An Apple a day, keeps the tax man away. Unwanted windfall gains for the Irish Government?

The Apple story has reappeared, like Granny’s reheated tart. The Irish Times reports here that Apple have said that a direction to pay additional taxes due to Ireland would be “material”. The story is also covered in the Financial Times (€) here. The two pieces are based on a quarterly stock exchange filing by Apple, which can be openly accessed here . The relevant comment, causing the controversy is,

On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact.”

The particular subsidiary of Apple under investigation is an Irish Registered, Non Resident company. Or put more simply, born on the Northside of Cork, after a long gestation, the international consultants present at its birth decided for the good of its financial health, it should emigrate post haste to sunnier climes. However the precocious baby contracted its old friends back in Cork to do its household chores.

The company has two sorts of income, investment income, taxable at 25% and trading income taxable at a 12.5% rate. The problem for Apple is that little if any of this income was taxed anywhere and any direction from the European Commission would cost it serious money. The Irish Government are likely to be in the awkward position of having to collect tax (perhaps with interest and penalties), which in its view, are not due. It went so far as producing a “Technical Paper” as part of its defence, which I analysed in this piece  on Unite’s Notesonthefront site.

The yield from the Commission’s investigations is likely to be huge. The Irish Times mentions a minimum figure of $2,500M dollars and the FT are talking about a penalty north of €1,000M. It is ironic that the party complicit in the crime, Ireland, will receive the benefit. But ee simply don’t know yet how big any final deal will be.

Apple is left with an awkward decision. Does it decide to fight the Commission or try to cut a deal. No multi-national wants to include disturbing statements such as the above comment in its statutory filings. Yet, Apple’s tax strategy from very early in its existence was extremely aggressive. The choice now is best described as the Prisoner’s Dilemma. However, the position of its fellow accused, Ireland, is slightly weaker. It has built an economic strategy based on conniving with International tax avoidance. It may be left with Hobson’s choice, take the windfall in taxes and suffer the long-term consequences.