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Return to: Home > Comments > Comment: Slicing the apple or killing the goose?

Comment: Slicing the apple or killing the goose?

The European Commission’s verdict on Apple is not about tax and it could have very worrying consequences for international trade relations, Robert Maas, tax consultant at CBW, Accountants, Tax and Business Advisors (DFK International), writes


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I was in Chicago when the European Commission delivered its verdict on Apple so I saw the USA view first.  Or perhaps Tim Cook pre-empted the USA view with his statement that it wasn't about how much tax Apple should pay, but rather to whom it should pay it.  The inference was that Apple believes that whatever it pays to Ireland it will recover in due course from Uncle Sam.  The USA Treasury seems to think that too.  Apple's USA stock price did not even shudder.  As The Wall Street Journal pointed out, € 13bn Euros ($ 14.5bn) is a drop in the ocean to Apple!  USA Today saw the decision as a sort of vindication of Brexit.  If the UK gets a reasonable trade deal with the EU, it will become an attractive European headquarters for multi-nationals who will then be able to avoid the idiocies of the EU.

Actually, in theory at least, the European Commission ruling is not about tax at all.  That is what makes it particularly worrying to tax specialists and probably, when the implications sink in, to most of the international business community.  What is alleged is that Ireland gave a subsidy to Apple by granting Apple a special tax regime not available to anyone else – or, to be more precise, not available to its EU competitors (assuming that it any longer has any).  Apple's current money-spinner is the iPhone, so it’s only EU competitor is possibly Nokia (although I don't think that they make phones any more).  Its main competitor is Samsung which is Japanese.  The EU is not asking Apple to pay Irish tax.  It is demanding that it repays to the Irish government the value of the special benefits that Ireland gave it in breach of EU competition law.

But theory and reality do not always coincide.  The reality is that the European Commission – unelected civil servants with enormous salaries and enormous powers – do not agree with the internationally agreed tax rules.  They think that the IRS is too soft on Apple, so if the IRS don't want to tax them, then someone should and that might as well be the EU.  The Commission does not itself have any powers in relation to income and corporation tax.  These are the sole province of the 27 individual countries of the EU.  Accordingly, if the Commission wishes to manipulate the international tax system – which it clearly does – it has to find a way to re-categorise tax as something else.  Unfortunately doing so undermines the international tax rules and creates significant uncertainty for business.  Apple is simply the fall guy for an attack on the US tax system.  No international company can feel confident that they will not be next.

I have better things to do with my time than search out and read the Commissions' report.  I have however read its press release, which presumably brings out what the Commission believes to be the salient point.  This is that Apple pays very little tax in the EU on the profits that the Commission thinks are generated in the EU.  Both Apple and the Irish Minister of Finance say that this is because Apple may have huge sales in the EU but that these do not generate huge profits.  There is also an inevitable mismatch between the headline rate of corporation tax and the effective rate paid by a company because most countries, including most EU countries, give tax incentives for things like investment in equipment, research and development, and patent income.  A technology company such as Apple is likely to benefit substantially from such incentives.  It needs to be stressed though that if Renault or Volkswagon were to move its European headquarters to Ireland, it would qualify for exactly the same incentives as Ireland gave to Apple (“gave” because Apple reorganised in 2015 so the issue is an historic one only). It should also be stressed that Apple pays full Irish tax as computed in accordance with internationally agreed tax rules that have just been endorsed, with a few tweaks, after an intensive review by the OECD.

The Commission's starting point seems to be its own concept of fairness.  It is not fair that France and Germany tax their multi-nationals on overseas profits at the time that they are earned, but the USA taxes their multi-nationals on non-USA profits only when the funds are remitted to the USA.  Fairness is, of course, in the eye of the beholder.  The USA wishes to encourage USA companies to   invest overseas; Europe is more insular and wants to tax companies, like any other resident, on worldwide income as it is earned. 

Apple is caught in the middle.  It not unnaturally wishes to structure its group so that local operating companies pay the “right” tax on their profits but it wants to keep those profits that rightly belong in America outside the clutches of the USA Treasury for as long as possible.  “Right” is another of those subjective concepts.  What is considered right by the European Commission is clearly different to what is considered “right” by the democratically-elected USA government and that may well be different to what you, or indeed I, consider to be right.

The Commission has latched onto two Irish tax rulings or comfort letters.  It uses both terms in its press release indiscriminately, but the two are actually very different.  What the Irish tax authorities has given Apple appear to be comfort letters, ie letters saying, “We agree with your interpretation of how Irish tax law applies to you and will not seek to challenge your use of the methodology that we have agreed with you”.  The rulings relate to two companies, Apple Sales International and Apple Operations Europe.  These appear to be Irish companies managed outside Ireland and, as such, outside the scope of Irish tax.  The Commission, in effect, says that these companies are shams.  They do not have any employees or own premises.  They simply hold board meetings.

So what? That is asking the wrong question.  What ought to be looked at is not what those foreign companies do, but rather whether the expenditure paid by the Irish operating company is a bona-fide business expense of that company.  What is clear is that the phones were not manufactured in Ireland so the manufacturing profit ought not to belong to Ireland.  Nor should the wholesaling profit.  Similarly the know-how and Apple's patents were not generated in Ireland.  They derived from the USA.  So why should Ireland tax the profits derived from the use of those assets? The Commission's argument seems to boil down to “because the USA is not going to tax them until the money comes into the USA and it is not fair that no-one should tax them in the interim”.

Tim Cook very cleverly has said that he intends to remit the money to the USA in 2017, which will be long before Apple's appeal has been resolved in the European courts, so the dispute looks likely to turn into one between the USA Treasury and the EU Commission. Whoever wins the USA presidency, I doubt that a claim by Europe to be entitled to tax USA corporations in defiance of international tax treaties and of the internationally agreed OECD taxing conventions is going to be taken lying down.  But that is the reality of the Commission's ruling. It is not an attack on Apple; it is an attack of the USA system of deferring the taxation of overseas profits of USA companies.  The Commission's position seems to be first come, first served.  If Europe can contrive to tax USA companies before the USA does, more fool the USA for then having to forgo the USA tax to which it is legally and morally entitled as it will need to give relief to the USA taxpayer for the EU's pre-emptive tax strike.

It is potentially a massive shift of tax revenue from the USA to Europe.  Whilst European public opinion may well favour this – although Irish public opinion seems to be torn between accepting a massive one-off windfall and doing so at the likely expense of frightening away other multi-nationals and the jobs and economic prosperity that they bring to Ireland – the implications for the still fragile USA economy and the uncertainties that it creates could prove highly damaging to world trade.

It will be fascinating to see how this plays out.  The European civil servants seem to believe that the USA needs trade with Europe far more than Europe needs to trade with the USA.  It is hard to believe that they are right.  Using the pretence of fair taxation to open the Pandora's box of international trading relationships could turn out to be a very dangerous game.  

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