Apple will need to pay 'the tax' either in Ireland or in the US. From what I have read, there may be no advantage to Apple to prolong an expensive appeal. While the EU commission may claim 'victory' in this as Apple pays its tax bill, it will likely be paid to the US (where it belonged IMO). As well, many US multinationals will return to the US. Hollow victory. The EU remains a large and important market but Margrethe Vestager [even her name makes me shudder] has made it very clear that the EU is/was not a warm environment for US companies. Hopefully Apple will not pull out of Ireland entirely.
Apple would (or should) get a credit against the U.S. income taxes it owes, but it won't be a full credit. With the tax law changes and discounted rate on as-yet unremitted foreign earnings, only part of the taxes paid to other countries is credited against the so-called repatriation taxes due on those earnings. So, if Apple eventually has to pay this money to Ireland (i.e. rather than it being in an escrow fund), that will cost Apple money even taking into account the reduction in U.S. income taxes which would (or should) result. It just won't, effectively, cost Apple the full amount paid to Ireland.
ok, so you are saying that it is paying American taxes now on the assumption that it wont have to pay the 13BN, but if it does it can claim some of it back from the US?
The thing is the 13BN is an expense, Apple could argue that it is not a tax per say, since it is a fine of sorts.
Apple would rather it be considered taxes paid on the foreign earnings in question. It is possible that the U.S. government might take the position that it isn't taxes paid but rather an expense of sorts as you suggest. But I don't think that will happen and I don't think it would ullamitately prevail if it took that position. I, of course, can't be sure on either of those points.
The reason Apple would prefer it be considered taxes paid is that, if it were, it would function as a credit (which would be prorated) against U.S. taxes owed rather than as a deduction from the income which U.S. taxes would be owed on.
In made up numbers... Apple owes U.S. taxes on $100 billion in foreign profit at a rate of 25%, so it owes $25 billion. It paid $10 billion in foreign taxes, which is credited against that, so it only has to pay $15 billion to the United States. Alternatively, it has another $10 billion in expenses such that its foreign profit is only $90 billion. It owes the U.S. 25% of that $90 billion, or $22.5 billion instead of $15 billion. In reality the numbers would work out quite differently, but hopefully these numbers demonstrate the point I'm trying to make.
As for the details of when Apple will account for the money paid to Ireland, as affecting what it owes the U.S., I'm not sure. I haven't given that aspect of the situation much consideration. Apple can pay the taxes it owes to the U.S. over time (perhaps 8 years) if it wants to. And it should be able to go back and amend its calculated tax liability later even if it doesn't account for the money that it might have to pay Ireland when it first recognizes its new (repatriation) tax liability.
Apple sells an iPhone in Brazil for (the equivalent of) $800. It makes $200 profit on that iPhone. Most of that profit is considered to be created in the United States because, e.g., that's where iPhones are designed and where the IP behind them is owned. So most of the taxes paid on the income generated from that sale go to the United States. Some small portion of the profit may be considered to be made in Brazil. Say, Apple has a retail store there and a small piece of Apple's total profit from that iPhone is considered to come from making the retail sale. Maybe Apple, in effect, charges the Apple store the same for each iPhone as it charges third-party retailers, leaving the Apple store itself without a lot of margin. Thus, after accounting for its own expenses, the store doesn't itself make a lot of profit. But income taxes are paid to Brazil on whatever profit is considered to be made there. Brazil might also choose to impose a VAT-like tax on sales made there, so it gets a (perhaps bigger) piece of the pie that way.
A lot of people dont get that point. The only corporation tax that Apple owes consumer countries is the corporation tax on profit made in the Apple stores. Those stores are legal entities in the consumer countries, and like all shops they buy at wholesale prices and sell at retail prices, and that revenue minus expenses, is what is owed. Since Apple owed back taxes to France, the UK etc it is on those retail profits pre phone, not on the whole profit made per iphone sale.
Some European countries think they can get some of that 13Bn pie. Not so, it is owed in Ireland or the US. Where the IP is added or in Ireland's case transferred.
