European Union Accuses Ireland of Giving Apple Illegal State Aid with Tax Deals

[Macky-Mac]

Given the state of EU member state finances believe me they will find a way to make Apple payback the billions of dollars in tax they've avoided paying through this little scheme. It will cost Apple an absolute fortune.

See this interesting Forbes article on the matter: http://www.forbes.com/sites/robertw...-tax-deal-is-illegal-fines-could-be-billions/

I'm all for the idea that corporations should be paying taxes and that politicians have gone way too far in creating tax structures that allow corporations to avoid taxes.

In this case the question is what illegal state aid Ireland has been handing out. If the issue is just a low tax rate, is that in itself really illegal state aid?

from your link:

Under EU law, state financing for individual companies is heavily restricted. Tax arrangements, on the other hand, may not count.

and

The biggest question may simply be whether Apple negotiated special tax deal that other companies in Ireland do not.

I suspect Ireland will put up a strong fight against the EU on this since their ability to offer low taxes to firms has been a key element in luring companies (and jobs) to Ireland. It'll be interesting to see how it gets resolved, although I gather it may take several years until we know

 

[jnpy!$4g3cwk]

This article explains it well http://www.forbes.com/sites/robertw...-tax-deal-is-illegal-fines-could-be-billions/

Thank you for the link!

You're missing the point.

Some people tell me that from time to time. ;-)

Nobody is saying that Apple did anything illegal.

OK, so, I really am missing the point. If Apple did not do anything illegal, why all the "outrage". Why would I expect any company to pay more in taxes than it is legally required to?

Let me explain it. The Irish Government gave Apple a sweetheart deal with a lower corporate tax rate. The Irish government didn't offer the same deal to other companies in Ireland. That is deemed to be "State Aid" which is illegal under EU law. So it's the Irish Government that have acted illegally. However Apple will still have to pay all the tax they should have paid in the first place. Now that may or may not be restricted to Apple's tax liabilities in Ireland.

I'm not arguing one way or another-- I don't know the legal details. But, setting a tax rate, while philosophically equivalent to state aid (the inverse is the oft-quoted "the power to tax is the power to destroy" (Daniel Webster/John Marshall)), legally, though, sounds like a retroactive stretch. I wish that special tax deals were illegal in the U.S. -- right now, states are tripping over themselves to give special tax deals to companies.

http://online.wsj.com/articles/tesla-nevada-tax-breaks-incentives-package-approved-1410507190

A quite separate issue is the on-going EU investigation into widespread corporate tax avoidance whereby companies like Apple effectively sell good to themselves at vastly inflated prices so they make all the profit in a low tax jurisdiction like Ireland rather than say the UK. It's not illegal but it is a loophole the EU and it's member states intend to close so Apple will not be able to continue to exploit that loophole in the future.

This is a huge problem for the whole concept of VAT. The modern quest for a single "fair tax" really began with Henry George:

https://en.wikipedia.org/wiki/Henry_George

George was concerned heavily with the value of land as an input to agricultural production, as well as manufacturing capital and labor.

Lauré conceived the modern VAT in 1954 as a single tax that would put the burden of accurate collection effectively on the business owner, who is also assumed to be manufacturing or is a service provider.

https://en.wikipedia.org/wiki/Maurice_Laur%C3%A9

The problem with these ideas is that the iPhone simply does not fit. If the bare manufacturing cost to an iPhone that retails for $600 is $200, what do you attribute the other $400 to? Apple spends billions on R&D and marketing. Not to mention the world of patents. Where was the "extra" $400 of value created? In a world dominated by manufacturing and local services, VAT was a brilliant idea. But, in a world dominated by other, nebulous-and-international, sources of value, the price that Apple UK should pay Apple Ireland for that (hypothetical numbers) iPhone is quite, quite arbitrary-- anything between $200 and $600. More generally, products whose prices are determined by the value of their innovations, rather than by competition between manufacturers or service providers, are a bad fit for VAT.

