Battling Apple and the Giants

By C.P. Chandrasekhar, Professor of Economics, Jawaharlal Nehru University, New Delhi and Jayati Ghosh, Professor of Economics and Chairperson at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. Originally published at Frontline

On the 30th of August European Competition Commissioner Margrethe Vestager dropped a bombshell at the tax doors of the world’s leading multinational corporations. After a lengthy investigation she ruled that Ireland must recover from the local Apple subsidiary up to 13 billion euros ($14.5 billion) in unpaid past taxes, adding on interest on delayed payments, which could take the total to as much as 19 billion euros ($21 billion).The ruling was based on a decision that tax benefits provided to Apple’s subsidiaries in Ireland through two tax rulings amounted to ‘state aid’ that was illegal under EU rules.

The penalty, though huge by past standards, is not the issue here. With as much as $230 billion of cash and liquid securities (which can be easily converted to cash) at hand, Apple would not have to stretch itself to meet this bill. The real issue is whether Apple’s tax accounting, which is considered legal by the Irish government, can be challenged by investigators acting on behalf of the European Commission. It is taken for granted by the world’s biggest companies that they can transfer profits earned anywhere to locations that are tax havens as part of their “tax planning” decisions. The method through which this is often done is to charge inflated book prices (“transfer prices”) for goods or services sold by the parent or a third country subsidiary (depending on which is located in a country that imposes lower taxes) to the subsidiary in the country from which profits are to be transferred out. This inflates costs and reduces profits on paper in the country from which incomes are being siphoned out. The practice could mean both, that the effective income tax incidence on these companies globally is less than that on smaller companies and even individuals, and that some countries from where the profits of these multinationals are earned would be deprived of tax revenues on those incomes. These problems have been accentuated in the neoliberal era, since countries pursuing neoliberal trajectories are keen on attracting foreign investors into their economies, and are competing with each other to offer them a range of concessions, including concessions that facilitate this kind of tax avoidance, which is legal and does not constitute tax evasion.

The case of Apple’s Irish operations is an extreme example of such tax avoidance accounting. It relates to two Apple subsidiaries Apple Sales International and Apple Operations Europe. Apple Inc US has given the rights to Apple Sales International (ASI) to use its “intellectual property” to sell and manufacture its products outside of North and South America, in return for which Apple Inc of the US receives payments of more than $2 billion per year. The consequence of this arrangement is that any Apple product sold outside the Americas is implicitly first bought by ASI, Ireland from different manufacturers across the globe and sold along with the intellectual property to buyers everywhere except the Americas. So all such sales are by ASI and all profits from those sales are recorded in Ireland. Stage one is complete: incomes earned from sales in different jurisdictions outside the Americas (including India) accrue in Ireland, where tax laws are investor-friendly. What is important here that this was not a straight forward case of exercising the “transfer pricing” weapon. The profits recorded in Ireland were large because the payment made to Apple Inc in the US for the right to use intellectual property was a fraction of the net earnings of ASI.

Does this imply that Apple would pay taxes on these profits in Ireland, however high or low the rate may be? The Commission found it did not. In two rather curious rulings first made in 1991 and then reiterated in 2007 the Irish tax authority allowed ASI to split it profits into two parts: one accruing to the Irish branch of Apple and another to its “head office”. That “head office” existed purely on paper, with no formal location, actual offices, employees or activities. Interestingly, this made-of-nothing head office got a lion’s share of the profits that accrued to ASI, with only a small fraction going to the Irish branch office. According to Verstager’s Statement: “In 2011, Apple Sales International made profits of 16 billion euros. Less than 50 million euros were allocated to the Irish branch. All the rest was allocated to the ‘head office’, where they remained untaxed.” As a result, across time, Apple paid very little by way of taxes to the Irish government. The effective tax rate on its aggregate profits was short of 1 per cent. The Commissioner saw this as illegal under the European Commission’s “state aid rules”, and as amounting to aid that harms competition, since it diverts investment away from other members who are unwilling to offer such special deals to companies.

In the books, however, taxes due on the “head office” profits of Apple are reportedly treated as including a component of deferred taxes. The claim is that these profits will finally have to be repatriated to the US parent, where they would be taxed as per US tax law. But it is well known that US transnationals hold large volumes of surplus funds abroad to avoid US taxation and the evidence is they take very little of it back to the home country. In fact, using the plea that it has “permanent establishment” in Ireland and, therefore, is liable to be taxed there, and benefiting from the special deal the Irish government has offered it, Apple has accumulated large surpluses. A study by two non-profit groups published in 2015 has argued that Apple is holding as much as $181 billion of accumulated profits outside the US, a record among US companies. Moreover, The Washington Post reports that Apple’s Chief Executive Tim Cook told its columnist Jena McGregor, “that the company won’t bring its international cash stockpile back to the United States to invest here until there’s a ‘fair rate’ for corporate taxation in America.”

