I have been asked by many people for more comment on Apple and Ireland and what it might mean. I just wrote this and will share it:
Corporate taxes are based on tax adjusted profits and losses i.e. they start from accounting data and end up with a tax charge.
There are numerous adjustments that can be made on the way, one of which relates to transfer pricing, which means that the profit at one end of a transaction is adjusted with the expectation that there should be a matching equal and opposite adjustment at the other end to ensure that profit is taxed only but in the right place.
In this case there are a number of extraordinary omissions from this process. First, the accounts seem to have had little to do with the tax charge made.
Second, there is no adjustment process as such to establish a 'transfer price' - the process for which the EU describe quite well at the beginning of their document.
Third there seems very little chance that compensating adjustments were made for those made in Ireland.
The result is that it is very hard to see how this process fits into any known basis for negotiating and an international tax advance pricing agreement for transfer pricing purposes: it was simply a price negotiation i.e. what Apple was prepared to pay Ireland.
The basis for the allegation is, then, that Apple was not really in the Irish tax system at all and the advantage of being outside it was what constituted the value of state aid.
I cannot see how there is any real defence to this allegation unless it can be shown that the same deal was offered to all companies in Ireland, and I am certain it was not. The EU do not need to rely on the OECD guidelines and whether they were in place or not in 1991 or 2007 to win, in other words.
What the Irish press should be musing on is something much bigger, which is that if Apple lose will the EU ask for details of all other such deals from Ireland and ask for settlement there as well. And if so how many such deals are there, and how much is involved? That's the hornet's next waiting to be opened.
Another point to make though: this does not apply outside Ireland, but it shatters the case that there is no action needed elsewhere, and that is its significance.
Is this a tipping point on these issues. Not by itself, but it's going to help the overall shift against abuse.
And for that reason the EU's actions are very welcome.
Richard, could you just expand a little on “this does not apply outside Ireland, but it shatters the case that there is no action needed elsewhere, and that is its significance” Apologies for being dense, or maybe missing something, but it looks in isolation as though you’re saying that because there’s a problem in Ireland, there are problems elsewhere..?
Is the inference that whoever was on the other end of the transaction clearly didn’t look at it properly, since the profits should have been taxed in that second jurisdiction as the counterpart to the Irish transfer price but weren’t? (Not quite sure what the counterpart to the Irish transfer price could have been anyway if it was actually more in the nature of just a business residency fee than a properly calculated tax attribute.)
There are two issues that I am referring toThere are two issues that I am referring to.
The first is that it seems very unlikely that Ireland advised any other countries that the profits that fell out of tax in Ireland should be taxed in some other place as a result. Whether or not this creates the possibility of reopening Apple’s corporate tax affairs in many other countries in the period since 1991 is, now, an issue that many countries will need to consider, but about which I cannot predict an outcome.
That said, the issue that I had at the forefront of my mind when making comment related to the tax losses arising in other countries as a direct result of Ireland’s actions in permitting sales to be recorded there when there was no permanent establishment in which they could be recorded in another place, which is the basis of so much anger about the Google tax situation, for example. Within the limitations of the Competition Commissions enquiry in Ireland there is no way that the loss of revenue to another government can be recovered because the only loss that can be recovered as result of this enquiry within Ireland is the amount of state aid provided by the Irish government to Apple. In other words, unless other countries are now willing to reopen their tax files on Apple because they think there may have been misstatement of transfer prices ( and without a relevant permanent establishment in their territory they may not have the capacity to do this) there is no way that the overall tax loss can be addressed.
That means that the compensation payments will be much less than the overall tax saving to Apple, whatever happens, unless of course the European Commission decides to impose serious and punitive penalties to compensate for the losses elsewhere.
Thanks Richard; much clearer in my mind now!
Richard, you’ve spoken well in raising taxability in other countries.
According to the Senate sub-committee hearing documents (which includes a number of internal Apple documents), Apple Operations International (AOI) and its subsidiaries were buying mostly from unrelated contract manufacturers (principally in China). Some sales were to unrelated parties and some sales were to related parties. For these latter sales, other countries could presumably question the transfer pricing and increase the level of tax in the country of the distributor.
As I’ve separately written to you, from my review of the Apple documents, it appears that some portion of their income (including from some sales of products and from service fees from selling third-party software, music, etc through the Apple App stores, iTunes, etc.) could be directly taxable to AOI in the US. There’s of course no tax treaty involved so that US domestic tax rules on the taxability of foreign corporations apply. In brief, if a foreign corporation such as AOI is conducting a US trade or business and has “effectively connected income” (as defined in the law and regulations), then that effectively connected income will be taxable at the normal US tax rate of up to 35%. In addition, there’s a branch profits tax of 30% and the potential loss of some deductions and tax credits because AOI has never filed any US tax returns (as disclosed in the hearing documents).
All the best,
Jeff