Irish finance minister decries EU's demand for $15B+ in Apple back taxes, says it's not Ir...
In a German interview this week, Ireland's finance minister attacked the European Commission's ruling calling for the collection of $15 billion in back taxes (plus interest) from Apple, saying it was both unjustified and outside Ireland's responsibility.
"We are not the global tax collector for everybody else," Paschal Donohoe remarked to Frankfurter Allgemeine, quoted by Reuters. He also reiterated the Irish government's main defense, claiming that the tax breaks extended to Apple were available to other companies as well, and broke neither Irish nor European Union laws. Under E.U. regulations, extending favors to some companies but not others can constitute illegal state aid.
Despite its protests, the Irish government is supposedly finalizing an arrangement to collect up to $17.7 billion from Apple and hold it in escrow, pending an appeal with the Commission. The government was originally required to collect the money by Jan. 3, but has been slow to respond, despite a Commission warning in May that it could be brought to court.
In August 2016 the Commission ruled that Ireland had extended "illegal tax benefits" to Apple, which it said were also "reverse engineered" to keep them low. Even though the company was funneling large sums of international revenue through its Irish subsidiaries, it's alleged to have paid 1 percent in taxes in 2003, and as little as 0.005 percent by 2014. Apple has repeatedly insisted that it follows the law in every country it operates in.
The Irish government has a strong incentive to keep Apple happy, since apart from the risk of losing what taxes it is paid, the company's European headquarters are located in Cork and a long-delayed data center may eventually be built near Athenry.
"We are not the global tax collector for everybody else," Paschal Donohoe remarked to Frankfurter Allgemeine, quoted by Reuters. He also reiterated the Irish government's main defense, claiming that the tax breaks extended to Apple were available to other companies as well, and broke neither Irish nor European Union laws. Under E.U. regulations, extending favors to some companies but not others can constitute illegal state aid.
Despite its protests, the Irish government is supposedly finalizing an arrangement to collect up to $17.7 billion from Apple and hold it in escrow, pending an appeal with the Commission. The government was originally required to collect the money by Jan. 3, but has been slow to respond, despite a Commission warning in May that it could be brought to court.
In August 2016 the Commission ruled that Ireland had extended "illegal tax benefits" to Apple, which it said were also "reverse engineered" to keep them low. Even though the company was funneling large sums of international revenue through its Irish subsidiaries, it's alleged to have paid 1 percent in taxes in 2003, and as little as 0.005 percent by 2014. Apple has repeatedly insisted that it follows the law in every country it operates in.
The Irish government has a strong incentive to keep Apple happy, since apart from the risk of losing what taxes it is paid, the company's European headquarters are located in Cork and a long-delayed data center may eventually be built near Athenry.
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This dispute isn't about other nations claiming that they are owed taxes based on sales of Apple products in those nations. For the most part, advanced economies (i.e. the governments of nations with advanced economies) don't require that income taxes be paid on profits just because those profits derive from sales which occurred in those nations. Generally speaking, international income tax accounting practices are based on where value is considered to be created, not where it is realized.
The dispute here is how much income tax should be owed to Ireland (based, in large part, on profits which derive from sales made in other nations).
And just to be clear, the reason Apple (and other companies) can defer paying U.S. income taxes on the kinds of earnings we're talking about is that they are foreign earnings. They aren't U.S. earnings shifted offshore to avoid U.S. income taxation. Most advanced economies don't tax those kinds of foreign earnings at all anymore - immediately or on a deferred basis. Many nations have already gotten rid of their extraterritorial taxation policies, the U.S. has not yet.
That said... you, as an individual, could do the same thing that Apple does in deferring paying U.S. income taxes on certain kinds of foreign earnings if those earnings aren't distributed to you from foreign corporations which you own (or own portions of).
