Apple faces a €13bn tax bill after Brussels ruled its tax arrangement broke European law. Does this spell the end for tax-dodging by multinationals? Simon Wilson reports.
The European Commission (EC) hasn't accused Apple itself of breaking any law. And Ireland's government is content with the amount of corporation tax the firm is paying. The problem is more a case of whether Ireland was right to be satisfied with that.
The EC thinks it wasn't: Margrethe Vestager, the competition commissioner, stunned Apple, Dublin and the US government all of whom are furious by ordering the Irish government to recover a mammoth €13bn in back taxes from the tech giant, on the grounds that Apple's "sweetheart" tax arrangements in Ireland since 1991 amounted to illegal state subsidies under European Union law.
Is Vestager right on corporate tax?
That will be for the courts to decide, in what most expect to be years of expensive legal wrangling. It is certainly true that Apple, with its superabundance of intellectual property and intangible assets the kind that are much easier to shift around to game the system has been a world leader in exploiting the gaps between national tax jurisdictions. The current spat centres on two Irish-registered subsidiaries that hold the right to use Apple intellectual property to make and sell its phones and computers in the world outside the Americas.
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The EC says that a stitch-up between Apple and Dublin allowed most of the profits to go to a "head office" that only existed on paper, and meant Apple paid tax in Europe of less than 1%. In Ireland itself, it says Apple's effective tax rate in 2014 was virtually nil (0.005%).
What does Ireland say?
The government is seething and worried. Michael Noonan, the finance minister, says the EC demand is "bizarre and outrageous" and that he would rather "defend the integrity of our tax system" than accept a $13bn windfall a sum that exceeds Ireland's annual healthcare budget. In effect, Ireland has been accused of being a giant tax haven. That charge has the potential to threaten the country's entire economic development model, which is unusually dependent of foreign direct investment (it's second only to Singapore in terms of FDI per capita).
Apple first arrived in Cork in 1980, opening a small factory with 60 workers. Now that factory employs 6,000 people; Microsoft, Intel and Pfizer also have substantial operations in the country, and Google and Facebook have their international headquarters in Dublin. There are 700 US companies in Ireland employing 140,000 people (in a country of less than five million).
So this is about reputation?
Yes. In the case of Ireland, it's about protecting its reputation as a legitimate low-tax regime in the face of a complex collision between competition law and tax law. In the case of Apple, and similar companies, it's about trying to keep its profits out of the clutches of the US taxman, where the average combined rate across the various states is 39.1% (compared with Ireland's 12.5%), while not actually stepping over the legal line. But in a broader context, the Apple/EU case is about the fact that it is getting ever easier for companies to disguise where their profits are being made, and harder for national governments to keep up.
The share of corporation tax (as a proportion of overall tax take) has slumped from 32.1% to 8.9% in the US since 1952. In the UK it has fallen from 10% to 6% since 1989. That suggests that companies are getting better at bending the rules avoiding tax even if they are sticking to the letter of the law.
Can't they be shamed into paying up?
There has been much discussion in recent years about "tax shaming" and tax as a moral issue rather than a legal one. Large numbers of companies that comply with the letter of the law have been accused of not complying with the spirit of it, and found themselves pilloried in the media.
It is naturally very frustrating for UK firms who uncomplainingly pay large tax bills not to mention individual taxpayers to see multinationals avoid doing so. But again, the power to bring about change lies with policymakers, not business leaders. Companies are accused of acting unethically for taking advantage of tax loopholes, but they might argue that politicians are to blame for permitting those loopholes.
What's a better solution?
People and companies should, of course, be ashamed of evading tax, argues Tim Harford in the FT earlier this year, but "a system that is driven by public shaming has gone badly wrong. Shame is an uneven incentive; it may keep celebrities, politicians and consumer brands in line, but less prominent figures and corporations will escape censure."
Moreover, there is more to good tax design than closing loopholes. The long-term solutions surely lie in overall lower tax rates on a broader base within a simplified system and exceptions eliminated together with multilateral reform of the global tax system of the kind being pursued by the OECD. In the meantime, companies will increasingly have to factor in the "front-page test" when working out how to keep both the taxman and their shareholders happy.
Britain's tough new tax rules
It's not just big business that's facing a more rigorousapproach from policymakers. Britain's tax professionals accountants, lawyers and financial advisers are "firmly inthe taxman's sights", says Emily Cadman in the FinancialTimes. Last month HMRC published its long-awaitedproposals for a clampdown on professionals who facilitateaggressive tax avoidance. If approved, the new regimewill include new punishments for individuals and firmsinvolved in designing, marketing or facilitating avoidanceschemes that are later "defeated" by HMRC.
Ominously forthe avoiders, tax campaigners warmly welcomed the move,while John Cullinane of the Chartered Institute of Taxationwarned of the risk from rules that prevented taxpayers"getting access to honest, impartial advice on the law".
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Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.
Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.
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