I don't like VAT for another reason -- it is regressive. I still think the progressive income tax of the 1950's worked the best of anything I have seen.

 

[zipa]

I never brought up planning/forecasting. My only point is that increasing taxes on a business impacts the consumer. When a business pays a higher rate in tax, they have to either raise prices, or cut costs (which could mean a cut in quality) in order to compensate for the higher tax rate. Are you disputing this?

Yes, I am. A business can also elect to not report its earnings as profit but pay them out, invest them or do any number of things. For a publicly traded corporation these options are somewhat limited, though.

Tax rate would only affect customer pricing if the company in question has set a net profit target for itself and that have a very accurate forecast on how much revenue they will generate. I have never heard of such a company, though. The disconnect between revenue and taxes is so large in a manufacturing company that I don't really see how it would even be possible to "price it in" the way that you suggest.

Maybe a one-man consulting company could do it, since for them revenue pretty much equals profit, but such a company can easily just not generate any profit by paying everything out as salary.

 

[69650]

I suspect Ireland will put up a strong fight against the EU on this since their ability to offer low taxes to firms has been a key element in luring companies (and jobs) to Ireland. It'll be interesting to see how it gets resolved, although I gather it may take several years until we know

Sorry but you're missing the point. Ireland can offer low taxes. They can set their corporation tax rate at whatever they want. However they must offer that rate to all companies. So they can't give one rate to Apple and another rate to other companies because that is unfair to the other companies.

It's the unfair deal they gave to Apple that is the problem. Under EU law that is illegal because it was intended to stop governments giving an unfair advantage to local companies by offering them a lower corporate tax rate than say non local companies have to pay.

It's very clear. The Irish Government acted illegally. Apple didn't act illegally but they will probably still have to pay the money back they saved because in effect Apple have profited from an illegal act by the Irish Government and you can't profit from a crime however unwittingly.

 

[Macky-Mac]

Sorry but you're missing the point. Ireland can offer low taxes. They can set their corporation tax rate at whatever they want. However they must offer that rate to all companies. So they can't give one rate to Apple and another rate to other companies because that is unfair to the other companies.

It's the unfair deal they gave to Apple that is the problem. Under EU law that is illegal because it was intended to stop governments giving an unfair advantage to local companies by offering them a lower corporate tax rate than say non local companies have to pay.

It's very clear. The Irish Government acted illegally. Apple didn't act illegally but they will probably still have to pay the money back they saved because in effect Apple have profited from an illegal act by the Irish Government and you can't profit from a crime however unwittingly.

no, I understand your point....but keep in mind that it hasn't actually been determined yet that Ireland acted illegally. The EU hasn't issued a final determination yet.....at this point they're still investigating, something that is apt to go on for another year or two before they reach an actual finding.

In any event, from the EU letter it's clear that a significant part of the issue that concerns the commission is what part of Apple's income was or wasn't taxed and why that income was or wasn't taxed. That's part of why there's so much about transfer pricing in the EU's letter. It's not just a simple matter of the tax rate.

edit; keep in mind that two companies can have exactly the same gross income and apply the exact same tax rate to their taxable income but still pay different amounts due to different expense deductions and tax credits.

 

[sransari]

Yes, I am. A business can also elect to not report its earnings as profit but pay them out, invest them or do any number of things. For a publicly traded corporation these options are somewhat limited, though.

Tax rate would only affect customer pricing if the company in question has set a net profit target for itself and that have a very accurate forecast on how much revenue they will generate. I have never heard of such a company, though. The disconnect between revenue and taxes is so large in a manufacturing company that I don't really see how it would even be possible to "price it in" the way that you suggest.

Maybe a one-man consulting company could do it, since for them revenue pretty much equals profit, but such a company can easily just not generate any profit by paying everything out as salary.

