Where the value is generated

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2 September 2016 | 0

Paul HearnsIt is with a heavy heart that I write this.

Not because it covers the recent EU Commission ruling on Apple’s tax affairs in Ireland, but because the topic is about corporate tax arrangements, both domestic and international, and therefore is baffling in the extreme, not to mention nonsensical, cynical and exploitative.

First, let’s recap the situation.

In 2015, Bloomberg reported that Apple CEO Tim Cook was facing something of a headache, as the company then had a cash stockpile of some $200 billion, 90% of which was held offshore.

“Where is the value generated? Is it where a device is sold or a service utilised? Or is it where the device was designed or the search algorithm devised?”

Offshore cash
The issue was that under US tax law, this offshore money could be held indefinitely so, meaning it was out of reach of the 35% US corporate tax rate. Previously, in 2013, senior Apple executives had been called before a US government committee to explain itself in having so much cash offshore that it was unwilling to repatriate to the US.

Apple, unsurprisingly, asked for tax reform, namely the reduction of the rate, and a potential amnesty for the cash, as had happened in 2004 despite the Wall Street Journal, among other critics, calling the amnesty a failed policy.

US tax law currently, allows companies tax credits against tax paid on profits in other jurisdictions. When what is left is brought back to the US, it is taxed at the full rate. However, there is a deferral system that means companies can, more or less indefinitely, put off doing so, thus avoiding taxes.

According to Bloomberg, this encourages companies to shift profits to low-tax countries for as long as possible, estimating that more than $2 trillion is being stockpiled in this manner by US companies.

Stateless removed
In 2014, one of the key facilities that allowed this kind of avoidance, Ireland’s stateless companies rules, was removed. There were some exceptions in Irish tax rules for Irish incorporated companies to be regarded as tax resident here. The first was called a treaty exception, but the second, and the relevant one, was a trading exception.

The trading exception facilitated what became known as the “double Irish” (famously leveraged with the Dutch Sandwich), whereby it was possible to create a company which was not tax resident in Ireland, but was Irish incorporated, and, critically, not subject to Irish corporation tax. Importantly though, the company was also seen as not being tax resident in any other jurisdiction either, hence the interpretation of stateless companies.

So, on Tuesday 30 August, a European Commission report said that Ireland granted undue tax benefits to Apple which amounted to illegal state aid, because it allowed the company to pay substantially less tax than other businesses.

The findings were that Apple, for the period of 2003 to 2014 had been given an unfairly advantageous tax scheme for which it should repay roughly €13 billion to the Irish state.

The Irish Government has said it will appeal the decision.

Apple maintains it has paid all tax due, as the does the Irish government, and both maintain that the deal was not either unfair or illegal.

‘Political crap’
Cook has since said in interviews with the Irish media, that it is “total political crap” and the Commission “picked a number from I don’t know where”.

However, in an open letter to Apple customers published on the Apple web site, Cook said that despite the fact that the taxes for multinational companies are “complex”, a fundamental principle was recognised “around the world” — “a company’s profits should be taxed in the country where the value is created”.

Cook adds “Apple, Ireland and the United States all agree on this principle.”

Now this is an odd statement.

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