Some insight into Apple’s use of capital allowances

We have previously looked at Apple’s revised tax structure put in place from the start of 2015 which, of course, was linked to the extraordinary growth in Irish GDP in that year.  Recent changes to Irish company law offer us further insight into this.  Previously, unlimited companies did not have to have their financial accounts published.  There is now a requirement for unlimited companies to publish accounts via filings with the Companies Registration Office (CRO).

This week the accounts for Apple Operations International for 2018 were published.  Actually, the accounts were the consolidated accounts of AOI and its subsidiaries which number close to 75 so some caution should be exercised about attributing elements in the accounts to particular countries, including the tax figures reported.

Apple’s other main Irish subsidiaries, including Apple Distribution International (ADI) and those central to the state aid investigation, Apple Sales International (ASI) and  Apple Operations Europe (AOE) also had their accounts posted this week by the CRO but using section 357 of the Companies Act have been able to provide the consolidated accounts of the group they are in headed by AOI so the same document is posted for all companies with no information on what happens at the level of each company within the group.  This somewhat limits the details that can ascertained from the accounts and seems to undermine the transparency that the recent changes to company law were intended to bring.

Regardless, there are still a couple of things worth looking at in the consolidated accounts of the AOI group and one of those comes from the balance sheet.  Here is asset side of the balance sheet.  One would think a decent scanner would be among the assets.

Anyway, the figure we are interested in is for deferred tax assets and we are directed to note #5.  First here is what the Summary of Significant Accounting Practices has to say about the treatment of deferred tax:

Deferred tax is recognised in respect of all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements of the Group except where the deferred tax arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets are recognised only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses.

Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amount and tax basis of investments in foreign operations where the Group is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.

Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to receive the asset and settle the liability simultaneously.

Hopefully the next bit makes more sense.  The note on the provision for income tax indicates that most of the tax charge is deferred tax, i.e. tax charged during the period but not actually paid.

For 2017, $4.2 billion of the $6.0 billion tax provision was for deferred tax and in 2018 it was $4.7 billion out of €6.7 billion with most of this described as “origination and reversal of temporary differences”.

The income statement shows that tax charges result from income before taxes of $43.4 billion in 2017 and $46.7 billion in 2018.  These give rise to effective income tax rates of 13.9% and 14.3% for the two years respectively.

However, the amount of tax actually paid is closer to the current income tax element of the tax provision.  The cash flow statement shows that net cash paid for income taxes was €2.0 billion in 2017 and $1.4 billion in 2018 which correspond to an effective rate of around 4% across the two years.  On this it should be noted that a variation on the following note is included several times in the accounts:

The corporate income taxes in the consolidated statements of operations, balance sheets and statement of cash flows do not include significant US-level corporate taxes borne by Apple Inc., the ultimate parent of the group.

US-level taxes are paid by Apple Inc. on investment income of the Group at the rate of 24.5% (35.0% in 2017) net of applicable foreign tax credits. In addition, under changes in US tax legislation that took effect in December 2017, Apple Inc. is subject to tax on previously deferred foreign income (at a rate of 15.5% on cash and certain other net assets and 8.0% on the remaining income), net of applicable foreign tax credits.  The new legislation also subjects certain current foreign earnings of the Group to a new minimum tax.

OK, so these accounts may not fully reflect the overall tax outcome but we are interested what it might show for Ireland.  From the table above we can see that a significant portion of the tax charge is considered a deferred tax.  A deferred tax can a tax charge that will be paid at some stage in the future, therefore the charge appears as a deferred liability on the balance sheet.  Alternative a deferred tax can be a tax charge that will not be paid in the future but instead is offset against an existing deferred tax asset on the balance sheet.

We know from the balance sheet that we are dealing with the utilisation of a deferred tax asset. A further table in note 5 in the accounts shows some detail on the the evolution of the Group’s deferred tax assets in 2017 and 2018.

The total for the end of each financial year, unsurprisingly, matches the figures from the balance sheet but it is the figures for intra-group transactions that we will focus on.

As the earlier post outlined, an Apple subsidiary purchased the license to sell Apple products outside the Americas and became an Irish resident company at the start of 2015.  This license is hugely valuable and the now Irish-resident subsidiary that bought it incurred a huge capital allow to buy the asset.  This expense can be offset against income via capital allowances over a period of time using the provisions of section 291A of The Consolidated Tax Acts.

The above table shows that in September 2016 the AOI group (which includes the subsidiary that can claim the capital allowances) had $22.6 billion of deferred tax benefits from intra-group transactions.  It is only an assumption, but assuming that most of these deferred tax assets arise in Ireland the associated level of income that could be offset by a deferred tax asset of that amount is around $180 billion (the amount of the deferred tax asset multiplied by eight due to the 12.5 per cent rate of Corporation Tax).

In both 2017 and 2018, there was a reduction of around $4.4 billion in those deferred tax assets. If this is linked to capital allowances claimed under s291A it  would be associated with income of around $35 billion.  Given exchange rates this corresponds to a euro amount of around €28 billion or so.  Some support to the such a link is offered as this ties in with changes in income and capital allowances we have since 2015 for companies with negative or nil net trading income.

At the rate of use shown above, it could expected that the capital allowances will be exhausted by the end of 2021, though additional capital expenditure related to the asset may also be eligible for claiming as a capital allowance. It is possible that when the original capital allowances are exhausted something close to the full amount of income will be exposed to Ireland’s 12.5 per cent Corporation Tax – but that assumes that a third tax structure is not implemented by Apple in the mean time.

Finally, it worth looking at the balance sheet to see the figure for the intangible assets against which these capital allowances are being claimed.  The text is hard to read but there is no massive figure for intangible assets.  They are included by the CSO in the capital stock of fixed assets for the country but not included by the company in its consolidated balance sheet.

If the national accounts also did not recognise them it would go some way to fixing some of the problems with the figures for Ireland’s national income.  GDP would still be a mess but GNP and GNI would be much improved (and it could save us €200 million on our EU contribution).

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