The recent decision of EU’s anti-trust agency that Apple owed about €13 billion (about ₹95,000 crore) in unpaid taxes must surely make several multinationals and governments to re-examine their policies and practices.
In focus is the special tax deal that Apple had with the Irish government, which is special to the company and thereby violates the commission’s objectives of ensuring a level playing field. The EU’s argument is that the tax deal is a form of state aid.
A race to the bottomThe EU commission has decided that Apple shifted its profit from a tax-paying, associated company in Ireland to another entity which is non-resident and non-taxable. Apple Sales International, the Irish registered company, buys Apple products from contract manufacturers and sells it in various countries. However, the company is allowed by the Irish government to allocate only a small amount of the profits to Ireland, and the rest is allocated to a notional ‘head office’ and outside the tax net. This effectively brought down Apple’s tax rate to between 0.005 per cent and 1 per cent.
The competition commission has further urged governments within the EU to do their own investigation of how Apple pays its taxes across the block. Apple’s Irish business includes its profits from all its European operations.
Ireland has thrived and become the darling of global companies with its 12.5 per cent corporate tax rate. Countries have often given tax concessions to corporations to encourage investment and by linking the tax benefit to competition rules the EU has triggered a debate in public policy. Ireland, although it benefits from the tax windfall, has been critical of the EU decision, but they have not indicated if they would appeal. Governments are often caught in a bind when it comes to lowering their corporate tax rates — they need to be attractive for investment yet raise revenues. When countries compete on tax rates, it becomes a race to the bottom.
Inversion and other maliceUS companies have been adopting tax strategies that even the US government have not been happy about. One is a technique called inversion where a US company acquires a foreign company and takes on the identity of the foreign company. Medtronic and Ingersoll Rand are major US corporations that have taken on Irish tax identities. Yet, US officials have been critical of the EU decision, perhaps because the EU is going after money that they may want.
Following the EU decision, Apple’s CEO has said that the company may bring back to the US some of the $215 billion (about ₹14 lakh crore) that the company holds as cash and liquid investments around the world. It will then be subject to a 35 per cent tax rate. US lawmakers have, in the past, wanted to change laws to tax the amount of profits US companies hold overseas, estimated at $2 trillion (about ₹130 lakh crore).
By present US laws, the money becomes taxable only when it is brought back. Apple holds profits outside the US where it is headquartered, but borrows money in the US to finance its operations. The Irish subsidiaries also finance over half of the companies R&D efforts in the US, reducing the tax bill. The EUs decision and resulting appeals is going to keep a lot of tax attorneys in business for a long time!
The writer is a professor at the Jindal Global Business School, Delhi NCR and Suffolk University, Boston