Tuesday, September 30, 2014

Why is the Apple case so confusing?

Here is a quote from the letter by the European Commission to the Irish government on the Apple state-aid case:
Multinational corporations pay taxes in jurisdictions which have different tax rates. The after tax profit recorded at the corporate group level is the sum of the after-tax profits in each county in which it is subject to taxation. Therefore, rather than maximise the profit declared in each country, multinational corporations have a financial incentive when allocating profit to the different companies of the corporate group to allocate as much profit as possible to low tax jurisdictions and as little profit as possible to high tax jurisdictions.
That’s pretty straightforward: companies try to shift profits from high-tax jurisdictions to low-tax jurisdictions. Ireland is low-tax. Very low tax. So the accusation must be that Apple are shifting excess profits here, right? Here is the EC summarising their position:
The main question in the present case is whether the rulings confer a selective advantage upon Apple in so far as it results in a lowering of its tax liability in Ireland.
The accusation is completely the opposite! The issue is whether the tax liability in Ireland was too small.

The reason is that Apple can find a lower-tax jurisdiction than Ireland namely the United States. Apple can have a tax rate of zero on certain profits in the US. Why pay 12.5 per cent to Ireland when you can pay nothing to the US?

They can do this using some of the deferral provisions in the US tax code (especially that known as "check-the-box” or, as formally introduced, the “look-through rule”). The US has a headline corporate income tax rate of 35 per cent. However in some instances, through a myriad of means, US MNCs can defer the actual payment of this until the profit is transferred to a US-incorporated entity in their structure. Apple has a number of Irish-incorporated companies operating in the US that earn massive profits but US corporate income tax is not paid on these until the profit is transferred to a US-incorporated company.

Essentially, Apple in deciding where to locate its intellectual property Apple has a choice between having profits taxed at 12.5 per cent in Ireland or at zero per cent in the US. It choose zero per cent in the US. Yet, US politicians claim Ireland is the tax haven!

Sen. Carl Levin issued a statement today arguing that the European Commission report supported the findings of his US Senate sub-Committee last May. The chief finding in that report was of a special two per cent rate:
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.
Spot the contradiction? The US Senate accuses Apple of shifting profits into Ireland; The EU Commission is accusing that the profits in Ireland are too small. This is as much political as it is legal. On the tax rate applied in Ireland, the Commission say:
The taxable income [.] was taxed at 12.5%, except for limited components taxed at 25% mainly represented by interest payments received.
The profit in Ireland was taxed at 12.5 per cent and some cases it was even taxed at 25 per cent!

Apple currently has a annual profit of close to $40 billion dollars. If Ireland took a 12.5 per cent chunk out of that we can be sure that Carl Levin would be issuing another statement – one accusing Ireland of theft. As Levin himself says “Apple developed its crown jewels -- lucrative intellectual property -- in the United States”.

This intellectual property is not held in Ireland. On the two companies in the spotlight in the Commission investigation, the Commission says:
No rights in relation to the IP concerned are attributed to the Irish branch of AOE.
No rights in relation to the Apple IP concerned are attributed to the Irish branch [of ASI].

Apple kept its intellectual property in the US. So why didn’t it pay the US rate of 35 per cent on its profits? Answer: the “look-through rule” and “check-the-box”. From the Senate report:

Apple avoided U.S. taxation for the entire $44 billion through a combination of regulatory and statutory tax loopholes known as the check-the-box and look-through rules. (page 32)

These figures indicate that, in two years alone, from 2011 to 2012, Apple Inc. used the check-the-box loophole to avoid paying $12.5 billion in U.S. taxes or about $17 million per day. (page 34)

Apple reduced it’s US tax bill by $12.5 billion in just two years using “check-the-box” and the “look-through-rule”. If Apple paid $5 billion of Irish Corporation Tax then the amount that the US could collect from the 2011/12 profits would be $7.5 billion as the US grants a credit for corporate income tax paid elsewhere. So the US can collect more tax when Apple pays less tax in Ireland but it is a US provision that allowed Apple to defer paying $12.5 billion of tax over the two years.

This is because the US system allows Apple to defer the actual payment of tax until the profit is transferred to a US-incorporated entity in Apple’s structure. Apple keeps the profit in Irish-incorporated entities even though they do almost all of their business in the US. Although they are US-based, US law considers these businesses as “offshore”. Again Sen. Levin tells us the reality when talking about ASI and AOE:
In short, these companies’ decision-makers, board meetings, assets, asset managers, and key accounting records are all in the United States. Their activities are entirely controlled by Apple Inc. in the United States.
It is US politicians who voted for a provision that allowed Apple to avoid paying $12.5 billion of tax in just two years.  The "look-through rule" was introduced in 2005 (it formalised in law the 1997 IRS provision called "check-the-box").  The "look-through rule" expired in 2010 but has been extended several times since then.  It was most recently extended as part of the American Taxpayer Relief Act of 2012.  The “look-through rule”  allowed Apple to avoid paying $12.5 billion of taxes in just two years.  Who was among those who voted to retain as recently as January 2013?  Yes, Sen. Carl Levin.  See here.  To be fair Sen Levin did vote against it when originally introduced in 2006.

The same US politicians who would be shouting ‘larceny!’ if Ireland collected 12.5 per cent tax from Apple’s profits passed a provision that allows Apple to pay no tax on large amounts of its profit.  So we have politicians in a country which allows zero tax to be collected on some profit in its jurisdiction accusing a country which collects 12.5% on all profits earned in its jurisdiction of being a tax haven!

The cases are full of contradictions. The European Commission set out the theory that companies shift profits from high-tax jurisdictions to low-tax jurisdictions but then present a case that argues that Apple taxable income in low-tax Ireland is “too low”. The US Senate bemoans about "special rates" and Apple shifting profits to Ireland that are "too high" when its own evidence shows that Apple accumulates its profit in the US and uses US tax rules to achieve a tax rate of zero percent on most of those profits.

But whether we are looking east or west, whether it is the US Senate or the EU Commission, whether the profits are too high or to low there is just one thing that stands out among all the inconsistencies -  everyone is blaming Ireland. And that suits everyone in the US Senate and almost everyone in the European Commission - but we cannot be guilty of completely contradictory accusations.

If Ireland really was directly at fault then there could not be these contradictions. It would be pretty clear what is going on.   Either the profit here is "too high" (US Senate accusation) or "too low" (EU Commission accusation) - it cannot be both.  As it stands, the whole thing is a complicated murky mess of contradictory accusations from east and west. Ireland stands in the middle but seems more intent on trying to absorb the blows rather than repel them. The strategy isn’t working.

1 comment:

  1. It is complicated and contradictory, and thanks for continuing to shed light on the issues. Nevertheless, and in a narrower sense, Revenue may have made an illegal 'sweetheart' deal with Apple which has lowered their tax liability here. And, Ireland has allowed Apple and others to incorporate companies here that have no presence and are used as part of global tax avoidance strategies. (Btw, there are quite a few typos in the article above, no doubt due to some rapid writing.)