That "wholesale price" is loaded tho, encumbered with licensing and IP costs for intellectual property that Apple US transferred to it's Irish subsidiary. Those bloated fees are added to the typical wholesale cost of an iPhone to essentially strip the retail product of most if not all profits realized from the sale of that Apple product in the French, UK, even Australian, etc Apple Store and move the profits to what had at least once been non-taxable Irish Apple subsidiaries.
That's how Apple managed to claim near zero profits and in at least one instance (Germany just a few years ago) actual losses from specific EU country retail activities. Like us EU countries of course recognize that Apple was making immense profits from selling products and services to citizens in their countries which is why Italy, Spain, France and others have or still wish to speak with Apple about their tax obligations.
If you want evidence that Apple realized their tax planning might be on shaky ground you don't have to look any further than Italy. Apple tried making the same argument there that Italian operations saw very little profit with most of the revenue's being claimed in Ireland due to the trademark, copyright, design and patent fees they charged on top of the product costs. Apple refused to pay but Italy pushed back anyway and when faced with one of their executive's being imprisoned for tax evasion Apple paid what Italy deemed was owed. That was perhaps part of what has emboldened other EU countries to look into their own local Apple operations.
Apple should just give a big finger to Ireland and ship out somewhere else just on principle since they can't respect what they actually sign. Apple set up shop there because they lied basically. Staying there would just be rewarding liars.
Eh isn’t Ireland contesting this within the confines of the law and the appeals process?? Why would Apple give two fingers to Ireland, the country who enabled the 0.005% tax setup. And then again why would Apple give two fingers to Ireland when it is not Ireland that wants to collect the tax bit rather the European Commission.
It appears so far to this whole story that Ireland is in fact on Apples side and is costing ireland a few million already appealing this. Ireland simply must collect the money as ordered by the EU commission.
Your point seems entirely misdirected at the wrong participant.
It's not just Apple, there are many multinationals that located in Ireland to receive the benefits of locating there for access to EU markets. It was a smart business move at the time, but if these companies are blackmailed by EU tax collectors Ireland will no longer be recognized as a sensible place to do business and they will lose the companies that are there, not just Apple.
Here is the problem with that argument. Currently as it stands, No tax law treaties have been broken and this will be proved.
However your point stands that going forward this is an issue for ireland but also MNC.
Ironically, there isn’t any other EU country that could offer the savings to the big companies. So once this loophole or tax system is changed - No new system seems to be there to replace it. therefore another viewpoint is that ireland is willing to do anything that’s in its power to reduce the tax, including brushing up against the line of the law.
Funtimes ahead.
Yes, the final ruling after Apple’s and Ireland’s appeals will make the difference between Ireland being viewed as a place that is accommodating or hostile to foreign businesses and capital.
The Irish government has appealed it as far as possible, along with Apple. They dont want the money ( to some consternation in Ireland). In the last few months Ireland has been put under pressume to get the money into escrow, so it is doing that.
BTW: all of this is in the original piece:
In August 2016, the European Commission ruled that Ireland had extended illegal state aid to Apple, offering preferential terms that allowed it to pay extremely low amounts of tax as little as 0.005 percent in 2014 while funneling billions in international revenue through the country. The Commission also accused Ireland of reverse engineering taxes on the fly, in order to appease the iPhone producer.
Ireland has made slow progress in acquiring the funds from Apple, over a year and a half after the European Commission laid down its original ruling. In July, Ireland established an escrow fund to receive the tax payment, with appeals from both Apple and the government also believed to be holding up the process.
In October, the European Commission warned that it will bring Ireland to the European Court of Justice over the delays, noting that similar tax cases involving Fiat and Starbucks in other European countries saw funds recovered before appeals were exhausted, albeit for smaller amounts.
Despite that, two hot heads popped in to this thread to rant about Ireland.
