Apple and Corporation Tax

Apple CEO Tim Cook gave an interview to The Irish Independent newspaper about the European Commission’s (hereafter EComm) finding that Apple’s tax arrangements in Ireland contravene EU law on state subsidies, and therefore some retropayment of tax is appropriate

The views of Mr. Cook being reported are: this is “political crap“, “politics at play“, and “no one did anything wrong here“.

It is equally interesting what Mr. Cook did not say. He did not say “our lawyers checked this out thoroughly at the time we made the arrangement and we hold it to be legal, contrary to the Commission’s view.” One assumes from his assertion that “no one did anything wrong” that he holds the arrangement to be legal. Well, maybe it is, and maybe it isn’t.

Ireland acceded to the forerunner of the EU, the European Economic Community, in 1973, 43 years ago. At that time, the EU laws on state subsidies, , were in force, because they were present in the 1957/8 Treaty of Rome. The Irish law of accession to the EEC would have incorporated these into Irish law. If there is a dispute about that Irish law, which Mr. Cook’s and the Ecomm’s views suggest there is, then binding resolution may be achieved as usual through the justice system   in the Irish High Court, the Court of Appeal, the Supreme Court, and, since this is a matter involving “EU law”, ultimately the European Court of Justice.

Note that the law governing state subsidies will have been in Irish law at the time at which Apple made its tax arrangements with Ireland, said to have been 25 years ago. Mr. Cook says that Apple has been in Ireland 37 years. Whatever, both of those are more recent than the law whose applicability is currently in dispute. When Apple made its tax arrangement with Ireland, that law existed and there is a legitimate expectation that Apple would have performed due diligence on the consistency of its arrangement with applicable law. Given what the EComm has now said, it looks as if that due diligence could have been more thoroughly enacted.

I don’t think there is any dispute that Apple should be paying taxes in Ireland consistent with Irish (and EU) law. So, in the case that Apple’s Irish tax arrangements are definitively determined to be illegal, as the EComm has said, what would follow? First, they have to be fixed. What does “fixed” mean? Most people I talk to – in fact all the people I have talked to about it – opine as I do that Apple should be paying the usual Irish corporation tax rate of 12.5% on the bottom line of its Profit&Loss statement.

Not 0.005%, as the EComm said Apple paid in 2014. Mr. Cook disputes this. He says Apple paid $400 million (yes, dollars) in 2014, and that it made Apple “the highest taxpayer in Ireland” that year. The facts of all that should surely be easy and quick to resolve.

The Independent reported that “Ms Vestager said that Apple had improperly routed taxable income to a subsidiary with no accountable head office.” What I think that means from previous newspaper reports is that Apple was receiving income at an office with a registered address in Cork, Ireland, but which was not domiciled in Ireland for tax purposes. Indeed, it was not domiciled anywhere for tax purposes! See, for example,

There is a general principle of corporate taxation that for-profit corporations doing business inside a nation-state pay tax on the profits of the business they do inside that nation-state. An example. I buy an iPad from Apple’s store in Covent Garden, London, as I did in 2012. It cost £632. I negotiation with a sales person in that store in London. A transaction was performed. The Apple salesman gave me an iPad, and I gave him (that is, his company) £632. That is a key example of a transaction taking place in England. That cash incorporated a 20% consumption tax/sales tax called Value-Added Tax (VAT) which Apple passed on to Her Majesty’s Revenue and Customs (HMRC), so in fact only 80% of that, a bit over £525, went to Apple and contributed to Apple company revenue. From that £525 are deducted costs of doing business: a proportion of rent on the Covent Garden premises; a proportion of the salary and social costs of the salesman, the store cleaners, the delivery people who brought the iPad to Covent Garden from where it was made, advertising costs, and so on. What’s left is profit. Say, I dunno, £100 (I really don’t know; this is just for illustration). From that £100, Apple should pay HMRC £20 in corporation tax (rate: 20% ) on or before a date nine months past the end of that fiscal year. That’s the naive conception, the one which the principle addresses. A transaction has taken place in Covent Garden, England in 2012 and corporation tax is due HMRC on the profit on that transaction.

It rapidly gets clever and complicated. For example, who is paying and where? I didn’t give the salesman cash. I used my credit card. The Mastercard payment centre in Germany of my credit card provider, the Sparkasse Bielefeld, paid the receiver. So, it could be argued, it’s not me in Covent Garden performing the transaction; it’s an entity in Germany making an international payment – and charging me 1% for conversion costs from euros to pounds sterling! And who is that payment centre paying? The receipt says “Apple Retail UK Limited”, so that’s who. Apple Retail UK Limited presumably gets lots of money from sales at its Covent Garden store and elsewhere, presumably more money than it pays out in expenses (otherwise it would close the stores). Does that get to be profit? Not necessarily.

For illustration, take a UK retailer XX(UK) of a multinational corporation XX with a European Headquarters in, say, Ireland, XX(IR). The HQ renders general services to all subsidiaries: performing all bookkeeping and accounting, say; rendering legal services; organising the logistics of distributing products from place of production to the stores where they are sold. XX(IR) will charge XX(UK) for those services. Likely not per-item, because it is administratively simpler as a general sum rather than an accumulation of individual transactions. Such a general sum is called a “transfer payment”. That transfer payment will detract from revenue of XX(UK) and add to revenue of XX(IR).