That's what enables Apple to claim that Apple Stores in Germany, and Apple in France, and Apple in a dozen+ other countries make little to no profits, even claiming losses at times if I remember correctly and avoiding corporate taxes on sales made in those countries. It's the Irish subsidiary that technically owns and sells the product to various Apple retail outlets at relatively high prices to pay for the intellectual property rights they own and thus takes the lions-share of profits from those sales.
Some counties of course have caught on finally, with Apple having been found to be evading (not avoiding) taxes in Japan and ponying up after a tax fraud investigation of Apple in Italy. Not sure what the status of the Australian tax inquiry is. Until very recently (and I don't believe the change has actually gone into effect yet) the Irish subsidiary who controls most of Apple's profits was not taxable in any country on the earth, answering to no taxing authority. That's why profits from countries far removed from Europe like Japan and Australia were moved via Singapore to Apple Ireland accounts. Tricky stuff.
And yes other companies like Google and IBM and Pfizer and hundreds of other big and profitable multinationals have their own tax avoidance schemes that have been found to stray into illegal tax evasion or tax fraud in some cases. That doesn't make it right because others do it.
Given that the US imposes worldwide taxation upon repatriation, there are many billions potentially owed to the US Treasury should that money be ever brought back to the US by Apple. Ireland claims that all of the taxes owed to it have been paid, so nothing more is needed, owed, or wanted there. EU says no, Ireland should collect more: they used the argument that since Ireland is a net recipient of EU aid, the additional taxes that Ireland collects from companies like Apple would lower the amount of aid that EU has to provide to Ireland from its coffers.
The US view is: "hey, you're now getting your paws on the money that could/would be, under current law, owed to our treasury." So, even if the EU wins this case, that is only stage 1 of a longer process. The US (most certainly, the Trump administration) will come down on them like a ton of bricks, and it will end up back in the courts somewhere. Stage 2 will be all about where that court fight will take place. Stage 3 will be the court fight between EU and the US. Then there'll be appeals. And Stage N -- assuming the EU finally wins the case against Apple -- will be when the EU starts to go after every major US multinational with operations in Ireland. Rinse and repeat.
Apple's own documents submitted under Subpoena spoke about it. Pull up the Senate report if you missed reading it. It includes links and/or references to the pertinent documents. There's other references here if you're curious about what the Irish themselves discovered, along with a report on the Japanese tax evasion case enabled in part by that transferred IP.
https://asia.nikkei.com/Politics-Economy/Policy-Politics/Japan-casts-wider-net-for-corporate-tax-evaders
https://www.irishtimes.com/business/financial-services/intellectual-property-rights-at-the-core-of-apple-s-irish-subsidiaries-1.1401739
I realized you might reply to say you don't have time to look for the Senate report (!) and other readers might not even know where to start, so here's that link too.
https://www.gpo.gov/fdsys/pkg/CHRG-113shrg81657/pdf/CHRG-113shrg81657.pdf
You can see, e.g., (former) CFO Peter Oppenheimer's testimony before the U.S. Senate in 2013.
WARNING!!!! SOMEWHAT LONG. (I HAVE HIGHLIGHTED THE KEY POINTS THAT APPLE MAKES IN BOLD. BUT I AM CITING MOST OF OPPENHEIMER'S TESTIMONY SINCE I DON'T WISH TO BE ACCUSED OF PULLING THINGS OUT OF CONTEXT).
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TESTIMONY OF PETER OPPENHEIMER, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, APPLE INC., CUPERTINO, CALIFORNIA
Mr. OPPENHEIMER. Good morning, Chairman Levin, Ranking Member McCain, Members of this Subcommittee. My name is Peter Oppenheimer, and I am Apple’s chief financial officer. I would like to discuss the structure and management of Apple’s global business and financial operations.
In the United States our operational structure is quite simple: We sell to our customers through our retail stores, online stores, and channel partners. We provide our award-winning support to our customers through the Genius Bar and AppleCare. We pay taxes to Federal, State, and local governments on the full profits from these sales.
Outside the United States we seek to provide the same industry-leading products, services, and support that our U.S. customers have come to expect. We now sell the iPhone and iPad in over 100 countries.