Apple sells an iPhone in Brazil for (the equivalent of) $800. It makes $200 profit on that iPhone. Most of that profit is considered to be created in the United States because, e.g., that's where iPhones are designed and where the IP behind them is owned. So most of the taxes paid on the income generated from that sale go to the United States. Some small portion of the profit may be considered to be made in Brazil. Say, Apple has a retail store there and a small piece of Apple's total profit from that iPhone is considered to come from making the retail sale. Maybe Apple, in effect, charges the Apple store the same for each iPhone as it charges third-party retailers, leaving the Apple store itself without a lot of margin. Thus, after accounting for its own expenses, the store doesn't itself make a lot of profit. But income taxes are paid to Brazil on whatever profit is considered to be made there. Brazil might also choose to impose a VAT-like tax on sales made there, so it gets a (perhaps bigger) piece of the pie that way.
A lot of people dont get that point. The only corporation tax that Apple owes consumer countries is the corporation tax on profit made in the Apple stores. Those stores are legal entities in the consumer countries, and like all shops they buy at wholesale prices and sell at retail prices, and that revenue minus expenses, is what is owed. Since Apple owed back taxes to France, the UK etc it is on those retail profits pre phone, not on the whole profit made per iphone sale.
Some European countries think they can get some of that 13Bn pie. Not so, it is owed in Ireland or the US. Where the IP is added or in Ireland's case transferred.
That "wholesale price" is loaded tho, encumbered with licensing and IP costs for intellectual property that Apple US transferred to it's Irish subsidiary. Those bloated fees are added to the typical wholesale cost of an iPhone to essentially strip the retail product of most if not all profits realized from the sale of that Apple product in the French, UK, even Australian, etc Apple Store and move the profits to what had at least once been non-taxable Irish Apple subsidiaries.
That's how Apple managed to claim near zero profits and in at least one instance (Germany just a few years ago) actual losses from specific EU country retail activities. Like us EU countries of course recognize that Apple was making immense profits from selling products and services to citizens in their countries which is why Italy, Spain, France and others have or still wish to speak with Apple about their tax obligations.
If you want evidence that Apple realized their tax planning might be on shaky ground you don't have to look any further than Italy. Apple tried making the same argument there that Italian operations saw very little profit with most of the revenue's being claimed in Ireland due to the trademark, copyright, design and patent fees they charged on top of the product costs. Apple refused to pay but Italy pushed back anyway and when faced with one of their executive's being imprisoned for tax evasion Apple paid what Italy deemed was owed. That was perhaps part of what has emboldened other EU countries to look into their own local Apple operations.
Sure that’s probably true. That doesn’t negate my point that taxes were due on retail profits in the stores only.
Its fairly common for newspapers to talk about how little tax Apple is paying on 500M in revenue when that revenue is the estimated number of phones sold multiplied by their price.
Apple sells an iPhone in Brazil for (the equivalent of) $800. It makes $200 profit on that iPhone. Most of that profit is considered to be created in the United States because, e.g., that's where iPhones are designed and where the IP behind them is owned. So most of the taxes paid on the income generated from that sale go to the United States. Some small portion of the profit may be considered to be made in Brazil. Say, Apple has a retail store there and a small piece of Apple's total profit from that iPhone is considered to come from making the retail sale. Maybe Apple, in effect, charges the Apple store the same for each iPhone as it charges third-party retailers, leaving the Apple store itself without a lot of margin. Thus, after accounting for its own expenses, the store doesn't itself make a lot of profit. But income taxes are paid to Brazil on whatever profit is considered to be made there. Brazil might also choose to impose a VAT-like tax on sales made there, so it gets a (perhaps bigger) piece of the pie that way.
A lot of people dont get that point. The only corporation tax that Apple owes consumer countries is the corporation tax on profit made in the Apple stores. Those stores are legal entities in the consumer countries, and like all shops they buy at wholesale prices and sell at retail prices, and that revenue minus expenses, is what is owed. Since Apple owed back taxes to France, the UK etc it is on those retail profits pre phone, not on the whole profit made per iphone sale.
Some European countries think they can get some of that 13Bn pie. Not so, it is owed in Ireland or the US. Where the IP is added or in Ireland's case transferred.