Remember, my original response was to the comment "Apple should pay more in taxes." This would happen one of two ways: a higher tax rate on profits, or, higher profits. Of course, Apple will try to maximize profits no matter what. However, if they had to pay a higher rate, you don't think this will affect how they do business? You don't think the consumer would be affected, at ALL, with higher business tax rates? You think businesses like Apple would simply eat the extra taxes without passing it on to the consumer? If so, why are business taxes not higher, say 75% or even 90%?

You make it sound like business don't care about paying taxes, but then you state that tax avoidance strategies like paying out profits and reinvesting are limited. If these strategies are limited, then how will Apple make up for a decrease in after-tax profit? Why would you think businesses don't care about after-tax profit? Don't you care about your after-tax take-home pay? Don't you think shareholders care about after-tax profits as well?

On a side note, If the one man company paid himself out a salary to avoid taxes on profit, then that person would be subject to income taxes that could be higher than the tax on the final by profits.

 

[zipa]

Remember, my original response was to the comment "Apple should pay more in taxes." This would happen one of two ways: a higher tax rate on profits, or, higher profits. Of course, Apple will try to maximize profits no matter what.

Yes, obviously.

However, if they had to pay a higher rate, you don't think this will affect how they do business? You don't think the consumer would be affected, at ALL, with higher business tax rates? You think businesses like Apple would simply eat the extra taxes without passing it on to the consumer? If so, why are business taxes not higher, say 75% or even 90%?

Of course it will affect things. Those wild numbers you "suggest" would obviously have massive, if not catastrophic impact on how businesses would be run, and quite frankly, I don't think that there would be very many businesses left to run with those figures.

What I think that you probably are missing, is that a tax hike affects each and every company, institution and basically even every person the same way, thus there simply isn't really anything that you can do about it. It would basically be like an increased rate of inflation. No matter what, you can't really account for that in your book-keeping. Or more precisely, you can't just increase prices and think that you got away with it.

You make it sound like business don't care about paying taxes, but then you state that tax avoidance strategies like paying out profits and reinvesting are limited. If these strategies are limited, then how will Apple make up for a decrease in after-tax profit? Why would you think businesses don't care about after-tax profit? Don't you care about your after-tax take-home pay? Don't you think shareholders care about after-tax profits as well?

Of course they care about it. The thing is that there isn't anything that they can do about it. Increasing after tax profits means increasing before tax profits. And, well, if a company has a way to increase before tax profits by waving a magic wand, don't you think they would've done it already? It's not like the choose not to do it so that they have something up their sleeves in order to fight of a potential tax increase.

On a side note, If the one man company paid himself out a salary to avoid taxes on profit, then that person would be subject to income taxes that could be higher than the tax on the final by profits.

Yes, that is completely true. On the other hand, if you run, say, a one man consulting practice where you have very little costs and very little need for investment capital, you will end up cashing out most of the profits anyway, since spending them on frivolous activities is pretty much the only thing you need the money for. Thus it makes usually more sense to just avoid the tax on profits altogether, than to first pay tax on the profits, then some time later pay it out as a bonus and be hit with income tax as well.

There are some leeway here as well, depending on local laws. Dividends and whatnots might be exempt from tax, but that's a different debate.

 

[mr.bee]

About time too. The EU should fine Ireland a multiple of taxes lost, in the same way European companies are subject to such fines in the US. It is time for this to end.

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To be honest it's not really Apple's fault. if you are a business and a country offers you a fantastic sweetheart deal what are you going to say ?

Taxes should rise for Apple and by a lot. The US tax authorities are rightly very unhappy with the use of tax avoidance techniques by Apple, in particular sheltering their international profits abroad and paying very little tax on them either via deal likes the one with Ireland

I agree with you, but knowing Apple it's the European customers who are going to pay. Expect rising prices with new Apple products.

 

[jnpy!$4g3cwk]

I am guessing that this thread revival may have been a mistake, but, if not -- let's set corporate tax rules to be the same in every country, making tax avoidance strategies less attractive. IMHO, that should have been part of GATT/WTO from the beginning.

 

[Solomani]

Time for the Irish Exit from the stupid EU.

Irxit.