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Apple Argues Paying More Than A 0.005% Tax Rate Is 'Unfair'

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Yesterday, the world was stunned as the European Commission demanded up to €13 billion ($14.5 billion) from Apple for unpaid back-taxes owed to the Republic of Ireland.

The EC found that the tech’s sweetheart deal with Irish tax authorities violated EU state-aid regulations.

Apple noted that “As our business has grown over the years, we have become the largest taxpayer in Ireland, the largest taxpayer in the United States, and the largest taxpayer in the world.”

This is hardly surprising, given that it is the biggest company by market capitalization in Ireland, the US and the world.

But there are two more meaty contentions that Apple is making in respect of the Commission announcement.

  1. Apple did not have a special tax arrangement with the Irish government. Therefore, there was no illegal ‘state aid’.
  2. Apple complied with all Irish tax codes and paid all owed taxes. Any new bill can be considered a retrospective change in tax law.

Sweetheart deal?

On the first matter: did Apple have a special arrangement with the Irish government? The view of the Irish government is unequivocal:

“Ireland’s position remains that the full amount of tax was paid in this case and no State aid was provided.  Ireland did not give favourable tax treatment to Apple.  Ireland does not do deals with taxpayers.

Apple has also denied the existence of a special deal.

The contention from the Commission appears to be that, even though there were no written agreement, the shockingly low tax rate (apparently 0.005% in 2014) suggests that there was a de facto arrangement. When the European lawyers began to look at Apple’s convoluted tax structures, shifting money between shell entities and a ‘head office’ that didn’t employ staff, possess facilities or even have a registered address in any country, it appeared that there was the blatant breach of tax codes.

By looking into these structures, the EC was effectively doing the job that the Irish tax authorities should have done years ago. Had Ireland engaged in a cursory investigation into Apple’s tax affairs, these anomalies would have been identified and a new tax bill drawn up.

Ireland in fact made a number of tax rulings to assign Apple’s tax center to its ‘head office’. That this facility was a stateless fiction appeared irrelevant to Irish authorities.

The supposed deal was not a contract for a special rate, rather it was a tacit decade-long gentleman’s agreement to look the other way.

Shifting the goalpost?

Apple’s second compliant relates to the new tax principles that emerge from the EC’s novel interpretations. This represents a significant change of principle for corporate taxation, that has historically looked to tax profits in which productive value was unlocked. Normally this is based upon sales generated in a particular geography.

Ireland contends that the Commission is looking at the basis of a ‘fair’ tax rate as a basis for tax law. Should the US or any other European state demand more taxes from Apple, Ireland’s recovery amount would be reduced.

Chiming with this view, the US Treasury has declared the move “unfair”.

Silicon Valley is also anxious as to the implications of this new move. “Instead of saying ‘going forward, this won’t be allowed’ – which seems more fair” Om Malik of tech venture capital firm True Ventures told the Guardian, “the EU is trying to change the rules of the game retroactively. It makes little sense to me”.

This appears to miss the main thrust of the European Commission claim. It is not so much of an issue where new laws have been retrospectively applied to Apple’s accounts, but rather, the re-application of codes that have been previously improperly applied.

The EU argues that “almost all profits” on Apple sales in Europe were funnelled through its Irish subsidiaries and given the convention that profit-centres should be the territory in which tax is paid, a 0.005% rate was ludicrous. In 2011, Apple recorded profits of $22 billion in Ireland (approximately 16 billion), but only €50 billion was taxed, yielding an effective tax rate for that year of 0.05%.

Applying the principle that, much like people, corporate persons should not be stateless and thus Ireland’s ruling that Apple’s taxes should be paid at a non-existent ‘head office’ was itself considered contrary to past cross-border tax arrangements. The Commission’s announcement can be considered as a continuing of tax law as well as perfectly in line with the EU’s long history in enforcing state aid treaties.

It is not a new idea that tax should be paid somewhere and not nowhere and the EC argues profits on European operations should have been paid in Ireland.

It’s fair to pay a fair tax rate

The Irish economy is valued at $238 billion. Apple’s market capitalization is $571 billion.

Given that the corporation is almost double the size of the country that sets its tax rates, there is a suggestion that a highly corporation can intimidate a small, economic vulnerable fringe state.

The economic consequences for the Irish economy if Dublin had penalised Apple’s hoarding billions of profits in a fictional ‘head office’ may have been disastrous, should the free-moving tech giant have chosen to base its operations in a more malleable alternative country. Given this, could any such agreement from such a one-sided arrangement be considered ‘fair’. Indeed, to point to the output as a measure of justice is patently absurd, much one would disregard deals made under duress.

Fairness rests on meeting the conditions of all laws (and not a selection) and this includes laws on state aid. But fairness is also built on compliance with the spirit of the law. Apple clearly has an obligation to pay a reasonable tax rate and given that it has avoided this in the past is an injustice that the European Commission is now aiming to rectify.

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