Ireland, the US, the EU Commission and the dilemma over how to play an #AppleTax wind fall…

It’s awkward. Ireland’s FDI policy has been in train for nearly 70 years. It has shaped its economy not simply through cutting deals and sustaining low tax, but developing its education and outreach through its diaspora.

It wasn’t just sentiment that brought big US companies ‘home’.

The decision (available only by presser), by what amounts to the EU’s Civil Service, that Apple (a private company with approximately £600 billion in its savings account) must pay Ireland some €13 billion in unpaid taxes for the decade 2004 to 2014.

As Jolyeon Maugham notes what has followed has been a domestic debate:

…about whether to appeal against the decision couched in purely parochial terms: should we keep the windfall? or should we act to protect the advantages that come from tilting the playing field in our direction?

The Commission believes (long commentary here) that Ireland has advanced Apple state aid, by recognising a virtual headquarters – that has no geographical base –  as Apple Sales International is the last known and substantial whereabouts of its humungous profits before they hit the bank.

Broadsheet have transcribed a fascinating exchange between Professor Richard Murphy and Fine Gael MEP Brian Hayes, which illustrates the tensions between Ireland’s national interest and that of the single market.

First Murphy:

It is the right decision, yes it is because if we believe in fair markets, if we believe that that’s the way we should organise the world, then everybody has to compete on a level playing field. And, as any economist will tell you, we need transparency. Well, this was a secret deal, it was done without people knowing.

Then Hayes:

…most of the cases on this top-level are being taken against small members states of the European Union – Belgium, the Netherlands, Luxembourg and Ireland. Countries that have, traditionally, certainly in the case of Ireland, have no industrial revolution, have since the 1960s got to open its doors towards inward investment and now we’re being asked, in terms of the entire corporate tax structure in Europe, to take these cases on.

Aside from the problematic politics, there is a legitimate objection to the idea that Ireland is solely responsible for the collection of tax on up to 60% of Apple’s global profits, and that’s the one lodged by Seamus Coffey:

…even for Apple stores it’s not clear that the customers were buying from ASI.  Apple Retail UK Ltd which runs Apple stores in the UK had £900 million of sales in 2014 (accounts here).  The shops might have bought the devices from ASI but the customers bought them from Apple Retail UK Ltd.

Only the Irish branch of Apple Sales International had the capacity to generate any income from trading, i.e. from the distribution of Apple products. Therefore, the sales profits of Apple Sales International should have been recorded with the Irish branch and taxed there.

And this is the contradiction.  We have “specific provisions in the Irish tax law” in the first extract saying the profits are not subject to Irish tax and the factual position set out by the Commission that only the Irish branch has substance.  The Commission are going for substance over law. [Emphasis added]

So what about the prospects for a resolution? David McWilliams takes a relaxed view, saying that Ireland has nothing to fear from pushing for a challenge (remember, for all the hysteria at the moment, the ruling may not be published for weeks or months yet):

Before we assess this unique opportunity given to us on a plate by the EU Commission, rest easy, because we win either way.

If we lose the appeal, Ireland gets a windfall of €13bn, or about €2,600 per person. This is enough to wipe out our budget deficit for years to come, spend on what we will, or use in another way, which I will explain a bit later.

If we lose, we will be seen by corporate America as its only friend in Europe. This is exactly where we want to be. It is not pretty, nor heroic, but it’s realpolitik. When you have no capital base, you have to borrow someone else’s.

He expands upon that point in this interview on CNN:

McWilliams’ framing is interesting, if a little extreme. He is clear that in this fight, Irish economic interest is far better served by staying much closer to Boston rather than Berlin since this is where most of the country’s capital originates.

That it cannot control the outcome (Ireland, in this case, is merely the grass beneath the feet of two fighting elephants) may be a pragmatic virtue in the sense that in launching an appeal Ireland gets off the hook with its US investors.

The Commission statement makes it clear that it is not questioning Ireland’s tax structure, at this stage at least. So, so long as this US-EU argument does not escalate, its current FDI policy should not be adversely affected.

Irish Times Apple Tax

Fintan O’Toole argues that Ireland should just take the money and hang the consequences. He provides a nice range of policy suggestions that the €13 billion could usefully pay for…

More likely the government will appeal the ruling, and the money put into an escrow account until it’s made its way through the European Court system. But money deferred until several days after tomorrow is not as appealing to the electorate as money today.