Like all multinational companies, Apple must follow the local laws and regulations in each region where we operate. This often requires Apple to establish a physical presence not only in the region but also in the particular country where we wish to sell our products and services.
Apple’s presence in these countries often takes the form of Apple-owned subsidiaries. These in-country subsidiaries acquire products to sell in their markets through Apple-owned regional operating subsidiaries, which in turn acquire products from our contract manufacturers.
In the European region, our primary operating subsidiaries are incorporated in Ireland. These subsidiaries, which were established in the early 1980s, now employ nearly 4,000 people in Ireland, and we recently broke ground on an expansion to our campus in Cork.
Since 1980, Apple has had an R&D cost-sharing agreement with our Irish subsidiaries. The agreement was first put in place when Apple was about 5 years old and wanted to sell its computers overseas. At that time, Apple’s revenues were one-tenth of 1 percent of what they are today, and the invention of the iPhone was decades away.
Today the substance of the agreement is largely unchanged except for our expansion into more countries and recent updates to comply with new U.S. Treasury regulations. Our cost-sharing agreement, which is common in the industry, is audited by the IRS, and we are in full compliance with all laws and regulations.
The agreement enables Apple to share the costs and risks of developing new products with our Irish subsidiaries. Virtually all of this R&D, and the jobs that go with it, take place in the United States. In exchange for this funding, the Irish subsidiaries have rights to distribute in Europe and Asia products created by the R&D funded by the agreement.
We have used this method to distribute our products internationally for more than 30 years. More than half of our ongoing R&D costs are funded by Apple Ireland. When times are good, as they have been in recent years, our Irish subsidiaries benefit greatly, as we do in the United States. When Apple lost money in the mid-1990s, our Irish subsidiaries lost money as well. I mention losing money in the 1990s because it serves as a reminder of how close Apple came to going out of business.
In 1997, we were on the brink of bankruptcy and about out of cash. In just 2 years, we lost $2 billion. I can tell you firsthand we were facing the very real possibility of a world without Apple.
A big part of the turnaround was a company-wide effort to streamline and simplify so Apple could survive. We restructured our operations and finances to make everything as simple and effi- cient as possible.
As part of that effort, we consolidated our European post-tax in- come into two existing subsidiaries: a holding company, Apple Operations International, or AOI; and an operating company, Apple Sales International, or ASI.
The consolidation eliminated enormous complexity in handling foreign bank accounts and improved our ability to manage currency risk. While AOI and ASI are both incorporated in Ireland, neither is tax resident there under the rules of Irish law. Indeed, Irish law contemplates that companies may be incorporated in Ireland with- out being tax resident there.
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So: (i) Apple has had this arrangement in place for 30 years; it started when they were small, and they've kept it the same since they're large -- in other words, it's not something that they started to do just because they became the most profitable company on earth. (ii) More than half the R&D costs are funded by Apple Ireland, even though most of the R&D is done in the US; (iii) The Irish subsidiary has, over the 30 years, shared in profits and they've shared in losses; (iv) over 60% of Apple's sales are abroad.
What exactly is at issue here? That Apple has not terminated this arrangement just because they've become larger and more successful? What is the logic for why they should do that? (@gatorguy, please feel free to explain why as well).
Yes other companies use transfer agreements too in efforts to avoid taxation with various levels of success depending on how aggressively they wield it. Apple is not the only big multinational using these types of transfer agreements and found to evade taxes or prompt fraud investigations in some countries when used inappropriately, and won't be the last I'm sure. Google too, along with Amazon and Facebook and other rich American companies are all dealing with tax investigations of their own.
As for the EU Commission IANAL and have no firm law-based opinion either way whether they will be successful. The only thing that's clear to me is that far too many very wealthy companies are getting ever richer and more powerful by shifting tax obligations off their shoulders and onto "others", modern-day versions of the old Railroad, Cattle and Oil Baron's.