That "wholesale price" is loaded tho, encumbered with licensing and IP costs for intellectual property that Apple US transferred to it's Irish subsidiary. Those bloated fees are added to the typical wholesale cost of an iPhone to essentially strip the retail product of most if not all profits realized from the sale of that Apple product in the French, UK, even Australian, etc Apple Store and move the profits to what had at least once been non-taxable Irish Apple subsidiaries.
That's how Apple managed to claim near zero profits and in at least one instance (Germany just a few years ago) actual losses from specific EU country retail activities. Like us EU countries of course recognize that Apple was making immense profits from selling products and services to citizens in their countries which is why Italy, Spain, France and others have or still wish to speak with Apple about their tax obligations.
If you want evidence that Apple realized their tax planning might be on shaky ground you don't have to look any further than Italy. Apple tried making the same argument there that Italian operations saw very little profit with most of the revenue's being claimed in Ireland due to the trademark, copyright, design and patent fees they charged on top of the product costs. Apple refused to pay but Italy pushed back anyway and when faced with one of their executive's being imprisoned for tax evasion Apple paid what Italy deemed was owed. That was perhaps part of what has emboldened other EU countries to look into their own local Apple operations.
But in this context there's a market-based pricing mechanism that can be used to determine proper transfer pricing between related parties. So even if that transfer pricing results in most (or meaningfully all) of the profit being attributed to the wholesaler, so to speak, it's pretty hard (or at least unreasonable) for taxing authorities to argue that that transfer pricing is unreasonable.
Apple sells products to third-party retailers. Those sales represent arm's-length transactions. If Apple sells products to its own retail stores at (or in some cases near) the same prices, then an arm's-length principle has been applied in determining transfer pricing. That is what so many taxing authorities require to happen. It's how it's supposed to work.
So if Apple sells an iPhone that retails for $700 to third-party retailers for $600, it might also sell it to its own retail stores for $600. If that means that, after accounting for all of their own costs, those stores don't make much money (or even lose money), then there isn't anything improper about that. That means that it isn't the retail operation that's really making the money, it's the making of iPhones and selling them at the wholesale level that is really making the money. Third-party retailers are willing to pay a price for iPhones that leaves them with (comparably) little margin, such is the demand (even at that level) for iPhones. It means that the value - or the vast majority of it - isn't being created by the retail stores. Apple's own retails stores might, at least in some cases, properly be thought of not as operations which themselves make lots of money, but as things which Apple operates in order to help facilitate the things which it does which do make lots of money. That isn't accounting trickery, it reflects the reality of the situation.
If, alternatively, Apple sells that iPhone to third-party retailers for $400 and for tax purposes claims to sell it to its own retail stores for $650, then that is accounting trickery. Under many jurisdictions' tax policies that wouldn't be allowed. The resulting profit allocation wouldn't be consistent with the application of an arm's-length principle.
There's also the reality that Apple sells a lot of products through (i.e. to) third-party retailers. If Apple doesn't have a permanent establishment in a given tax jurisdiction which is making those sales, then it is selling into the jurisdiction rather than in the jurisdiction. If it has an operation in Greenland which sells - wholesales, so to speak - products to businesses in Iceland, then generally speaking the profits generated by those sales are properly allocated to that operation in Greenland rather than in Iceland. Depending on the Greenland operation's relationship with other (Apple) parties, some or most of that profit might also be properly allocated elsewhere. It goes back to value creation. But in this case the value creation isn't happening in Iceland, Apple is merely selling into Iceland. That is how it is supposed to work. That, again, isn't accounting trickery, it reflects the reality of the situation. If Iceland wants, it can apply a VAT-like tax to capture revenue at the retail transaction level. And, of course, it can collect income taxes on whatever profits the businesses in Iceland make from their retail sales of Apple products.
EDIT: I meant to add... Everything I'm saying here is broad strokes type stuff. There is, of course, considerably nuance at play and there are differences in how jurisdictions apply their tax policies.
