Showdown could set a precedent as US tech giants fight for their right to bill business from around the world – including New Zealand – to subsidiaries in low-tax countries. With special feature audio.
In a landmark ruling, the European Commission has ordered Ireland to recoup what it says are €13 billion ($NZ20 billion) in illegal tax benefits extended to Apple.
Apple chief executive Tim Cook responded in an open letter to customers: "In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe."
However, the EU says Irish tax law falls foul of its rules, specifically with tax rulings in 1991 and 2007 that it says gave Apple selective treatment.
While €13 billion (or €4300 per citizen) might seem like a major windfall for Ireland, its government is eyeing closer relationships with US corporates as one way to compensate for the economic challenges posed by the Brexit vote – and its infamously low corporate tax is one way to woo them.
Finance Minister Michael Noonan says, “I disagree profoundly with the commission’s decision."
Mr Noonan is seeking permission from the cabinet to appeal the EU's decision and "defend the integrity of our tax system.”
Brandishing his iPhone in front of media, the finance minister pointed to "Designed by Apple in California. Assembled in China" message on the back. His government was not responsible for taxing revenue from either operation, he said.
In a statement to investors, Apple says it will also appeal. It adds, "While we desire a resolution as soon as possible, the process will likely take several years."
The company says it will place an unspecified amount of cash in escrow in the meantime.
Cash mountain
Apple could easily afford to pay the €13 billion. The US-based company makes a net profit of $US8-10 billion a quarter, has $US212 billion in cash and short-term investments, much of it held outside the US (Mr Cook says his company would lose around 40% it attempted to repatriate the funds. Moody's estimates US corporates are now sitting on a $US1.6 trillion tax horde with just five tech companies – Apple, Google, Microsoft, Cisco and Larry Ellison's Oracle accounting for a third of that total).
In a statement, EU commissioner Margrethe Vestager says the 1991 and 2007 Irish tax rulings “substantially and artificially” lowered the tax paid by Apple, giving the company a “significant advantage” over other businesses subject to the same national taxation rules.
“Member states cannot give tax benefits to selected companies – this is illegal under EU state aid rules,” Ms Vestager said.
“The commission’s investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years.
“In fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1% on its European profits in 2003, down to 0.005% in 2014.”
Apple responds
In his open letter, Mr Cook says his company employs 6000 people in Ireland and has "helped create and sustain more than 1.5 million jobs across Europe" including jobs with suppliers, and third-party software developers who create apps.
The 6000 are mostly employed at an Apple manufacturing plant in Cork, which most see as the "reward" for company's virtually-no-tax deal with the Irish government.
Ms Vestager's statement paints a different picture, saying Apple's “so-called” head office in Ireland has “no employees, no premises and no real activities."
Both statements are true, reflecting the fact Apple has set up two subsidiaries in Ireland; one for its factory, the other for its "headquarters".
Test case
The appeal mounted by Apple and the Irish government's appeal will serve as a key case.
US tech companies have long booked revenue from around the world to fully-owned subsidiaries in Ireland. In recent years, Facebook, Google (which now charges to Singapore) and Twitter have been among those who have openly invoiced New Zealand customers to subsidiaries in Ireland and paid tiny amounts of tax here, while Vodafone NZ has minimised its local tax exposure by borrowing large amounts from its UK parent at a robust interest rate.
While conservative governments in the UK and Australia have instituted so-called "Google tax" unilateral measures to crack down on revenue and profit-shifting by multinationals, New Zealand's government says it prefers to wait for a multi-country action being coordinated by the OECD, which has been under way for several years and could see changes from July next year.
Apple shares [NAS:AAPL] fell around 2% as the market opened, but as investors digested the news that the Irish government would challenge the ruling, the stock recovered and, in late trading, it was down just 0.73%.
Margrethe Vestager spells out the case against Apple & its $NZ20b tax bill. More + reaction: https://t.co/8JWEO9VVhv pic.twitter.com/iJfZYDuyvg
— NBR (@TheNBR) August 30, 2016
POSTSCRIPT: Apple's New Zealand tax bill
Its latest public accounts for its New Zealand operations detail that Apple paid $8.9 million or 50.28% of its $17.7 million profit in tax for the 12 months to September 26, 2015.
Revenue rose 29% to $732 million.
Purchase of hardware inventory from its US parent was easily the largest single cost for Apple's NZ business (run out of Sydney, with no staff on the ground here; distribution is handled by Ingram Micro).
Was Apple's New Zealand profit kept low by charging to offshore subsidiaries? Hard to tell. The accounts don't detail the level of iTunes and AppStore purchases from New Zealand, or where that revenue was invoiced.
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