Brussels strikes at Apple’s tax planning

Posted on August 30, 2016

24/11/1980 . Mr. Gene Fitzgerald,T.D. unveiling a plaque to officially open the new Apple Computer Ltd. plant at Hollyhill Cork , included in the picture are from left , Steve Jobs , Vice Chairman Apple, Mike Markkula , Chairman, and Alec Wrafter Man . Dir. Apple .Irish Examiner staff picture . Reference number 244/50©Irish Examiner

Cork politician Gene Fitzgerald opens the Apple plant at Hollyhill in 1980 watched by Steve Jobs and Mike Markkula of Apple

The tax arrangements of multinationals have rarely been out of the headlines in the past half decade. Taxpayers have marvelled at the inventive schemes that allowed companies to avoid paying their dues where they do business, while at the same time fuming at the effect these have on the amounts national treasuries collect.

The European Commission has been fighting back against practitioners of this fiscal vanishing trick. Last year, the competition commissioner, Margrethe Vestager, created a stir when she announced that the tax schemes of two multinationals — Fiat and Starbucks — had broken state aid rules and should make good their unpaid taxes. Now, Ms Vestager has raised the stakes. Her latest case dwarfs the tens of millions of euros involved in those judgments. She has ruled that Apple’s arrangements in Ireland are similarly illegal. This may result in the US group having to pay the Dublin authorities back taxes of up to €13bn.

    The commission’s decision to stray into the realm of tax is not without controversy. Traditionally, Brussels had little say in such questions. Corporate tax remains, rightly, a matter reserved for national governments alone.

    Ms Vestager has been able to step in because of the rules covering the single market. These prohibit member states from tailoring special inducements to encourage companies to locate operations on their soil. The Apple case focuses on tax rulings issued by the Irish taxman to two of its local subsidiaries, which collectively account for 90 per cent of the group’s non-US profits.

    The commission maintains these rulings represented just such an illicit inducement, allowing these entities to squirrel almost all their profits away from Ireland to a head office that existed only on paper, where they were untaxed anywhere. As it deems this illegal state aid, Brussels can unpick them and force Apple to cough up the unpaid tax.

    The ruling will infuriate Washington, which has accused Brussels of behaving like a “supranational tax authority”. Both Apple and the Irish government have vowed to appeal.

    The company claims no tax has been avoided because any residual surplus is ultimately accountable to the US taxman when those profits are remitted. But Brussels is right to go after profit shifting. Sharp practice should be uncovered, whether blessed by a member state’s tax authorities or not.

    The commission’s ability to intervene is, however, limited. Its rulings are an imperfect mechanism for tackling the problem. The Apple judgment creates new uncertainties for companies. It exposes national tax rulings to challenge, meaning these no longer create safe harbours for businesses. But it does not sharpen the boundary where legitimate planning ends and unacceptable avoidance begins.

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    Much of the problem lies within the tax system itself. Inter-group debt financing and the transfer pricing of intangibles make it too easy to shuffle profits off to low tax countries. The commission is implementing rules demanding greater transparency of companies — notably of profits and taxes on a country by country basis.

    The US could help too by reforming its dysfunctional tax system. A regime that combines high corporate rates with forbearance on taxing unremitted foreign profits is an inducement to wholesale arbitrage. Disclosure will not end the culture of avoidance. That will only happen if bosses are more responsible about tax and politicians find a better way of linking what companies pay to economic activity. In the meantime, an activist Brussels may be one of the best tools the taxpayer has to hand.

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