Apple sells an iPhone in Brazil for (the equivalent of) $800. It makes $200 profit on that iPhone. Most of that profit is considered to be created in the United States because, e.g., that's where iPhones are designed and where the IP behind them is owned. So most of the taxes paid on the income generated from that sale go to the United States. Some small portion of the profit may be considered to be made in Brazil. Say, Apple has a retail store there and a small piece of Apple's total profit from that iPhone is considered to come from making the retail sale. Maybe Apple, in effect, charges the Apple store the same for each iPhone as it charges third-party retailers, leaving the Apple store itself without a lot of margin. Thus, after accounting for its own expenses, the store doesn't itself make a lot of profit. But income taxes are paid to Brazil on whatever profit is considered to be made there. Brazil might also choose to impose a VAT-like tax on sales made there, so it gets a (perhaps bigger) piece of the pie that way.
A lot of people dont get that point. The only corporation tax that Apple owes consumer countries is the corporation tax on profit made in the Apple stores. Those stores are legal entities in the consumer countries, and like all shops they buy at wholesale prices and sell at retail prices, and that revenue minus expenses, is what is owed. Since Apple owed back taxes to France, the UK etc it is on those retail profits pre phone, not on the whole profit made per iphone sale.
Some European countries think they can get some of that 13Bn pie. Not so, it is owed in Ireland or the US. Where the IP is added or in Ireland's case transferred.
Income tax liability in a given jurisdiction could be based on Apple's retail stores or some other kind of permanent establishment in that jurisdiction. (I use the term permanent establishment in a generic sense, different jurisdictions may refer to and define what I'm talking about in different ways.)
Apple might, e.g., have a sales management operation in a given jurisdiction which markets its products, sells them to third-party retailers, provides support, handles delivery logistics and such. Apple would be liable for income taxes in that jurisdiction based on the profit properly allocated to that operation.
But, yeah, two of the key concepts are permanent establishment and value creation. Is there a permanent establishment in a given jurisdiction and, if so, what value is created by that permanent establishment (rather than elsewhere, outside of the jurisdiction)? If there isn't a permanent establishment, then generally speaking sales are being made into that jurisdiction rather than in that jurisdiction.
"Ireland expects the final disputed tax bill that the European Commission ordered it to collect from Apple to be "in the ballpark" of the 13 billion euros ($16 billion) estimated, the head of the country's tax collectors said on Thursday.
"It's in that ballpark," Revenue Commissioners' chairman Niall Cody told a parliamentary committee when asked if the bill his office is obliged to calculate will be in line with the record EU estimate, which both Dublin and Apple are appealing.
"Over 95 percent of the calculations are completed and we have agreed with the Commission that all our calculations will be with them before the end of April."
Comments
The reason Apple would prefer it be considered taxes paid is that, if it were, it would function as a credit (which would be prorated) against U.S. taxes owed rather than as a deduction from the income which U.S. taxes would be owed on.
In made up numbers... Apple owes U.S. taxes on $100 billion in foreign profit at a rate of 25%, so it owes $25 billion. It paid $10 billion in foreign taxes, which is credited against that, so it only has to pay $15 billion to the United States. Alternatively, it has another $10 billion in expenses such that its foreign profit is only $90 billion. It owes the U.S. 25% of that $90 billion, or $22.5 billion instead of $15 billion. In reality the numbers would work out quite differently, but hopefully these numbers demonstrate the point I'm trying to make.
As for the details of when Apple will account for the money paid to Ireland, as affecting what it owes the U.S., I'm not sure. I haven't given that aspect of the situation much consideration. Apple can pay the taxes it owes to the U.S. over time (perhaps 8 years) if it wants to. And it should be able to go back and amend its calculated tax liability later even if it doesn't account for the money that it might have to pay Ireland when it first recognizes its new (repatriation) tax liability.
That's how Apple managed to claim near zero profits and in at least one instance (Germany just a few years ago) actual losses from specific EU country retail activities. Like us EU countries of course recognize that Apple was making immense profits from selling products and services to citizens in their countries which is why Italy, Spain, France and others have or still wish to speak with Apple about their tax obligations.
