by Frank Schnittger
Fri Sep 2nd, 2016 at 12:52:52 PM EST
The Apple case has highlighted the degree to which major global corporates have been able to avoid paying any significant amount of corporate tax at all, never mind just taking advantage of relatively low headline tax rates like Ireland's 12.5% rate. In addition, even headline tax rates have been declining globally, and many countries operate complex systems of exemptions which means that the actual effective rate paid by corporates does not bear any relationship to the headline rate.
This distorts competition in a number of ways: It advantages the bigger multinational players at the expensive of smaller local businesses which cannot claim such exemptions. It encourages a race to the bottom in corporate taxation amongst countries competing for FDI. It reduces the tax take for cash strapped states seeking to maintain social services, and increases the power of wealthy corporates relative to to democratic states. It can be argued that this is the dominant engine driving the increase in global inequality more generally.
The Irish Government case is that there was no special deal for Apple. Apple merely sought and got clarification from the Revenue Commissioners that a corporate structure their lawyers were proposing was legal in Ireland and that it would be treated, for tax purposes, in the way they were advised it would be.
Apple exploited two key loopholes: Firstly, their ability, under US Tax law, to defer repatriation of profits indefinitely without payment of tax. This enables them to lobby a future administration to reduce tax rates with the incentive that they will promise to repatriate their cash pile if that is done.
Secondly, they exploited their ability, under Irish law, to establish a Company which was effectively not tax resident in Ireland or anywhere else. When Noonan closed off that loophole last year, they had a choice: They could register their (nominal) HQ in Ireland or somewhere else with an even lower tax rate. They choose Ireland because they have considerable operations here, considerable clout with the Government, and because they were concerned that the EU would come after them if they registered it in the Cayman Islands or some other tax shelter outside the EU.
This is common practice among global Multinationals. Diageo is tax resident in Holland even though it doesn't have much of a presence there. Luxembourg is famous for sheltering major Corporations which have little more than brass plate operations there.
One effect of their HQ and it's associated cash pile becoming tax resident in Ireland may well have been the extraordinary rise in Ireland's GDP (26%) announced a few weeks back without official explanation other than that some global corporates may have moved there assets and IP here. The other effect is that it may well reduce their tax liability in the USA when they do, eventually, repatriate their profits to the USA, as US tax law allows them to offset any taxes paid abroad against their liability in the USA. Hence the concerns expressed by the White House over the Commission finding. Effectively, any money paid in tax to Ireland is less tax revenue for the USA.
The Commission's case relates only to historic profits made while the Apple HQ was effectively not tax resident anywhere. It is effectively applying Noonan's abolition of non-tax resident Companies established under Irish law retrospectively. If it can prove that it was illegal for Ireland ever to have allowed a company to be incorporated here which was not also tax resident here, they may well have a case. I do not know what the international legal situation is regarding this, but Noonan clearly saw it as open to abuse when he abolished it last year.
Apple are feeling aggrieved because they believe they were always tax compliant and even did the decent thing last year when non-tax resident companies could no long operate in Ireland. They registered their HQ and paid tax in Ireland where a lot of their non-US operations are based. Of course those profits were generated from sales all over the world and should more properly be paid in the country where the sale took place. But then we have the whole issue of transfer pricing which can effectively ensure that all profits are made by HQ in a country of their choice.
Long term there is no substitute for an international Treaty regulating how profits should be allocated between markets. At the moment they can effectively be declared wherever they choose to locate their nominal HQ which will generally be in a low tax country or one which offers exemptions for profits made elsewhere or generous allowances for "R&D" and IP. To avoid a race to the bottom such a Treaty should also regulate what tax rates or Bands countries may apply. However there is no incentive for smaller countries to agree to this as it represents their main way of attracting major companies to their otherwise insignificant markets.
To overcome this problem current efforts by the OECD and others to regulate corporate taxation have focused on the tax base erosion effects of artificial transfer pricing rather than on the headline tax rates themselves. However this is hideously complex and requires tax authorities to delve deeply into the internal financial arrangements within companies. How do you define a non-artificial transfer price? Is it cost plus? Cost plus what? Given that pricing in a market economy is generally defined by what the market will bear, rather than the cost of production, it can be argued that any regulatory interference in internal pricing arrangements is "artificial".
The reality is that the globalisation of capitalism has resulted in a great concentration of wealth and capital by a few people and corporations in a few regions within a few countries, and other countries have responded by lowering their tax corporate tax rates to make their locations more attractive for global corporates and to encourage global corporates to declare their profits in their jurisdictions. This has led to a race to the bottom in corporate tax rates globally which is exacerbating the already stark inequalities in the distribution of wealth. States are being denied revenues they could otherwise use for social redistributive services.
The only solution, it seems to me, is to try negotiate a global tax Treaty which goes some way towards standardising tax bands but which gives some scope to smaller/weaker economies to set somewhat lower rates. The most egregious abuses right now do not concern countries with low corporate tax rates like Ireland's 12.5% rate, but the number of global corporates who are able to avoid paying almost any tax on their profits anywhere. A Global minimum effective rate of say 10% and the elimination of all loopholes for non-territorial entities and artificial (and open to abuse) exemptions for R&D etc. would go at least some way towards addressing this problem. The Treaty could also provide for a slow and gradual increase in this minimum rate for countries which reach agreed development goals.
Our problem is that the world is increasingly run by global corporates who are far too powerful to be effectively policed by individual nation states acting on their own. Apple can simply play off one country against another and go with the lowest bidder. The price for access to global markets has to be the submission of those corporates to minimum global standards of regulation, taxation and governance. I do not hold my breath that this will happen any time soon. One of the motivations behind Brexit is that it will enable the UK to undercut the EU on tax rates and regulatory regimes. Or at least that is what the Brexiteers think.
So the trend has been all one way - ever greater global corporate power, lower or non-existing corporate taxation and regulation, and those few institutions capable of challenging such trends - like the EU Commission - under increasing attack. The US Government has effectively been acting as an advocate on behalf of Apple in this dispute. If the EU wants to display a new sense of purpose and relevance post Brexit, getting to grips with the Apples of this world is not a bad place to start. The problem is that it may not have the competencies required to do so. Prosecuting Apple under state aid rules when the real problem is global corporate tax competition seems a stretch, at best.
Perhaps Brexit will enable a new EU Treaty to be passed which does address these problems, but only if the EU also develops its fiscal transfer powers to enable those peripheral member states to develop in a situation where they no longer have tax competition as an effective development tool. If the only way peripheral member state can compete with the central powers is through tax competition they will fight tooth and nail to retain sovereignty over taxation. The EU has to find a way to ensure a fair and equal opportunity for all member states if it is to eliminate the gaming of the system to the detriment of the whole which is what tax competition effectively represents.