4. The Case Study of Apple in Ireland
According to the press release at the end of August in 2016, the EU commission launched an investigation from 2014 onwards and ordered Ireland to collect $14.5 billion in unpaid taxes from Apple. The reason for this is that Apple only paid 50 euros for every million euros in profit during 2014. As part of EU regulations, the EU has demanded Ireland to recoup 10 years’ worth of taxes, some 13 billion euros, or about $14.5 billion, plus interest. Accordingly, both the Irish government and Apple have been responsible for this illegal deal.
4.1 Did Apple take advantage of loopholes in Irish tax laws?
A report by a Congressional panel revealed that Apple has avoided billions in taxes by using international subsidiaries. In detail, Apple Europe Operations(AEO) that manufactured certain computer lines and Apple Sales International (ASI) that recorded the profits on global sales of the iPhone and another Apple products in Ireland, share significant contributions to development efforts in the US.
When it came to tax, each operated similarly. But the Commission pointed out that between 1991 and 2007, the income generated from ASI based on the Irish Branch was allocated to the so called “head office” without operating capacity to handle business, as it could be seen on Figure 1. In addition, the Irish Government endorsed the artificial allocation for them without being charged tax (EU Commission, 2016).
Figure 1 The Structure of Apple in Europe. Source:
Consequently, Apple successfully have avoided tax payment on almost all the profit generated from its multi-billion euro sales of iPhones and other products across the EU single market. For instance, ASI recorded a €16bn profit in 2011. €50m of the profit was allocated to the head office and Apple paid €10m tax in Dublin on that (Beesely and Barker, 2016). What is worse that they only paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014, contrary to an increase in their profits (See Figure 2.). Thus, this selective tax treatment of Apple in Ireland is illegal under EU regulations, because it gives Apple a significant advantage over other businesses that are subject to the same taxation rules.
Figure 2 Tax on Apple’s foreign profits. Source:
*Note: About 90% of Apple’s foreign profits are earned by Irish subsidiaries, which are highly profitable because they hold rights to Apple’s intellectual property.
(Houlder et.al, 2016)
In spite of this “long dark history”, Apple have been doing everything it could to prove they have not done anything wrong. First, Timothy D. Cook (the CEO of Apple) regarded it as ignoring Ireland’s tax laws and upend the international tax system in the process. He insisted that the tax structure deployed in Ireland was applicable to all companies and that it was not unique to Apple. However, the US Senate of Testimony proved the opposite perspective, as in accordance with US law, Apple paid over $7 billion in taxes to the US Treasury from its sales in the US and on the investment income of its Controlled Foreign Corporations, including the investment income of its Irish subsidiaries (AOI). Further, it was claimed that Apple did not move its intellectual property to offshore tax havens. Their foreign earnings were taxed in the jurisdiction where they were earned. Similarly, the Finance Ministry of Ireland stated that the EU Commission’s decision would undermine a continuing global tax overhaul and create business uncertainty(Kate, 2016).
4.2 Ireland’s tax reforms encouraged Apple?
The dynamic Irish-US economic relationship needs to be looked at now. The ACCI’s last report by Wall Street economist Joseph Quinlan revealed that Ireland has benefited from $277bn (£182bn) of US direct foreign investment in the past two decades. Specifically, according to data from the U.S Bureau of Economic Analysis, Ireland’s share of US investment stock in Europe has soared over the past decade, with Ireland’s sharing amounting to 11.1% of the total in 2014 versus 6.2% in 2004, as shown on Figure 3. the increasing total amount of it. Compared with the global basis, US FDI outflow rose by only 11% in 2014.
Figure 3 Foreign Investment Stock in Ireland
The biggest reason behind the flourishing trend is that to plump up the staggering national economy, the Irish government set up the lowest corporate tax rate (12.5%) among EU members to attract US FDI, which grew at a breakneck 26.3% in 2015 that will further reduce Ireland’s debt-to-GDP ratio. While it is phasing out some of the more contested loopholes, they also have just introduced a new break for profit on intellectual property, a potentially huge benefit to large technology companies with troves of patents (James and Mark, 2016). Based on Ireland’s central Statistics Office, corporate inversions tends to become the main drivers for the sharp rise in economic engine, like its GDP expanded at an annual rate of 2.3% in the first quarter of 2016 (David, 2016). While, it is a double-edge sword strategy, as followed by Ireland or other European countries providing cost competitiveness to attract foreign direct investment, the negative influence was created that the government revenues from corporation tax has been fallen as well. However, contrary to Irish government incentives, many EU partners criticised the disadvantages of low corporate tax rate. France, for example, claims the rate is tantamount to state aid for giant US companies all of whom have their European bases in the Republic (Henry, 2014). The EU Competition Commissioner has made this issue a central focus last year that also launched investigations of tax ruling of Starbucks in the Netherlands, Amazon in Luxembourg and Anheuser-Busch InBev in Belgium (James & Mark, 2016).
4.3 Does the EU discriminate against US based MNEs in terms of tax avoidance?
Faced with large number of MNE’s aggressive tax planning strategies, represented by Apple reducing their global tax burden, in January 2016, the Commission concluded that selective tax advantages granted by Belgium to least 35 multinationals, mainly from the EU, under its “excess profit” tax scheme are illegal under EU state aid rules. At the same time, following global standard developed by the OECD in last year that agreed on measures to limit tax base erosion and profit shifting (BEPS), they presented the new proposal against corporate tax avoidance to ensure effective taxation in the EU and increase tax transparency to strengthen the fair trade.
4.4 The US Government’s reaction
The US Treasury Department has stated that Europe is overstepping its power by unfairly targeting American companies and hurting global efforts to curtail tax avoidance.
A recent paper published by the US Treasury Department about tax policy addressed the tax avoidance issue by MNEs and the key points mention implications for the US: The Commission’s actions jeopardized the American efforts in developing transfer pricing norms and implementing the OECD/G20 BEPS project. There is the possibility that any repayments ordered by the Commission will be considered foreign income taxes that are creditable against U.S. taxes owed by the companies in the United States. If so, the companies’ U.S. tax liability would be reduced dollar for dollar by these recoveries when their offshore earnings are repatriated or treated as repatriated as part of possible U.S. tax reform.
Nevertheless, at the root of the problem is the out–of-date international tax system that cannot match with the development of MNE’s overseas business, which gradually become increasingly exploited for them to shift profits to tax havens. Compared with other developed countries, the US Government charged the most onerous corporation tax regime. Their firms are taxed at 35% on their domestic earnings and income repatriated from foreign subsidiaries (Rob, 2016). So, the issue is not only challenging the cooperation between EU regulations and US Administration, but also has negative influence on WTO fair regulations.
Since the US Elections, president Donald Trump announced during his campaign that he would force US companies, including Apple to move manufacturing jobs within the nation’s own borders, rather than allowing them to seek cheaper labour overseas (Sean & Henry, 2016). Particularly, his tax reform plan would lower the business tax rate from 35% to 15% regardless the size of the company and would also eliminate the corporate alternative minimum tax.