The Big Irish Sweetheart Deal
A couple of days ago, Apple won a massive legal battle against the European Union’s antitrust regulators and now they won’t have to pay €13 Billion in unpaid taxes to Irish authorities.
The Story
There’s a good reason why Apple likes to operate out of Ireland. At 12.5%, the country has one of the lowest corporate tax rates in the world. But the company doesn’t even pay up 12.5%. It actually pays… nothing.
In 1991, Apple created a new Irish subsidiary — Apple Sales International (ASI). This subsidiary recorded all profits made in Europe, the Middle East, Africa and India. So when someone in Germany buys an iPhone, the profit is recorded by ASI in Ireland, not in Germany. And ASI only paid tax rates between 0.005 % and 1 % in Ireland until 2014 because of an agreement between Apple and Ireland.
But then the European Union’s competition commission intervened. It claimed that Apple had struck deals with the Irish government in order to claim benefits that it shouldn’t have. In fact, the so-called ‘sweetheart deals’ allowed the tech giant to largely avoid paying taxes on most profits made by selling its products in Europe. For instance, Apple’s subsidiary in Ireland recorded profits of $22 billion in 2011. However, only about $57 million was actually considered taxable in Ireland.
And the Commission was having none of it. They claimed that Ireland had issued tax rulings specifically to offer Apple a distinct advantage. In fact, most profits of Apple Sales International were allocated to its “head office” when this “head office” had only existed on paper and couldn’t generate actual profits. It didn’t have any operating capacity to handle and manage the company’s product distribution business. Only the Irish branch of Apple Sales International had the capacity to generate any income from selling Apple Products. Therefore, the profits of Apple Sales International should have been recorded with the Irish branch and taxed there.
Instead, the money probably made its way into a tax haven — say Bermuda or the Cayman Islands.
Because, according to Irish laws, if any Irish entity is controlled by managers elsewhere, then the profits will be taxed in that jurisdiction. So if Apple Sales International had a controlling presence in say, Cayman Islands, then you only have to pay tax in this small Caribbean territory. And since the effective tax rate here is nil, you won’t have to pay anything at all. It’s something we have written about extensively — A Double Irish Dutch Sandwich Arrangement. An arrangement that isn’t illegal, but one that does seem to offer the likes of Apple a veritable advantage.
But why would Ireland let Apple get away with this stuff? After all, they are losing out on precious tax revenue, right?
Well…
Yes, but Ireland’s low-tax environment has lured some 250,000 multinational employers to its shores. Apple itself employs around 6,000 people in the country, and these numbers, combined with employment offered by other tech companies like Google and Facebook now account for 1 in 10 Irish workers. And Ireland doesn’t want to scuttle this deal.
However, the EU laws are clear. Any preferential treatment of this kind could be construed as State Aid — whereby Ireland offers a selective economic advantage to one individual company that threatens to distort competition with the European market. So the commission forced Ireland to recoup up to €13 billion in unpaid taxes from Apple, including interest.
Apple, however, vehemently refuted the EU antitrust commission’s claims, with CEO Tim Cook going as far as to call the ruling “total political crap.”
And then, they went to court. The battled raged on 4 years but finally, it seems Apple has been vindicated. Judges of the General Court of the European Union have found that “the Commission did not succeed in showing to the requisite legal standard that there was an advantage” for Apple.
In other words, the Commission simply couldn’t prove that the tax benefits Apple received was a byproduct of preferential treatment from Ireland’s tax authorities and so, they offered the company a clean chit.
Until next time….