It is possible for such transfer payments to reduce the profit of XX(UK) close to zero. In which case, instead of XX(UK) paying HMRC 20% of its before-transfer profit, it will pay 20% of close-to-zero.

Some examples of that happening with Starbucks, Google and Amazon are recounted in the report of the Inquiry of the UK parliamentary Public Accounts Committee into the corporation-tax arrangements of those multinational companies in its 2012-3 session

The Public Accounts Committee refers to such actions as “immorally minimis[ing] their tax obligations” (op. cit. Paragraph 12), which is strong language, suggesting that the Committee considers that conforming with the principle enumerated above, that companies should pay corporation tax at the going rate on their business conducted in a country, is a question of moral rectitude, and that any attempts to avoid such payments, even by legally-valid means, are immoral.

Mr. Cook said in the interview that Apple’s “tax rate worldwide” is 26.1%. I wonder what that means? If Apple paid only 0.005% in Ireland in 2014, did it pay 52.195% somewhere else to make up?

John Kenneth Galbraith, in his 1967 work The New Industrial State (Princeton U.P., 1967), and other works, observed that multinational corporations such as those discussed here have the economic power of small countries, and increasingly a political power commensurate with that economic power, but are a command economy, not run as a nation-state is run, for the nominal benefit of its citizens (for a company, that would be employees), but “immortality through an uninterrupted stream of earnings” , or, as is often said, benefits to its shareholders. That is a different kind of political interest and a different kind of political force on the international stage as those of a nation-state (with few exceptions), and it is as well to acknowledge that.

This different view is evident in the interview.

Mr. Cook suggests that European politicians are going after his company for reasons other than the overt ones. Well, maybe or maybe not, but the overt reasons are the only ones that count. The EC has said that Apple’s tax arrangement with Ireland is illegal. Is Mr. Cook’s view that “our lawyers checked this out at the time we made the arrangement and we hold it to be legal, whatever the Commission’s view”? We don’t find out, except by inference from “no one did anything wrong“. You don’t hear POTUS, talking about an international agreement into which the US entered, saying “no one did anything wrong”. The political language is completely different.

The other thing to observe is that, for all the real power which Apple exerts, on this matter it is likely impotent. The dispute concerns Ireland and the interpretation of EU law incorporated into Irish law, not Apple. It won’t be politicians deciding the matter, but jurists (if Ireland appeals). However, it obviously has consequences for Apple. If the tax arrangement is indeed illegal, which seems plausible, then one could plausibly fault Apple’s due diligence at the time the arrangement was made. And, if Apple has been paying less tax than it should have been paying, due to an oversight of some kind in the past, isn’t some kind of retropayment appropriate? Apple is said to have over 17 times the amount of cash/securities that the EComm suggested is an appropriate retropayment

Calling this issue “political crap” rather than “the rule of law” is inappropriate. As Galbraith said, we need to find some kind of way to encourage people governing companies such as Apple to engage in the governmental issues with more serious terminology and forms of argument.

Another interesting point to finish. Mr. Cook said “It’s wrong. In the last several years, we’ve had political differences of opinion in the US on this. But on this one, literally 100pc of the comments are in agreement.” However, the article also said “Mr Cook agreed with the US government finance minister, Jack Lew, that the “retroactive” €13bn tax bill was an attempt by the EU to grab taxes owed to the US treasury.” It sounds to me as if that agreement is not 100%. From the second quote, it sounds as if the US Treasury thinks that some of €13bn is owed to it. If so, then the US Treasury agrees in principle with the EComm that Apple is paying less corporation tax than it should be. It just disagrees on who should get it. As a first move, it seems as if it will be the US Treasury

I don’t immediately see how paying money to the US Treasury will resolve the issue about paying corporation tax on profits made in European countries (discounting transfer payments outside the EU) to some designated European tax authority.

Mr. Cook, your company makes wonderful products, some of which I use. The world is better off for those products, in any number of ways, so a very big thank you! My life is certainly better than it would be otherwise. You have remedied the alleged situation that some of your manufacturing subcontractors did not provide appropriate working conditions or compensation to employees. You have emphasised the importance of privacy in a world of ever-more-intrusive government surveillance of communications, and provided the trustworthy technology to help to assure it. European consumers buy your products in their home countries and elsewhere in Europe and your company profits by that. Please pay the taxes which we Europeans consider appropriate, as above. It’s not about who’s right and who’s wrong, or “politics at play“, or who is being fair or unfair. It’s about statesmanship. It’s about responding to what a lot of us think, how we expect taxes to be raised – being a “good resident” – and what those taxes are used for. Tax payments provide education here for the current and next generation of your customers; help keep sick people healthier; put roofs over the heads of homeless people, including a couple million recently escaping slaughter elsewhere in the world. Each annual half a billion euros helps! Please contribute yours.

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