The Apple tax fallout

EU's ruling renews the debate over tax havens

Ireland’s tax regime has been a honey-pot for all the hottest digital corporations — the small country is the number two location worldwide for investments by global internet behemoths. But the European Commission’s ruling last Tuesday that Ireland granted undue tax benefits to Apple, which should cough up $14.5 billion in back taxes, brings back the issue of preferential regimes and tax havens to the centre stage. This comes at a time when leaders of the world’s leading economies are meeting in Hangzhou, China. Tax havens have been an important item on the G20 agenda, and the last meeting of the group’s finance ministers had embraced a crackdown on them, especially the use of shell companies to lift the shield of secrecy for companies and individuals stocking assets offshore behind anonymous companies. The Apple case should help the G20 to push for more action.

Apple has run its international sales and European operations from the Irish city of Cork since 1980. The EU has alleged that two Irish “sweetheart” deals in 1991 and 2007 effectively allowed a large part of Apple’s profits to be apportioned to a “stateless head office”, as a result of which the company paid just 0.05 per cent tax in 2011. This came down to just 0.005 per cent in 2014, abnormally low even for Ireland, which has one of the lowest corporation tax rates in the 28-country EU.

The core issues, however, are how global firms and their subsidiaries are taxed, and the thin line dividing national tax policies that promote competition and the ones that masquerade it. Did Apple shift and/or defer profits in a manner that denied many other European countries and, ultimately, the US their rightful share of taxes? With the Irish government joining Apple in deciding to appeal against the ruling, the case is headed for the European competition courts and beyond. Interestingly, the US treasury has already said the money should come to it, and not go to Ireland.

Meanwhile, a growing section within the Irish ruling elite is of the view that for the government to turn down $14.5 billion, equivalent to the country’s annual health budget, is a huge political ask. They also feel that it is in Ireland’s long-term interest not to be seen as a tax haven, and to be seen as transparent regarding taxation. This view is likely to gain ground as the global community, driven by the scourge of cross-border terrorism, has been cracking down on tax havens, which are often conduits for laundering money that ends up financing global terror networks. It is only now that preferential regimes have started receiving the international scrutiny they deserve.

The Organisation for Economic Co-operation and Development (OECD) contends that revenue losses from base erosion and profit shifting (Beps), a practice where corporate profits “disappear” or move to low- or no-tax “preferential regimes”, already runs at over $240 billion. Such losses are crippling for governments, especially in developing countries that have greater reliance on direct taxes. Many countries, including India, have taken measures to attack such tax avoidance measures by multinational corporations, including key revisions in the investment treaties with Mauritius and Cyprus. Surprisingly, the US, which has for long debated ending the practice of allowing its firms to accumulate tax-free profits offshore, is yet to move decisively. The Apple case may help that country to finally make up its mind.