Thursday, September 1, 2016

Does the arithmetic behind the €13 billion stack up?

In a word: yes.  This is from a post last March which looked at ASI in detail.

But what if the profits of ASI were to be deemed taxable in Ireland?  All the noises are that this is a determination that the European Commission could make.  There seems little basis in fact to support it but I guess there are arguments that could be made.  These may be that:

  • ASI should be deemed tax resident in Ireland
  • ASI is an Irish-registered company
  • ASI has employees in only one country – Ireland
  • ASI only has substance through its Irish branch which is enough to deem the parent, which has no substance, taxable in Ireland
  • Such is the nature of the activities of the Irish branch that ASI’s sales should be considered to be fully completed by it

What happens if all of ASI’s profits are deemed taxable in Ireland? Without the exact calculations it is difficult to tell but if it does happen we will be really at the races and the talk will be of billions not millions.

Assuming ASI performance in 2013 tracked that of the overall company then the cumulative profit earned by ASI over the ten-year period from 2004 to 2013 is somewhere around $113 billion.  If we just do a crude approximation and apply a 12.5 per cent tax to that you get $14 billion.

And you can’t just rock up to the Revenue Commissioners in 2016 and say you want to pay tax due for 2004.  At the very least interest will be applied and the interest rate used by the Revenue Commissioners since 2009 has been the equivalent of eight per cent per annum.   If we apply eight per cent interest to this notional $14 billion of tax due over the ten years then the total liability reaches $19 billion.

The calculation was from 2004 to 2013 and is based on the figures in the table below showing ASI’s profits and taxes.  Convert to €, add in the amounts for 2014 and interest for another 8 months and you get around €13 billion of tax and around €6 billion of interest.  There is nothing wrong with the Commission’s arithmetic.

The table below also shows some of the effective rates used by the Commission in their press release. 

ASI Tax Outcomes

Getting the arithmetic right is one thing; getting the logic right is another.  As shown above we suggested five possibilities through which the Commission might conclude that the entire profits of ASI could be deemed taxable in Ireland.  They went for a variation of the fourth:

  • ASI only has substance through its Irish branch which is enough to deem the parent, which has no substance, taxable in Ireland

Essentially what the Commission have said is that because the parent – which the Commission describe as the “head office” and with the quotation marks! – has no substance (in their view) all the profit allocation within the company should be zero to the “head office” and 100 per cent to the Irish branch (bar some interest income).

So while they have the arithmetic right the key question is do they have the basis for the logic behind the arithmetic right.  We only have the press release to go on so far so it can be hard to tell what the exact justification is.  The government and Apple have the full 130-page ruling so they are in a better position to assess what the Commission have done.  But once the smoked has cleared it is something we will come back to over the next while.

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