And if there is one set of TDs in the Irish government who understand that better than most it is the independent populist members of the cabinet. The Irish Times reports rumours of a split, quoting a pithy Michael Noonan likening acceptance of the money to “eating the seed potatoes.”

Final word to Maugham

If you agree with the proposition that it’s a good thing for big multinational companies to pay tax on their profits then you should be interested in how this strange state of affairs came about.

It wasn’t Ireland, or Germany, or France, or the UK that delivered it. It was the European Commission. The reality is that the smaller you are, the more difficult it is for you to generate tax receipts. You’re less important a market.

And you’re less able to absorb the risks attached to widening your tax base or increasing your tax rates. Or to face down threats of retaliation. On the other hand, the bigger the market you are, the greater the heft you have.

As we have seen in the Euro crisis, what makes sense at the centre of Europe does not always work in the same way at the edge. Ireland would do well to play this one with it’s own longer national interests at the centre.

It remains to be seen if the electorate is in any kind of mood for such a shortcut.

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  • terence patrick hewett

    What the EU has done is the financial equivalent of bombing Pearl Harbor: I rather think that a third time smack for Ireland is going to be very unlucky for the EU.

  • chrisjones2

    Even worse for all those here decrying Brexit.

    What happens if Ireland does eventually get its €13bn payment? The Irish Government elected by the Irish people is not permitted to decide how to spend its own tax revenues. The EU insist it cannot be spent on tax reliefs for citizens or even current spending like employing more Garda or Nurses. No it MUST be used at the EUs behest to pay off any debts Ireland owes to the EU or or major capital works

    Do the people of Ireland realise the extent to which they are now indentured to a Commission that they do not elect and have no power to dismiss?

  • terence patrick hewett

    It is pretty hard to see the extent of the fallout from this: certainly for Brexiteers and the City of London: Christmas has come twice already before December 25th.

  • mickfealty

    My betting is on Apple. As highlighted by Seamus Coffey above, the ruling has been arrived at on the basis of substance rather than law. If Ireland doesn’t take the case, Apple certainly will.

    In which case the cash money now being dangled so deliciously in front of readers by Fintan and others is very unlikely to materialise.

  • Kevin Breslin

    I think the Republic of Ireland at the end of the day will probably get a lot more than the measly £42 million the UK has settled upon from Apple. And the Irish people did decide on the Fiscal Compact, the British people had no direct say on how the UK manages its debt or international treaties and didn’t before they joined the EU either.

    http://www.economist.com/blogs/newsbook/2012/06/irelands-referendum-fiscal-compact

    The fact is people are sceptical about Brexit, just as people are sceptical about the EU, there are people who are going to be sceptical about both to be fair. And there’s really nothing that actually helps to manage Brexit as a result of this.

    For years and years Eurosceptics blamed the UK for everything, they’d blame it for Princess Diana’s death if they actually approved of her, and took next to no responsibility for its own decisions or mistakes.

    We have a very fractured Conservative party, leading a very fractured United Kingdom, scrutinized by a very fractured Labour Party. The Conservatives big problem is that it cannot manage conflicting demands of the grumblers within it for the type of Brexit they want, the Labour Party cannot deal with those wanting the 1950’s back and those wanting the 1990’s back.

    At the same time, companies relying on EU networks are being told they aren’t getting them as everything is going to change, and people who despise migrantion or the net contribution or certain regulations are being told nothing is going to change.

    The EU may have internal dialogue over finding some equilibrium in order to do things, but the UK being outside the EU needs to have that internal dialogue too as is going to find the toughest country it has to negotiate with is itself. Right now it really is losing that battle miserably as individual Tories demand their place as Brexit king or queen.

  • chrisjones2

    Well the case may take so long to decide, will the EU still be there when it ends? Even if it is will Ireland be in it?

  • mickfealty

    Harumph.

  • Declan Doyle

    It’s an odd world when those who occupy cabinet positions and are genuiinely concerned about the common good are dismissed as ‘populist’ but the parties who make the dodgy deals or land us in the economic schit are apparently pragmatic.

