Is iRISH government right to appeal Apple verdict?

The Irish government has confirmed plans to appeal against an order to recoup €13bn in tax from Apple. Last week, the European Commission (EC) described Ireland’s tax breaks for the tech giant as anti-competitive “illegal state aid”. The ruling threatened to divide the coalition government, with independents rejecting an expensive and lengthy appeal.

Many commentators angry at the EC’s decision have dismissed the illegal state aid ruling as creative. They point to similar tax breaks provided by large EU members like France and Germany, questioning why only smaller nations like Ireland, Luxembourg and the Netherlands, come under fire. Tax law is determined nationally too, so the EC is being criticised for encroaching on member states’ sovereignty.

However, the EC has a point. The illegal state aid argument is legitimate because Ireland does not apply tax breaks equally across businesses. Domestic companies are not conferred with the same level of tax exemptions as multibillion-dollar US firms. So while it is not within the EC’s jurisdiction to determine national tax systems, it is within its rights to pursue anti-competitive arrangements.

In brief: Apple’s deal with Ireland

The enormous €13bn sum covers a ten-year period to 2013. Although Ireland’s headline rate of corporation tax is an internationally competitive 12.5%, Apple has effectively paid as little as between 1% and 0.005% tax on its European, Middle East, African (EMEA) and Indian profits.

There are two Irish-incorporated companies: Apple Sales International and Apple Operations Europe. Both are owned by the Apple group and benefit from similar tax structures in Ireland.

The Revenue Commission only claimed tax on profits earned in Ireland and allocated EMEA and Indian profits to its head office, which is registered in Ireland.

Under the tax arrangement however, this head office is not based in any country, allowing the Revenue Commission to argue it was not responsible for taxing non-Ireland profits. That means no tax was collected on products bought throughout the rest of EMEA and India, even though the sales were contractually (but not physically) made in Ireland.

In 2011, Apple Sales International alone recorded profits of around $22bn (€16bn) but only €50m was considered taxable in Ireland. That left €15.95bn of profits untaxed in a single year.

These same companies enjoy tax breaks on profits used for research and development (R&D) in the US. Again in 2011, some €1.79bn was re-routed to the US parent company under the R&D subsidy offered by the Irish government.

If the tax agreement was to be summed up in a conversation between Apple and Ireland, it would go something like this:

Apple: We need somewhere for our head office but we don’t want to pay taxes.

Ireland: No problem. Why don’t you register here but we won’t recognize it for tax purposes?

Apple: Sounds great, what’s the catch?

Ireland: We’ll tax any profits you make in Ireland.

Apple: Cool, that’s only a small bite out of the big Apple, haha.

Ireland: We’ll also let you cut your tax on those Irish profits if you use some of that money for R&D in the States. That will help sweeten our American friends.

Apple: Even better.

Ireland: Grand, job done.

The case for appeal

Ireland needs the ability to be competitive in a globalised world. As a small island nation with a population of 4.7m, it is heavily reliant on foreign direct investment (FDI). The country made great strides in the early 90s to attract and retain FDI, using tax subsidies as a way to win over, primarily US, multinationals. These policies sparked the Celtic Tiger, which transformed the state from a poor Western European backwater into one of the wealthiest countries in the world by the mid-00s.

The government also needs to defend Ireland’s reputation. By failing to appeal the judgment, it is de facto admitting the corporate tax system is corrupt. It is important to demonstrate to other multinationals that Ireland is willing to defend its tax structure, otherwise they are likely to pull out. If the appeal is successful, the likes of Google and Facebook will be reassured they will not face similar scrutiny. This will help keep them in the country and may even encourage further FDI into Ireland.

The case against appeal

International critics view Ireland as a tax haven, which is already damaging for the country’s reputation. Appeals processes are extremely costly and can last for years. Ironically, it will be the ordinary Irish taxpayer who foots the bill for an appeal against a multibillion-dollar organisation paying its taxes. Apple is already taking an appeal to the European Court of Justice (ECJ) so the government could just sit on the sidelines. That would save millions in legal fees. And it is probably Apple’s case that will determine the decision, not Ireland’s.

Even if the EC’s decision is overturned by the ECJ, there is no guarantee this will keep FDI in Ireland. In 2009, 1,900 jobs were lost at Dell in Limerick after the computer giant decided to move manufacturing to a cheaper facility in Poland. There is no preventing other countries from implementing more attractive tax deals so the Irish government’s low corporate tax environment is short-sighted. It was successful in the early 90s because production costs and wages were low, but now Ireland has one of the highest minimum wages in Europe.

Economic case

Ireland definitely needs FDI. But it is difficult to quantify whether the level of tax forgone under the current structure justifies the jobs created by multinationals. When the Central Statistics Office (CSO) published figures stating that gross domestic product (GDP) grew 26 per cent last year, the whole world laughed. Nobel prize-winning economist Paul Krugman called it “leprechaun economics”.

The CSO ascribed the phenomenal economic growth to recent tax inversions. That means there was an increase in multinationals registering their head offices in Ireland. But GDP is problematic as an indicator of economic success; it only measures the amount of cash flowing in and out of a country.

A better measure of prosperity is gross national product (GNP), which records how much of that wealth stays in the country. This rose by an impressive 18.7 per cent in 2015. However, that can be partly explained by the rise in rental prices, which have exploded by as much as 16 per cent in Dublin city centre alone.

Is it ethical?

If the tax structure is deemed illegal and multinationals leave the country, it loses both the jobs and any potential corporate tax. However, it feels wrong that a country’s prosperity hangs so delicately on intricate corporate tax deals. Why should ordinary Irish citizens and domestic businesses be forced to pay full taxes when rich foreign firms can get away with paying almost nothing?

There is no doubt that Irish living standards would dive if FDI dried up. However, the government needs to evolve FDI policymaking. Ireland has a strong level of human capital yet it regularly suffers brain drains as the most qualified emigrate to places like London, Sydney and Toronto, to further their prospects. The low corporate tax policy has failed to provide sufficient opportunities for Irish workers. Perhaps rebalancing corporate tax rates between foreign and domestic firms would help promote homegrown success. It would certainly derail the EC’s argument of illegal state aid.

 

Apple

About natashabrowne

Natasha is a freelance journalist and aspiring economist.
This entry was posted in Economic conundrums, Somewhat Political, Thought nutrition and tagged , , , , , , , , , , , , . Bookmark the permalink.

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