This has created a peculiar situation where the US is expressing concern about the EC decision not because it disputes the conclusion about tax avoidance, but because it sees the tax revenues as due to it rather than to Ireland or any other EU country. US Treasury Secretary Jack Lew criticised the ruling saying, “I have been concerned that it reflected an attempt to reach into the U.S. tax base to tax income that ought to be taxed in the United States.” In Europe on the other hand, the French Finance Minister and the German Economy Minister, among others, have come out in support of Verstager, recognizing the implication this has for their own tax revenues. Governments other than in Ireland are not with Apple, even if not always for reasons advanced by the EC.

Expectedly,Tim Cook decided to launch an attack against the EC decision, describing its ruling as “total political crap”, and arguing that “In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe.” Holding that the EC “is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been”, he argues that “a fundamental principle is recognized around the world: A company’s profits should be taxed in the country where the value is created,”and that “Apple, Ireland and the United States all agree on this principle.” Since, “in Apple’s case, nearly all … research and development takes place in California, so the vast majority of .. profits are taxed in the United States.” Unfortunately, that is not true, as yet, and is unlikely to be in future, if Apple has its way.

But the fault lies with the Irish political elite as well. The 13 billion euros figure illustrates how much the Irish government gave up over the period 2003 to 2014 to have a bit of Apple on its soil.The EC did not call for data from years prior to 2003. Yet, the benefits that Ireland derived because of Apple’s presence seem meagre. Direct employment by Apple in Ireland provides only 5,500 jobs, though Apple claims that employment in services associated with its operations adds another 2500. But, even then the benefit does not seem to be much from a company that has been running operations in Cork, Ireland for more than 35 years. On the other hand the 35 billion euros that Ireland ‘gave up’ to have the privilege of hosting Apple would have been enough to do away with the government’s deficit and almost equals what the Irish government spends on health care for its 4.6 million inhabitants. There are surely many areas where the additional money can be fruitfully put to use.

Yet the Irish government is sticking by its decision to give Apple the concessions it has. The Irish cabinet has decided to appeal against the EC ruling, though a few of the independent legislators whose support is crucial for the survival of the minority government of Taoiseach Enda Kenny initially expressed some reservation. The argument as expected is that this kind of retrospective tax demand in violation of the rulings of previous governments would not only upset Ireland’s relationship with Apple but damage its image as a superior investment destination for multinational enterprises in general. That image has been cultivated, Niall Cody, the chairman of Ireland’s tax collection agency the Revenue Commissioners, argues, by giving similar tax concessions to around 1,000 other multinationals, mostly American. On the Apple case he says: “Full tax due was paid in accordance with the law.”

Thus the power of the multinationals comes not just from their own size and reach, and from the support that their own governments afford them, but from their ability to divide desperate countries seeking the presence of global giants to make a small difference to their economic conditions. The costs of garnering that difference are, therefore, often missed. Reuters reports that an investigation conducted by it in 2013 found that around three-fourths of the 50 biggest U.S. technology companies use practices that are similar to Apple’s to avoid paying tax. So Verstager has taken on not just one giant, but the worlds corporate elite. She should not lose. But even if she does this time, this is a battle well begun.

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21 comments

  1. Ranger Rick

    I think the common misconception that multinational corporations exist because “they are big companies that happen to operate in more than one country” is one of the biggest lies ever told.

    From the beginning (e.g. Standard Oil, United Fruit) it was clear that multinational status was an exercise in political arbitrage.

  2. Jim Haygood

    With as much as $230 billion of cash and liquid securities (which can be easily converted to cash) at hand, Apple would not have to stretch itself to meet this bill.

    Revealing logic: Apple can afford it, so let’s take their dosh and kick their tush.

    Retroactive liability is an ugly thing. Both individuals and corporations simply want predictable rules, so that each year’s tax bill is final (subject to audit).

    Had the EC challenged Apple’s tax arrangements in 2003, Apple’s set-up would have been either affirmed or changed then. Now the EC wants back taxes from up to twelve years ago. Surprise! Gotcha!

