The mechanisms are now in place for the Irish government to begin collecting the €13bn in taxes the EU said Apple owes.
Speaking to journalists to at the World Economic Forum in Davos, Irish prime minister Leo Varadkar explained that the Irish treasury had to set up an escrow account to receive the funds. It was going ahead with the collection despite both it and Apple appealing the EU’s original decision.
AccountingWEB readers may recall the initial details of the EU Commission’s case against Apple (and essentially the Irish government). After a blockbuster three-year probe into Apple’s tax affairs, the Commission said Ireland granted undue tax benefits of up to €13bn to the Californian tech giant.
This is the figure that Apple and the Irish government are appealing. The €13bn figure stems from the tax payable if the profits from Apple’s contract manufacturing activity were attributed to Ireland (as the Commission said it should be).
In 2014 alone, the Commission calculated the company’s Irish tax bill at €2.5bn. It's was made worse by Apple having almost nothing to offset it against. And that's precisely what Apple has moved swiftly to change. Seamus Coffey, an Irish economist, has offered a fascinating and exhaustive examination of how Apple has minimised its tax liability after 2014.
In 2015, Apple carried out the same functions in Ireland as it did in the past, but now the sales were executed and recorded in Ireland (as per the Commission's wishes). But here's the key bit: the license for Apple's IP was onshored to Ireland, too.
Apple’s tax liability on the profits went from €2.5bn in 2014 to near zero in 2015. Speaking to AccountingWEB, Coffey explained this happened because in 2015 a “different Irish company” bought the license to use Apple’s IP, products, and trade secrets outside the US. “There was a huge capital spend in 2015 and now the capital spending is being offset against revenue”.
In a nutshell: the profits in 2015 haven’t decreased; a related company in Ireland earned around the same amount – except it has paid an astronomical amount to buy the license for Apple’s IP.
While this new structure is legal, the European Commission has said it’s taking a close look. It’s an open announcement that’s quite unusual, Coffey said. Normally the Commission does its information gathering in private.
More peculiar still is how the Commission’s seeming disapproval of Apple’s tax structure is at odds with its own tax directorate. Coffey explained: “The tax directorate of the EC are proposing a common corporate tax base for the EU as part of the consolidated corporate tax base.
“The treatment of intangible assets in the common corporate tax base mirrors the treatment in Irish legislation. It’s unusual for one part of the Commission to say this is what should happen, and another part of the Commission investigating it and saying this is what a company shouldn’t do."
It’s not to say the EC will actually open an investigation into Apple’s tax structure. But if it does, it drastically increases the stakes. The structure is in place for 2018, and it doesn’t look likely to change next year either. Billions of euros are at play.
"If you’re doing this to avoid tax, and it’s just a purely non-commercial transaction solely to avoid tax, even Irish legislation disallows that,” said Coffey. “If you look at this from the Commission’s perspective, they’ve ruled that Apple owes €2.5bn for 2014, it’s hard to see how they could happy with a tax structure that takes that tax liability and reduces it to zero in 2015.
“For what other purpose was the transfer of the license other than to reduce tax? That’s the question they’re asking."
About Francois Badenhorst
I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter.