French Minister for Digital Affairs Axelle Lemaire, speaking to the Irish Times in 2015 said, in relation to the then upcoming document on the digital single market, that “profits are taxed where the value is generated, including in the digital economy”.
This would appear to be a thorny issue, as one can be quite sure that what Cook means by “the country where the value is created” and what Lemaire means by “taxed where the value is generated” are very different things.
Business models
Firstly, in the digital world, there are different types of business models at work. For example, Apple does most of its R&D work for its products in the US. Our finance minister himself quoted the legend on the back of the iPhone that states “Designed by Apple in California. Assembled in China.”
But the reality is that companies can have a Byzantine system of internal purchasing, licensing and transfers that sees one subsidiary buying its own products from another subsidiary at an inflated price, as reported by the US Citizens for Tax Justice group, to reduce apparent profits. This can be applied to intellectual property too, whereby one subsidiary licenses the likes of search algorithms from another subsidiary or parent company for a surprisingly large amount, given that all of the companies are within the same group and controlled by the same people.
So, 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?
Cook’s argument would seem to be circular, insofar as the Commission findings are that a huge amount of the company’s profits was routed through an Irish registered but essentially stateless company which is then regarded as Irish by the US system and therefore not taxable, but foreign controlled by the Irish system, and so not taxable. Cook’s assertion that the tax should be levied where the value is generated is then meaningless, as the profits routed through a stateless company came from European, Chinese and Indian sales, but due to that stateless status, were essentially taxed nowhere.
Both correct
The bottom line is that Cook and the Irish government are indeed correct: Apple has paid all tax due under the system that applied in period 2003 – 2014. The Commission’s assertion is that Apple was guided to use the system in such a manner as to gain an unfair advantage over other businesses.
It now remains to be seen whether other companies, mostly in the tech and pharmaceutical sectors, were given the same guidance. In which case there is no real case to answer. Or at least no tax case. There is a policy case to answer in that the government would be guilty of facilitating massive tax avoidance by allowing this system to exist and persist, guiding companies to use it to its fullest.
The 2014 removal of the trading exception will go some way toward preventing this kind of exploitation in future, but it does nothing to change the US deferral facility that still allows US companies, and those controlled by US companies, to offshore profits that have gone through other jurisdictions, leaving them tantalisingly out of reach of that 35% rate.
Until all countries move to address these avoidance facilities, these stories will persist, leading to resentment and distrust of both governments and multinationals.
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