    When Bill Clinton signed the Omnibus Budget Reconciliation of 1993 on 10 Aug 1993, it contained retroactive taxation of estates commencing on 1 Jan 1993. Obviously, decedents and their executors couldn’t go back in time to change their estate plans during this period.

    At one time, Clinton’s odious retroactive taxation would have been considered flatly unconstitutional. But since the constitution has fallen into desuetude, it was “all legal.” :-)

    1. Daníel Örn Davíðsson

      I’m sorry but I find it pretty incredulous to say that most companies want predictable rules and thus imply that this in some way applies to Apple’s case or other multinationals who are able to game the system. I wish I could claim my income in a foreign country which in turn would allow me to divide my income so that I had an effective tax rate if 1% and then provided I had the political clout could then claim that I was deferrring repatriating that income until the tax rate is more to my liking.

      Regarding taxes that are claimed into the past, most tax statutes in europe have a clause which allows tax authorities to reappraise taxes about six years into the past if it is deemed that tax information provided was deficient. Otherwise if tax information is deemed to have been sufficient for tax authorities to levy taxes correctly tax authorities can correct taxes about two years into the past.

    2. jsn

      Yes, when we used to have constitutional government, ex post facto laws were illegal. But its been a while.

      Of course once you start arbitraging national rules you shouldn’t be too surprised if you occasionally land outside anyone’s protections.

      Apple should just re-patriate everything and buy some new tax laws, no constitutional constraints on money here in the USA, its protected speech and in fact the only speech still protected.

    3. Adam Eran

      Let’s be fair, the Reagan tax revise of 1986 included retroactive taxation of real estate-owning partnerships. The previous arrangement was for limited partners owning, for one example, apartments, would be able to write off the depreciation, so wealthy people had a tax incentive to build affordable housing.

      Never mind the crookedness of the entire depreciation mess, removing that incentive meant that many such partnerships were no longer financially viable. The smartest operators simply deeded their projects to the lenders, avoiding foreclosure costs.

      It’s also worth remembering that this was during the second-biggest political/financial scandal in U.S. history: the S&L debacle. It undoubtedly made things worse for lenders flooded with un-viable foreclosures.

      What’s the worst political / financial scandal? The sub-prime / derivatives meltdown…the one that indicates the malefactors’ victory over regulation.

    4. Vedant Desai

      What most of the taxpayers, whether individuals or Corporations , want is not predictable rules. What they really want is that they want to avoid paying taxes. Predictable rules merely comes in handy for this sinister purpose. And this is clearly not a case of retroactive taxation, as EU has not issued new rules on taxation, but rather it enforced their already existing “state aid rules.” And here purpose is to reduce avoidance of tax payment and collect taxes avoided in past, if they had challenged apple in 2003 , apple would have changed its arrangement to a new one and would be still avoiding tax payment. Hence, challenge in 2003 would be useless as it would neither reduce tax avoidance nor increase tax collection.

      1. OpenThePodBayDoorsHAL

        I’d say that what big corps want is opaque and byzantine rules that only their massive legal teams can exploit, as they have done here in spades. And what big corps want, big corps get.
        The EU dings Apple for $14B so a few days later Treasury dings Deutsche for…wait for it…$14B! Oops except that puts Deutsche into negative equity territory. So maybe that’s the plan, EU member states claw back from the likes of Microsoft and Alphabet and Amazon and Facebook and use the proceeds to recap their domestic banks, not a minute too soon with EU banks leveraged at 25X. Italy got a check the other day for $446 M from Alphabet, hey it’s a start.
        If you surveyed the average businessman or citizen in 1913 they would have said everything’s great, behind the scenes though JP Morgan needed to get paid so by 1918 38 million people were dead.

        1. Anon

          I agree with the first part. But not certain of the last sentence. If you are referring to WWI: there were 17 million dead and 20 million wounded (some of whom probably died earlier than expected).

          In any case, war and armament sales are good for the MIC. (And that’s good for us all, right?)

    5. Plenue

      Awwwww, who will have pity on the poor corporations? And of course, for you illegal state aid is perfectly acceptable, right? Funny, I thought you hated government.

    6. Darthbobber

      If one wants “predictable” rules, one doesn’t push the envelope with legally novel and untested arrangements. On the face of it, this does not involve retroactive liability, since the commission’s claim is that the arrangement was legally defective at birth.

  3. tegnost

    “Thus the power of the multinationals comes not just from their own size and reach, and from the support that their own governments afford them, but from their ability to divide desperate countries seeking the presence of global giants to make a small difference to their economic conditions”
    Those who support globalisation support this power disparity.