If you want evidence that Apple realized their tax planning might be on shaky ground you don't have to look any further than Italy. Apple tried making the same argument there that Italian operations saw very little profit with most of the revenue's being claimed in Ireland due to the trademark, copyright, design and patent fees they charged on top of the product costs. Apple refused to pay but Italy pushed back anyway and when faced with one of their executive's being imprisoned for tax evasion Apple paid what Italy deemed was owed. That was perhaps part of what has emboldened other EU countries to look into their own local Apple operations.
Its fairly common for newspapers to talk about how little tax Apple is paying on 500M in revenue when that revenue is the estimated number of phones sold multiplied by their price.
Apple sells products to third-party retailers. Those sales represent arm's-length transactions. If Apple sells products to its own retail stores at (or in some cases near) the same prices, then an arm's-length principle has been applied in determining transfer pricing. That is what so many taxing authorities require to happen. It's how it's supposed to work.
So if Apple sells an iPhone that retails for $700 to third-party retailers for $600, it might also sell it to its own retail stores for $600. If that means that, after accounting for all of their own costs, those stores don't make much money (or even lose money), then there isn't anything improper about that. That means that it isn't the retail operation that's really making the money, it's the making of iPhones and selling them at the wholesale level that is really making the money. Third-party retailers are willing to pay a price for iPhones that leaves them with (comparably) little margin, such is the demand (even at that level) for iPhones. It means that the value - or the vast majority of it - isn't being created by the retail stores. Apple's own retails stores might, at least in some cases, properly be thought of not as operations which themselves make lots of money, but as things which Apple operates in order to help facilitate the things which it does which do make lots of money. That isn't accounting trickery, it reflects the reality of the situation.
If, alternatively, Apple sells that iPhone to third-party retailers for $400 and for tax purposes claims to sell it to its own retail stores for $650, then that is accounting trickery. Under many jurisdictions' tax policies that wouldn't be allowed. The resulting profit allocation wouldn't be consistent with the application of an arm's-length principle.
There's also the reality that Apple sells a lot of products through (i.e. to) third-party retailers. If Apple doesn't have a permanent establishment in a given tax jurisdiction which is making those sales, then it is selling into the jurisdiction rather than in the jurisdiction. If it has an operation in Greenland which sells - wholesales, so to speak - products to businesses in Iceland, then generally speaking the profits generated by those sales are properly allocated to that operation in Greenland rather than in Iceland. Depending on the Greenland operation's relationship with other (Apple) parties, some or most of that profit might also be properly allocated elsewhere. It goes back to value creation. But in this case the value creation isn't happening in Iceland, Apple is merely selling into Iceland. That is how it is supposed to work. That, again, isn't accounting trickery, it reflects the reality of the situation. If Iceland wants, it can apply a VAT-like tax to capture revenue at the retail transaction level. And, of course, it can collect income taxes on whatever profits the businesses in Iceland make from their retail sales of Apple products.
EDIT: I meant to add... Everything I'm saying here is broad strokes type stuff. There is, of course, considerably nuance at play and there are differences in how jurisdictions apply their tax policies.
Apple might, e.g., have a sales management operation in a given jurisdiction which markets its products, sells them to third-party retailers, provides support, handles delivery logistics and such. Apple would be liable for income taxes in that jurisdiction based on the profit properly allocated to that operation.
But, yeah, two of the key concepts are permanent establishment and value creation. Is there a permanent establishment in a given jurisdiction and, if so, what value is created by that permanent establishment (rather than elsewhere, outside of the jurisdiction)? If there isn't a permanent establishment, then generally speaking sales are being made into that jurisdiction rather than in that jurisdiction.
"Ireland expects the final disputed tax bill that the European Commission ordered it to collect from Apple to be "in the ballpark" of the 13 billion euros ($16 billion) estimated, the head of the country's tax collectors said on Thursday.
"It's in that ballpark," Revenue Commissioners' chairman Niall Cody told a parliamentary committee when asked if the bill his office is obliged to calculate will be in line with the record EU estimate, which both Dublin and Apple are appealing.
"Over 95 percent of the calculations are completed and we have agreed with the Commission that all our calculations will be with them before the end of April."