Corporation Tax, Stiglitz and Ireland as bad neighbour

Comments made last week by Prof. Joe Stiglitz attracted some attention.  Here is the main point:

In the area of taxes, Ireland has not behaved well, either globally or for their own citizens, or as an EU citizen.

It is not a good citizen to try to rob your neighbour. And what Ireland did is it tried to get revenue that would have gone to other European countries to be relocated into Ireland, to take a pittance out of that [in tax] and to do a deal where Apple is perfectly happy because they get their taxes reduced.

And who pays? The rest of Europe is paying. You don’t do that to your neighbours, to your partners in the EU. I view Ireland not only as a tax haven; it is not a good citizen of the EU.

This has been a song Prof. Stiglitz has been singing as a cover version for a while so he has the lyrics down pat.  One point that should trouble him is that other people have stopped singing it including the person who had the original hit.

Obviously we can trace this back to Commissioner Vestager’s statement when she announced the finding of state-aid in the Apple case in August 2016:

Finally, it may be that not all the unpaid taxes are due in Ireland.

Apple Sales International is based in Ireland, where it records all profits on sales of Apple products throughout Europe, in the Middle East, Africa and India. As I have already mentioned, this recording of profits in itself is not a matter for state aid rules. It results from Apple's choice of structure.

But, other countries, in the EU or elsewhere, can look at our investigation. If they conclude that Apple should have recorded its sales in those countries instead of Ireland, they could require Apple to pay more tax locally. That would reduce the amount to be paid back to Ireland.

This was a mistake by the Commissioner.  Such comments were not repeated when other state-aid finding on tax were announced and not long afterwards Commissioner Vestager rowed back on the above statements.

For example, here are a couple of exchanges she had with Members of the Oireachtas Finance Committee when she met with them in January 2017. [In some instances the questions and/or answers are truncated.]

Deputy Michael McGrath: Is the Commissioner repeating today that some of the tax the Commission believes is owed may not be necessarily owed to Ireland but to other member states if they calculate, based on their own tax systems, the taxes owed to them?

Ms Margrethe Vestager: It is not something we believe.

Deputy Pearse Doherty: [I]s it a case that most of the €13 billion could be claimed by other member states?

Ms Margrethe Vestager: My guess would be that a large majority of the unpaid taxes would be due in Ireland.

Deputy Paul Murphy: Is it Ms Vestager's opinion that the large majority of the €13 billion, plus interest, would be owed to the Irish State rather than to other countries?

Ms Margrethe Vestager: Yes.

Deputy Michael D'Arcy: The Commissioner is of the opinion that the majority of the €13 billion figure should be available to the Republic of Ireland. Is that correct?

Ms Margrethe Vestager: That would be our estimate, yes.

Could Apple owe more tax to other EU countries? Yes.  But that is a matter for those countries to decide.  In fact, if those countries have not been collecting the required amount of tax from Apple it would be those countries who have granted Apple state aid.

But there is no way for any country to unilaterally introduce a law or grant a ruling that reduces the tax due to another country on profits sourced in that country.  The division of profits between countries may be subject to dispute but there is no way for one country to unilaterally shift source profits out of one country and in to its own tax base. 

Companies can use structures where a greater share of their profits are located in one country versus what the case might be if they used a different structure. Again countries can challenge these structures.  France has done so in the case of Google and although Google will face an additional tax bill, the structure used by the company with sales booked in Dublin held up to legal scrutiny.

There is a way in which the €13 billion Irish tax bill estimated by the Commission could be reduced and that is if the profits are rightfully sourced where they arise – in the United States. As Commissioner Vestager has said:

“If the U.S. tax authority found that the monies paid due to the cost-sharing agreement were too few ... so that they should pay more in the cost-sharing agreement, that would transfer more money to the States and that may change the books and the accounts in the States.”

It is the view of the OECD that the bulk of the profits belong in the US.  The crucial aspect, as referenced by Commissioner Vestager, is the cost-sharing agreement which allows the profits to escape the US in the first place.  Without this there would not be headlines about the tax outcomes of US MNCs or charts about “biggest tax havens” etc. Why do we only ever see charts like that for US companies?

It is because it is the US approach to cost-sharing agreements that is central to these outcomes not the practices in the labelled countries.  [Aside: It is also the case that the licenses created by these cost-sharing agreements is the principal component of the intangible assets that are currently being moved to Ireland by US MNCs.] 

The IRS have taken a number of US MNCs to court over the terms they have included in these cost-sharing agreements (initial buy-ins, ongoing payments etc.) and have lost every single time. This is because of the way the provisions are set out in the US tax code.  If Prof. Stiglitz thinks that the taxation of MNCs such as Apple is wrong he would do well to look a little closer to home for the solution.

Of course, as a result of the Tax Cuts and Jobs Act passed by the US Congress in December 2017, Apple has indicated that it will pay $37 billion of US tax on the profits it was able to get offshore via the cost-sharing agreement.  These profits include those subject to the state aid case.  In its 2018 Annual Report, Apple said:

As of September 30, 2017, the Company had a U.S. deferred tax liability of $36.4 billion for deferred foreign income. During 2018, the Company replaced $36.1 billion of its U.S. deferred tax liability with a deemed repatriation tax payable of $37.3 billion , which was based on the Company’s cumulative post-1986 deferred foreign income. The deemed repatriation tax payable is a provisional estimate that may change as the Company continues to analyze the impact of additional implementation guidance. The Company plans to pay the tax in installments in accordance with the Act.

These payments will have no bearings on the principles used by the Commission in the state aid case.  This is the US taxing the worldwide profits of one its companies so this profit could be sourced in another country. The Commission is arguing that 60 per cent of Apple’s profit was sourced in Ireland.

However, if Apple does end up paying €13 billion to Ireland, then this will likely by subtracted off the tax bill to be paid to the US.  Foreign taxes are creditable when US companies pay US tax on their non-US profits.  The state aid case will not result in Apple paying more tax; but could result in the company paying much less to the US.

Robert Stack, former Assistant Secretary at the US Treasury said the following to a Congressional Committee about what would happen if the state aid decisions are upheld by the courts:

“Now if we were to determine that those payments are in fact taxes and we were to determine that they are creditable under our rules, now when that money comes home from those companies in addition to the credit they got for the tax they originally paid in those jurisdictions they get an extra credit. And that credit to this taxpayer you asked me about means in effect the US Treasury got less money and in effect made a direct transfer to the European jurisdiction that is getting the ruling from the Commission.

So if these turn out to be creditable taxes it is the US taxpayer that are footing the bill for these EU investigations.”

This was also covered by a WSJ piece last week and is also the view of the company itself who in their most recent quarterly SEC filing state that:

The Company believes that any incremental Irish corporate income taxes potentially due related to the State Aid Decision would be creditable against U.S. taxes, subject to any foreign tax credit limitations in the U.S. Tax Cuts and Jobs Act. 

In time, it could be that Prof. Stiglitz will try to sing a new tune.  This is because the Apple state-aid case is not about whether Apple owes additional tax in other EU countries.  That is for them to determine.  The state aid case is not about the amount of tax Apple pays.  The US taxes companies on their worldwide income so all the profit is subject to tax (though up until the TCJA some payments could be deferred).  The state aid case is about whether Apple pays €13 billion of tax to Ireland or the US.

If the state-aid decision is upheld Prof. Stiglitz could do an about turn and argue that Ireland is being a bad neighbour to his country and robbing tax revenue from his fellow citizens. And he has a better chance of being right if he can get the lyrics of that one down. But which country will be at fault if that happens? His own.