  4. Synoia

    Let’s quibble about this statement:

    Apple is holding as much as $181 billion of accumulated profits outside the US

    Correctly stated it is:

    Apple is holding booking as much as $181 billion of accumulated profits outside the US.

    This is a bookkeeping exercise.

    1. Yves Smith Post author

      Thank you! I managed to miss that fix. But at least the author said “profits,” which is technically correct but easily misunderstood by laypeople, as opposed to “cash”. It could have been worse.

  5. vlade

    well, if us is upset over a tax loss, I am sure eu woudl allow any us taxes (actually) paid to be offset..
    Personally I find it unbelievable tha us citizens are taxed on worldwide income eve if not resident in the us, but its corporations are not.

  6. What Goes Up...

    The Transfer Pricing bit is possibly the rock upon which the Apple appeal is dashed.

    There’s a great thread here covering this:
    http://www.thepropertypin.com/viewtopic.php?f=4&t=66347

    TL:DR – If Apple appeal and claim Apple Sales International’s (ASI) Head Office is stateless, then the €19 Billion becomes €60 Billion, because a stateless entity can’t benefit from Transfer Pricing.

  7. RBHoughton

    Is it unnecessary for the goods to touch Ireland in their passage from manufacturing country to buying country? That seems a bit daft. Shouldn’t there be a smidgen of plausibility in tax avoidance schemes?

    It seems reasonable to me to require an offloading of the goods at Dublin and a reloading with new invoices for the voyage to real destination, i.e. two voyages, two B/Ls, two invoices, etc.

    Otherwise its like the fraud US merchants pulled on Britain that caused the 1812 war.

  8. Bas

    desperate countries seeking the presence of global giants to make a small difference to their economic conditions.

    Ireland wasn’t desperate when it decided to prostitute its tax base. Neither is Luxembourg, Belgium or the Netherlands.
    Those countries are just small(ish) enough to get away with it.

    Not all bottom feeders are detritivores.

  9. Anand Shah

    The best part is that ireland is a NATO signatory, and the US is footing the majority of the NATO with American tax payer money….

    Apple is an American corporation that stiffs both the countries, and all both governments can do is sit back, relax & smile :-)

    The even more funnier part, would be, when the time comes, for EU to collect the 14+B$, ireland will file for a referendum…

    And the game goes on… and these countries want inflation, after the horses have bolted…. :-)

    1. TheCatSaid

      “the best part is that ireland is a NATO signatory”

      Not exactly. In theory, Ireland is neutral. However in practice that neutrality is meaningless. According to Wikipedia,

      Ireland and the North Atlantic Treaty Organization have had a formal relationship since 1999, when Ireland joined as a member of the NATO Partnership for Peace (PfP) programme and signed up to NATO’S Euro-Atlantic Partnership Council (EAPC). To date, Ireland has not sought to join as a full NATO member due to its traditional policy of military neutrality.

      Lesser-known facts about Ireland’s supposed neutrality:
      1) The IRA blew up a radome on Mount Gabriel in West Cork in 1983 because it was a secret NATO listening post;
      2) There are daily ongoing military flights coming into the small rural Ireland West/Knock (NOC) airport in the middle of the night–at least since 2003 Iraq war buildup, but continuing now–even though supposedly the airport is closed to all air traffic at night (and its planning permission specifically forbade night-time operation). A friend who checked it out recently saw a Hercules C-130 land at 3am. He also spotted a very large hanger building at the far end of the ultra-long runway (the Knock runway length is a major anomaly in itself), and when he went to take a look, some threatening guys in camoflage with British accents (!) jumped out of the bushes and told him to leave, “FAST”. The same friend has a contact who works at Knock Airport Air Traffic Control who said the “regular” staff leave every night at 8pm, but that every night between 12 midnight and 4am other people come in and take over. Also there is a huge fuel supply brought in daily for these refuelling operations–inconsistent with the fuel needs of a tiny regional airport on the Western fringe of supposedly neutral Ireland. Funny how all the plane spotters focus on Shannon Airport and no one pays any attention to Knock.

  10. TheCatSaid

    One of Apple’s legal team on this case is a family friend, and we met up at a recent gathering. The case couldn’t be discussed, but it was a good reminder that these professionals are full-fledged human beings with lives outside their work. Some of them would probably rather be doing something else, but the “pay” and “career” are seductive, and the intellectual challenge is stimulating.

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