Wednesday, October 29, 2014

Sunday Business Post 26/10/2014

Here is the submitted text for an article in last weekend’s SBP on the European Commission State-Aid investigation to Apple’s tax arrangements in Ireland.

Commission probe unlikely to bear fruit

The European Commission’s investigation into Apple’s tax affairs started out as a narrow probe of a transfer pricing arrangement in place in Ireland back in 1991 but could expand into a much broader trawl through Apple’s global tax affairs. 

The discussions from 1991 that took place between Apple’s tax advisers and the Revenue Commissioners were reported in a damning fashion by the Commission but were short of what is required for an adverse state aid finding to be made.  It seems the Commission investigation are motivated to make an adverse finding against Ireland and have thrown a wide net over Apple’s management of its intangible assets.  However, like their examination of the 1991 agreement the Commission are unlikely to come up with much to interest them.

The key to Apple’s profitability are its brand and innovations.  Lots of companies can make smartphones and other consumer devices but none command the customer loyalty Apple has engendered or the reputation it is fostered.  The Apple brand is a massively valuable asset and much of Apple’s profit is rightfully attributed to it.

Apple has divided the economic rights to into two divisions.  On one side you have the Americas, with Apple declaring its profits to the Internal Revenue Service in the US and paying tax accordingly.  On the other side there are the global rights to Apple’s intangibles and that is where the story gets interesting.

As was revealed by a US Senate investigation in May 2013 these hugely valuable intangible assets are held in Irish-incorporated subsidiaries of Apple.  However, apart from some Irish Corporation Tax paid on the profits of the activities of their branches in Ireland these subsidiaries paid no other corporate income tax anywhere in the world.

This was achieved by being “stateless” for tax purposes which was the result of not being tax resident anywhere.  Apple engineered this by falling between gaps in the interaction of Irish and US tax law.  Of course, a company that is “stateless” for tax purposes has to be somewhere in reality.

The question the European Commission wants answered is where are these companies.  If they are in the US it is not an issue for Ireland but if these companies are carrying out their operations in Ireland how come they are not paying Corporation Tax to Ireland on the massive profits earned.

There was lots finger-pointing at Ireland following the US Senate hearing but the reality is that these “stateless” Apple subsidiaries carry out their activities in the US and therefore their profits are not subject to Irish tax.

In his opening statement to the Senate hearing when talking about these companies, the committee chairmen Sen. Carl Levin said that “these companies’ decision makers, board meetings, assets, asset managers, and key accounting records are all in the United States.”  In a sense the European Commission have asked the Irish government to prove this.

A problem faced by the government is that they need Apple’s help to do so.  It was easy for the government to provide the information on the 1991 agreement because the Revenue Commissioners had it all but how do they get information about Apple’s activities in the US unless the company provides it?

From an outsider’s perspective we can try to find evidence of these companies in Irish economic statistics, most notably the balance of payments which records international transactions.  The scale of Apple’s financial flows means they should be fairly easy to identify in Irish statistics.

In 2011, the key Apple subsidiary in question made payments of $1.4 billion to the parent company as part of the agreement to use Apple’s intangible assets outside the Americas.  In that year this company had sales revenue of $48 billion and a profit of $22 billion.  If these massive financial transaction were happening in Ireland they should be easy to identify in Ireland’s economic statistics. 

We know that Google does have its international sales running through Ireland and the effect of these on Irish economic statistics can be identified.  In 2013, Google’s non-US revenue was €17 billion which is much lower than Apple’s.  It is also the case that Apple’s revenues are growing rapidly.  The subsidiary the Commission are focussing on had revenues of $48 billion in 2011 which in 2012 had grown to $64 billion and this rapid growth has continued.  Figures in the Irish data do not show these increases.

A useful check to make would be to see if these flows appear in US balance of payments data.  Apple may be one of the biggest companies in the world but the US remains the biggest economy in the world and identifying the impact of a single company in US statistics is impossible. 

We can check flows by country and there is nothing in the US data to suggest that Apple is routing its revenues through Ireland.  A possibility is that the investigations into these “stateless” companies has revealed huge gaps in the international tax law but also a massive black hole in balance of payments data.

The profit from Apple’s sales around the world flow directly to the US just as Sen. Carl Levin said last year.  Unlike Google there is no stop-off in Ireland to indicate that the application of Irish Corporation Tax to these profits is warranted.  The profits are in the US and it is US rules that allows them to go untaxed until they are transferred from the subsidiary to the parent.

It is not clear how the Commission investigation will proceed from here.  Apple may not have been pleased but, as a US company, they were obliged to provide information to the US Senate on their US activities. There is no such obligation for them to tell the European Commission about their activities in the US and the Irish government cannot provide information that they do not have. 

The Commission are shaking the Apple tree but nothing is going to fall out of it.  Rather than being objective it seems they will be disappointed by that.

No comments:

Post a Comment