Battling Apple and the Giants

C.P. Chandrasekhar

On the 30th of August European Competition Commissioner Margrethe Vestager dropped a bombshell at the tax doors of the world’s leading multinational corporations. After a lengthy investigation she ruled that Ireland must recover from the local Apple subsidiary up to 13 billion euros ($14.5 billion) in unpaid past taxes, adding on interest on delayed payments, which could take the total to as much as 19 billion euros ($21 billion).The ruling was based on a decision that tax benefits provided to Apple’s subsidiaries in Ireland through two tax rulings amounted to ‘state aid’ that was illegal under EU rules.

The penalty, though huge by past standards, is not the issue here. With as much as $230 billion of cash and liquid securities (which can be easily converted to cash) at hand, Apple would not have to stretch itself to meet this bill. The real issue is whether Apple’s tax accounting, which is considered legal by the Irish government, can be challenged by investigators acting on behalf of the European Commission. It is taken for granted by the world’s biggest companies that they can transfer profits earned anywhere to locations that are tax havens as part of their “tax planning” decisions. The method through which this is often done is to charge inflated book prices (“transfer prices”) for goods or services sold by the parent or a third country subsidiary (depending on which is located in a country that imposes lower taxes) to the subsidiary in the country from which profits are to be transferred out. This inflates costs and reduces profits on paper in the country from which incomes are being siphoned out. The practice could mean both, that the effective income tax incidence on these companies globally is less than that on smaller companies and even individuals, and that some countries from where the profits of these multinationals are earned would be deprived of tax revenues on those incomes. These problems have been accentuated in the neoliberal era, since countries pursuing neoliberal trajectories are keen on attracting foreign investors into their economies, and are competing with each other to offer them a range of concessions, including concessions that facilitate this kind of tax avoidance, which is legal and does not constitute tax evasion.

The case of Apple’s Irish operations is an extreme example of such tax avoidance accounting. It relates to two Apple subsidiaries Apple Sales International and Apple Operations Europe. Apple Inc US has given the rights to Apple Sales International (ASI) to use its “intellectual property” to sell and manufacture its products outside of North and South America, in return for which Apple Inc of the US receives payments of more than $2 billion per year. The consequence of this arrangement is that any Apple product sold outside the Americas is implicitly first bought by ASI, Ireland from different manufacturers across the globe and sold along with the intellectual property to buyers everywhere except the Americas. So all such sales are by ASI and all profits from those sales are recorded in Ireland. Stage one is complete: incomes earned from sales in different jurisdictions outside the Americas (including India) accrue in Ireland, where tax laws are investor-friendly. What is important here that this was not a straight forward case of exercising the “transfer pricing” weapon. The profits recorded in Ireland were large because the payment made to Apple Inc in the US for the right to use intellectual property was a fraction of the net earnings of ASI.

Does this imply that Apple would pay taxes on these profits in Ireland, however high or low the rate may be? The Commission found it did not. In two rather curious rulings first made in 1991 and then reiterated in 2007 the Irish tax authority allowed ASI to split it profits into two parts: one accruing to the Irish branch of Apple and another to its “head office”. That “head office” existed purely on paper, with no formal location, actual offices, employees or activities. Interestingly, this made-of-nothing head office got a lion’s share of the profits that accrued to ASI, with only a small fraction going to the Irish branch office. According to Verstager’s Statement: “In 2011, Apple Sales International made profits of 16 billion euros. Less than 50 million euros were allocated to the Irish branch. All the rest was allocated to the ‘head office’, where they remained untaxed.” As a result, across time, Apple paid very little by way of taxes to the Irish government. The effective tax rate on its aggregate profits was short of 1 per cent. The Commissioner saw this as illegal under the European Commission’s “state aid rules”, and as amounting to aid that harms competition, since it diverts investment away from other members who are unwilling to offer such special deals to companies.

