Tuesday, August 30, 2016

The European Commission's ruling on Apple and Ireland

Today the European Commission announced its (internally) final ruling, subject to appeal in the European courts, concerning Apple and Ireland.  The verdict holds that Ireland gave Apple illegal tax subsidies, in the form of advance  transfer pricing rulings, and that Apple must therefore pay Ireland $14.5 billion relating to a ten-year period.  The EC press release is available here.

Apple has issued a press release stating what "responsible corporate citizens" they are, and condemning the EC's "unprecedented" interference into EU nations' tax autonomy.  They're "proud" of their contributions to the Irish economy, mainly from providing 6,000 local jobs per year, and don't threaten to leave Ireland, but do say they'll keep on fighting in the courts.

BTW, $14.5 billion of under-taxation over 10 years, relative to a reasonably defensible transfer price, divided by 60,000 jobs (6,000 per year for 10 years), amounts to more than $240,000 per job per year.  Rather a lot compared to what I presume were the average salaries.  But that isn't necessarily money that Ireland voluntarily passed up, given the tax competition point (Apple could have gone elsewhere).

In any event, while I think the EC's side of this dispute has far more legal and policy merit than Apple's side, I don't believe in being overly moralistic about this.  Apple was doing what one would expect it to do, given its incentives.

I have a lot more to say about this dispute and the other EU state aid cases, much of it focused on the US vs. EU aspect that featured prominently in the White Paper that the US Treasury released last week.  But while I will be speaking to the press, the 30 page paper I've written on the subject is embargoed (other than for limited informal sharing on request) until Monday, September 19, when it will appear in Tax Notes.  I still need to make a few small revisions to reflect the new EC ruling.

Just with regard to Apple, $14.5 billion sounds like a lot of money, even for them.  And it is a lot of money, which helps explain why they and Ireland (which wants to preserve its credibility as an offeror of special deals to multinationals) will be fighting the ruling so hard.  The stake is also large enough (especially when combined with amounts potentially due from other U.S. companies with lots of U.S. shareholders) to explain the U.S. Treasury's interest.  It's not necessarily in our national interest for large sums of money to end up in European hands rather than our hands, simply because we are us and they are them.  But that is distinct from the issue of whether we should be self-righteously fulminating about things that we probably would have wanted to do ourselves, if in their shoes.

Back to Apple, not only do they have huge cash reserves that are (metaphorically if not literally) sitting around in tax havens, but the reason for the size of the tax charge is that they shifted A LOT of profits - illegally, in the EC's view - from Ireland to tax havens during the 10-year period at issue.  Ireland's tax rate is only 12.5 percent, so the $14.5B presumably reflects more than $100B of profit-shifting over the 10 years.  So what's happened to Apple - rightly or wrongly, validly or improperly - is that they are ending up paying a 12.5% tax rate, rather than close to zero, on huge profit flows that they enjoyed over a 10-year period.  One thus might want to un-cue the violins a bit, even if one sides with Apple in the dispute.

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