  • Thomas Barber

    One door closes and another opens –

    http://www.telegraph.co.uk/technology/2016/08/30/apple-ordered-to-pay-11bn-after-european-union-tax-investigation/

    “Britain flutters eyelashes at Apple following European Commission tax ruling”

  • Reader

    Kevin Breslin: I think the Republic of Ireland at the end of the day will probably get a lot more than the measly £42 million the UK has settled upon from Apple.
    Presumably because the profit was funnelled through Ireland leaving the UK (and Germany, and France, and Italy…) with nothing to tax. All of the above were actually in the EU at the time in question of course, which didn’t help them.
    Note that the commission has almost nothing to say about this profit shifting; their interest was in the extra sweeteners applied by Ireland instead.
    Ireland’s advantage lay in their ability to make a deal that suited both them and Apple. That seems to be coming to an end. Whether profits can be routed through a non-EU country in the future is an interesting question, isn’t it?

  • mickfealty

    Ruling applies between 2004-14: ie, no longer a runner. Ireland can cut Corpo Tax to zero if it keeps within the ‘fiscal space’.

    But you point to a wider incentive for the Irish government not to follow Fintan’s advice and take the money now and run.

    Very different, of course, if the Commission wins, and Ireland is forced to take the money.

  • mickfealty

    Really? I thought I’d laid plenty enough detail out there to give context to that remark. Perhaps you could reciprocate?

  • terence patrick hewett

    “German activists have launched the country’s largest-ever civil lawsuit
    in protest of a planned free trade agreement between the EU and Canada.
    They argue the trade pact violates the constitution and the rule of law.”

    NGOs launch massive lawsuit against EU-Canada trade deal

    http://www.dw.com/en/ngos-launch-massive-lawsuit-against-eu-canada-trade-deal/a-19515611

    As all this unfolds or in the case of the EU – unravels, the UK is being presented with and an amazing opportunity to create a massive trading zone: they can hardly believe their luck.

  • chrisjones2

    Its a genuine view….. Italy has the wobbles….the EU is beset with problems and has no strategy. It may easily fail

  • chrisjones2

    “Flutters eyelashes”? We have our fishnets on as well

  • mickfealty

    I think India already was considered to have the same status as Ireland in this regard, though I’ve not looked into that in any great detail. Some 60% went via the Republic to the virtual headquarters.

    On the profit shifting, I suspect that’s because it’s hard to define where profit is due in a globalised chain. Easier to step on the last real place the profit moved through before it goes to the virtual HQ.

    All part of our old friend, “the political trillema of the world economy”: https://goo.gl/ApW5wC.

  • Declan Doyle

    No context really at all. It was more like a subconscious hit and run type of comment. Dump the populist tag in the middle assuming the reader will make a negative association and therefore enforce the illusion that the governments position is both reasonable and logical. The only context given was an assumption based on an assumption; that being an assumption that the independents will assume the people will somehow be less bothered by the issue of the windfall in a few days or further down the line. Clever, all the same.

  • Sherdy

    But will Britain have similar access to the EU market post-Brexit as Ireland has?

  • mickfealty

    Calling for the Dail to reconvene is a good out. But their populism dictates they require cover after years of making easy hay at the expense of others will similar responsibilities.

  • Declan Doyle

    Nothing easy about fighting against a system that is corrupt to the core and backed by a media which has lost all integrity. In fact, it would be much easier to play the game, join the club and get fat on the profits. Recalling the Dail in this situation is the right thing to do on a million different levels. The question now is how many of the ‘populares’ can be either bought off, or blackmailed into submission.

  • JohnTheOptimist

    Ireland and Britain are in cut-throat competition for mobile FDI. Both have done much better than continental EU countries. Each has some advantages. Britain’s main advantages are its size, worldwide connections and pro-business environment. Ireland’s low-tax regime for businesses is its main advantage, although there are others. Britain would dearly love to undermine this advantage. and sees the Apple controversy as an opportunity. It has already said it would welcome Apple moving to Britain. I have no problem with Britain wanting this – bad-mouthing your competitors and trying to undermine their advantages is what all countries do. Ireland probably does the same.