In the books, however, taxes due on the “head office” profits of Apple are reportedly treated as including a component of deferred taxes. The claim is that these profits will finally have to be repatriated to the US parent, where they would be taxed as per US tax law. But it is well known that US transnationals hold large volumes of surplus funds abroad to avoid US taxation and the evidence is they take very little of it back to the home country. In fact, using the plea that it has “permanent establishment” in Ireland and, therefore, is liable to be taxed there, and benefiting from the special deal the Irish government has offered it, Apple has accumulated large surpluses. A study by two non-profit groups published in 2015 has argued that Apple is holding as much as $181 billion of accumulated profits outside the US, a record among US companies. Moreover, The Washington Post reports that Apple’s Chief Executive Tim Cook told its columnist Jena McGregor, “that the company won’t bring its international cash stockpile back to the United States to invest here until there’s a ‘fair rate’ for corporate taxation in America.”

This has created a peculiar situation where the US is expressing concern about the EC decision not because it disputes the conclusion about tax avoidance, but because it sees the tax revenues as due to it rather than to Ireland or any other EU country. US Treasury Secretary Jack Lew criticised the ruling saying, “I have been concerned that it reflected an attempt to reach into the U.S. tax base to tax income that ought to be taxed in the United States.” In Europe on the other hand, the French Finance Minister and the German Economy Minister, among others, have come out in support of Verstager, recognizing the implication this has for their own tax revenues. Governments other than in Ireland are not with Apple, even if not always for reasons advanced by the EC.

Expectedly,Tim Cook decided to launch an attack against the EC decision, describing its ruling as “total political crap”, and arguing that “In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe.” Holding that the EC “is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been”, he argues that “a fundamental principle is recognized around the world: A company’s profits should be taxed in the country where the value is created,”and that “Apple, Ireland and the United States all agree on this principle.” Since, “in Apple’s case, nearly all … research and development takes place in California, so the vast majority of .. profits are taxed in the United States.” Unfortunately, that is not true, as yet, and is unlikely to be in future, if Apple has its way.

But the fault lies with the Irish political elite as well. The 13 billion euros figure illustrates how much the Irish government gave up over the period 2003 to 2014 to have a bit of Apple on its soil.The EC did not call for data from years prior to 2003. Yet, the benefits that Ireland derived because of Apple’s presence seem meagre. Direct employment by Apple in Ireland provides only 5,500 jobs, though Apple claims that employment in services associated with its operations adds another 2500. But, even then the benefit does not seem to be much from a company that has been running operations in Cork, Ireland for more than 35 years. On the other hand the 35 billion euros that Ireland ‘gave up’ to have the privilege of hosting Apple would have been enough to do away with the government’s deficit and almost equals what the Irish government spends on health care for its 4.6 million inhabitants. There are surely many areas where the additional money can be fruitfully put to use.

Yet the Irish government is sticking by its decision to give Apple the concessions it has. The Irish cabinet has decided to appeal against the EC ruling, though a few of the independent legislators whose support is crucial for the survival of the minority government of Taoiseach Enda Kenny initially expressed some reservation. The argument as expected is that this kind of retrospective tax demand in violation of the rulings of previous governments would not only upset Ireland’s relationship with Apple but damage its image as a superior investment destination for multinational enterprises in general. That image has been cultivated, Niall Cody, the chairman of Ireland’s tax collection agency the Revenue Commissioners, argues, by giving similar tax concessions to around 1,000 other multinationals, mostly American. On the Apple case he says: “Full tax due was paid in accordance with the law.”

Thus the power of the multinationals comes not just from their own size and reach, and from the support that their own governments afford them, but from their ability to divide desperate countries seeking the presence of global giants to make a small difference to their economic conditions. The costs of garnering that difference are, therefore, often missed. Reuters reports that an investigation conducted by it in 2013 found that around three-fourths of the 50 biggest U.S. technology companies use practices that are similar to Apple’s to avoid paying tax. So Verstager has taken on not just one giant, but the worlds corporate elite. She should not lose. But even if she does this time, this is a battle well begun.

Originally published in Frontline.

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September 27, 2016 | Posted in: Uncategorized | Comments Closed

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