "head offices" were not subject to tax in any country under specific provisions of the Irish tax law, which are no longer in force.

This seems to be a bit of a contradiction to what follows later and also a bit of a stretch of what Irish tax law can achieve.  I doubt Irish tax law can be used to argue that profits in other countries are not subject to tax there.  And if these specific provisions of Irish tax law deemed that the profits of the head offices were not subject to tax in Ireland how is that state aid?

This selective tax treatment of Apple in Ireland is illegal under EU state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules.

Not sure I get this.  If what Apple did was under “specific provisions of the Irish tax law” why couldn’t other companies do it.  I guess some probably did!

This tax ruling was terminated when Apple Sales International and Apple Operations Europe changed their structures in 2015.

Well I guess that confirms where the 26% GDP growth rate in 2015 came from!

Apple set up their sales operations in Europe in such a way that customers were contractually buying products from Apple Sales International in Ireland rather than from the shops that physically sold the products to customers. In this way Apple recorded all sales, and the profits stemming from these sales, directly in Ireland.

Hmmm. I’m not sure that’s true.  Some customers, such as online customers, may have bought from ASI but anyone going to a shop bought the product from that shop – especially when they bought from non-Apple stores such as Currys, Carphone Warehouse, Dixons etc.  These retailers may have bought from ASI but that’s a bit different to saying the customers did.

And even for Apple stores it’s not clear that the customers were buying from ASI.  Apple Retail UK Ltd which runs Apple stores in the UK had £900 million of sales in 2014 (accounts here).  The shops might have bought the devices from ASI but the customers bought them from Apple Retail UK Ltd.

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.

And this is the contradiction.  We have “specific provisions in the Irish tax law” in the first extract saying the profits are not subject to Irish tax and the factual position set out by the Commission that only the Irish branch has substance.  The Commission are going for substance over law.

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.

I’m not sure “limited decisions” is how best to describe the activities of the board of directors.  They signed the cost-sharing agreement with Apple Inc. which the Commission highlight as being key to the profit earned by ASI.  They negotiated and signed the contract manufacturing agreements with the manufacturers in China.  And they set the price at which ASI could sell the products.  All the key elements of ASI’s costs and revenues were controlled by the board of directors and not the responsibility of the Irish branch.

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".

So the EC are attributing 60 per cent of Apple’s global profits to what goes on in Hollyhill in Cork because the “limited decisions” of the board of ASI only generate interest income.  Everything else is down to the staff in Cork. That’s serious productivity!

This is only a first run through the ruling and this is only from the press release.  In a couple of months we’ll get the full 130-page decision (minus some redactions) so we’ll see then if the Commission have their ducks in a row. 

And if you want to look through the finer details of Apple Sales International they are in this previous post which showed that the approach proposed by the Commission gives a tax bill of $14 billion for 2004 to 2013.  Add 2014 and you get to in and around the €13 billion figure the Commission have come out with.  And the interest probably comes to another €6 billion or so (if we apply the Revenue Commissioner’s 8 per cent simple interest rate).  €19 billion. Who’d have thunk? Not me!

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