by Frank Schnittger
Tue Aug 30th, 2016 at 08:25:39 PM EST
The European Commission has made a ruling charging Ireland with giving illegal state aid to Apple and ordering Ireland to collect 13 Billion in back taxes due - a figure that represents c. 6% of Ireland's total national debt. Apple has a market valuation of $571bn, a cash pile of $230bn, and an expected $53 billion in free cash flow this year, making the ruling material but hardly terminal from a corporate point of view. Apple shares are down less than 1% on the day.
Irish Finance Minister Michael Noonan is recommending that the Irish government appeal the finding to the European Court. Yes, you read that right. The Irish Finance Minister doesn't want the money. Apparently collecting the money would damage Ireland's ability to attract multi-nationals like Apple to Ireland in the first place. Noonan is also concerned that the ruling might be seen to imply wrong-doing by Irish tax officials and that it represents an encroachment by the Commission of Ireland's sovereign right to determine its own tax policies.
A White House spokesman has confirmed that Apple has been in contact over the ruling and that the US is concerned that the ruling might result in taxes that might otherwise be due to the US being collected by Ireland instead. The US Treasury said the ruling threatened the "business climate" between the US and Europe while Number 10 and the Treasury said Britain was "open for business" after being asked whether it was comfortable with the tech-giant coming to Britain.
The Commission, for it's part, is framing the ruling as part of its remit to prevent state aid favouring some companies over others. The Irish Government is adamant that Apple got no special treatment not available to any company under Irish and international tax laws. Noonan claims that the lack of corporate tax being collected is due to loop-holes in international tax laws and that the Irish Government is supportive of attempts by the OECD and others to increase corporate taxation more generally.
Based in Cork since 1980, Apple employs about 6,000 people in Ireland and recently announced a major expansion. Despite claiming to be the biggest corporate taxpayer in Ireland and the USA it nevertheless paid almost no tax on the vast majority of its international sales - with the proceeds transmitted to what the Commission claims is a largely fictitious HQ.
A detailed description of Apple's corporate structure, profitability and taxes paid is available here. Suffice to say here that this is a major embarrassment for the Irish Government and shines a light precisely where it does not wish it to be shone. The already very shaky Irish Government could even fall over this issue if the independents keeping it in office fail to support an appeal of the Commission's ruling.
While the Government is undoubtedly sincere in its opposition to Commission encroachment on sovereign tax policies and concerned about the risks to future FDI, I suspect it wouldn't be too upset if it eventually lost the appeal and had to collect the money. However it believes that in order to continue to attract FDI it has to be able to demonstrate that it is robustly looking after the interests of major foreign employers and so it has to be able to say "the Commission made us do it!".
Recent changes in the corporate tax law in Ireland have abolished the "double Irish and Dutch sandwich" tax dodge and the ability to set up non-resident companies in Ireland which can effectively pay tax nowhere. Corporate tax revenues have increased by €2 Billion in the past year (from about 5 to €7 Billion) but what is at issue here is that Apple's profits on overseas sales weren't even subject to the low headline 12.5% rate applied to profits on sales in Ireland.