Apple's $14.5 billion in back taxes - it's not about the money

Profile picture for user gonzodaddy By Den Howlett August 30, 2016
The eye watering Irish tax bill Apple now faces may make the headlines but that is less important than the principles the EU is seeking to ensure are operated in the broad common market.

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Our own Derek duPreez reported earlier today on the EU's ruling to slap Apple with $14.5 billion in back taxes that Apple must pay to Ireland.

While the headline catching amount is certainly eye watering, although a small fraction of Apple's cash pile (it holds about $190 billion in various accounts, much of it out of the reach of US taxing authorities), it is the taxing principle that matters here.

Although it is not thought that other companies are under the same scrutiny as Apple, it is reasonable to assume that having got this decision, the EU will go after other companies, or, at the very least, actively encourage other nation states to do so. Why?

Long time colleague Richard Murphy, a highly vocal tax specialist had this to say before the quantum was known:

Ireland, to my knowledge, offered incentive packages that were individually negotiated during the 1980s depending on how much the company in question might bring to the country. A tax deal would seem to have been part of that package in Apple’s case. It cannot have been alone.

Let’s not pretend that this activity has ended: we know Luxembiyrg perpetuated it until relatively recently.

And we know many developing countries use such deals as an active part of their Foreign Direct Investment programmes, offering tax incentives that last for decades in some cases.

Murphy then assumes that Apple entered into a secret agreement with Ireland that was selective and so anti-competitive. It is not an unreasonable assumption although according to the Guardian:

Apple and Ireland have denied repeatedly that they have a special deal. Tim Cook, Apple’s chief executive, has called the investigation “political crap” and said his company and Ireland would appeal against a ruling that Apple received state aid.

There is plenty of talk that Washington will retaliate but quite how is something of a mystery. If the US imposes arbitrary tariffs on Ireland then it will muddy the waters of an already complex issue and likely have a disastrous impact on an already fragile economy that is heavily dependent upon tech investment. If the US arbitrarily slaps duties or tariffs on EU goods then it flies in the face of recent proclamations about the importance of the EU as a trading partner. If the US takes any action at all, then it flies in the face of the populist view that outsize corporations enjoy tax benefits that are not available to everyone. In short, this is an extremely hot political potato that the EU has lobbed back to Washington suggesting that:

An alternative laid out by Brussels is for the US Internal Revenue Service to re-examine Apple’s cost-sharing agreements, forcing Apple’s Irish operations to pay a bigger share of US research and development costs. This would also reduce the Irish tax bill — but only through effectively generating a much bigger US tax bill.

The fact that Ireland is conjoining with Apple sets up a very interesting scenario. It's not as if Ireland doesn't need the money. Ireland was the I in PIGS (Portugal, Ireland, Greece and Spain) in the post-2008 financial crisis bailout situation. Property prices have been hammered in the Republic with precious few signs of recovery. Ireland is highly dependent upon the technology industry which it has successfully attracted through its benign tax regime. This from the FT puts the topic in context:

Pfizer last year tried to acquire Ireland-domiciled Allergan in a $140bn pharma merger that was predicated almost entirely on the attractions of Ireland’s tax regime. If the merger had succeeded, the enlarged company would have moved its fiscal headquarters to Ireland.

At this point, it is hard to see how Apple and Ireland will wriggle out of the ruling although my view is that the EU has hammered Apple with a view to accepting a lower figure on appeal while establishing a principle that can be used to go after others. And it is not as if the commentary surrounding the matter is making a case that the EU decision is wrong in principle. And while Irish politicians may be screaming 'foul' today, repudiating the ruling is going to be one heck of a hard sell to the Irish people in a country with some $223 billion in debt.

One thing is certain - those who are at the forefront of tax reform will feel emboldened to put pressure on nation states to create the level playing field many of them view as vital to fair competition. Tax policy is a big weapon in that armory.