    However, the role of SF in all this needs is interesting. You’d think that as a nationalist party they’d be going flat out to defend Ireland in this controversy and do everything possible to support the main pillar in Ireland’s economic success in recent decades, this economic success being by far the best argument in favour of a United Ireland, which SF claim to want. But, quite the opposite. Judging by their antics in Dublin yesterday (leaving apples outside FG head office), SF are clearly on the side of Ireland’s competitors in trying to undermine the low tax policy. Seems bizarre. The most likely explanation is the continuing influence of MI5 on SF’s policy-making process, following its takeover by said organisation in the 80s and 90s.

  • Katyusha

    Not really surprising. SF are a left-wing quasi-socialist party as well as a nationalist party. They can hardly position themselves as standing up for the poor and downtrodden if they’re defending a multinational skimping on its tax burden. While it may not be accurate, there’s been a lot of talk about the taxpayer having to foot the burden that Apple evaded. SF want to portray themselves as on the side of those who have been cheated by the government, by big business and, in other cases, the EU.

    It doesn’t matter if that narrative is correct. All that matters is that it sells

    SF can hardly condemn Fianna Fail as corrupt, greedy and willing to sell the country to the highest bidder if they are defending the kind of “special treatment” that earned FF that reputation, and they need to portray Fine Gael as heartless and spineless in implementing the EU austerity program, willing to take on the EU when the interests of big business are threatened but not the ordinary citizen. The economic recovery has bypassed the most vulnerable in society; as such, SF do not have to defend the means by which it was achieved. FG’s “Lets Keep the Recovery Going” slogan is still used as a joke by SF months after the election.

    They need to differentiate themselves from FF and FG; defending their policies would not be a good move. When SF are trying to undermine the low-tax policy, they are not so much on the side of Ireland’s competitors as trying to undermine their own competitors. You might as well vote FF if you’re going to get the same policies. If you want low business tax rates and special measures to attract FDI, why would you vote SF over FF?

    Another thing. This debacle has little to do with Ireland’s low corporation tax rate. If Apple paid the same 12.5% rate that is apparently the corporation tax rate, I don’t think there would be a problem. At least there would be a level playing field for everyone. Paying 0.005% tax looks brazen and blatantly unfair.

  • Kevin Breslin

    Well again they didn’t opt for Switzerland, didn’t opt for the American Tax havens, didn’t opt for the Channel Isles, Monaco, Iceland, Liechtenstein … you know the old reliables outside the EU.

    Apple picked an EU country for a reason.

  • Kevin Breslin

    If Apple win, there will be tax reform in Ireland and the EU. If the EU wins there may be a rethink from multinationals investing in Ireland, but the state may get a windfall to boost local industries … in effect the money will materialize, it is a question of where.

    http://www.independent.ie/business/irish/apple-tax-row-government-should-tell-eu-to-fk-off-michael-oleary-35010094.html

    However, a former IMF deputy director has said that the Irish government should think deeply about whether an appeal is the right option.

    “I think they should hold the horses and reflect on this for a number of reasons,” Donal O’Donovan said on the Sean O’Rourke show on RTE
    “First of all, what grounds do they have for thinking that they will win the appeal?

    “The Commission, on this highly controversial subject, presumably thought long and hard before it came out with its ruling, and it must be fairly confident that it can withstand this and win in a European court. Otherwise, the damage to the commission would be enormous in terms of credibility and they wouldn’t want to take that risk.

    “It is not impossible that there could be a deal out of this, if we worked on it, that might allow us to spend some part, perhaps a good part, of the €13-19bn on infrastructure: schools, hospitals… I just wouldn’t rule that out,” he added.

    Earlier, Mr O’Dea was adamant that Revenue collected the full amount of tax due from Apple in accordance with Irish tax law.

    “If the two Apple companies concerned had been resident in Ireland of course there would be a basis for having charged the amounts mentioned or alleged by the Commission,” he said.

    “However, the two companies concerned were not resident companies in Ireland for tax purposes. So they were not chargeable on the worldwide profits, they were actually chargeable on their branches here in the state…

    He agreed that “while somebody may be owed €13bn, Ireland isn’t owed it”.

    “I’m not here to defend the international tax planning by multinationals, but I am here to reassure listeners that Revenue gave no deviation from the law, gave no preference to this company and collected the full tax due,” he added.