How will Apple's tax ruling affect the US?
The European commission recently ordered Ireland to collect €13 billion ($14.5 billion USD) in unpaid taxes from 2003 to 2014 from Apple. Andrea Murad reports on what it means for the US.
While this amount of money may be a drop in the ocean for Apple considering the tech company has more than $200 billion in cash reserves, this ruling could have broader repercussions affecting the incentives countries offer multinationals for setting up operations in their jurisdictions.
“Operationally for Apple, this will mean very little,” says Robert Salomon, Associate Professor of Management and Organisations at New York University’s Stern School of Business. “It won’t change how they do business, sell their products, market their products or how they run their business, but it will change their potential tax liability.”
In the meantime, both Apple and Ireland have appealed the case, which is unlikely to come to a swift conclusion. Any taxes paid to one country will cause another country, particularly the US, to lose out on that money.
There are a number of different scenarios that may come out of the appeal, whether the case is settled or goes to trial, as the tax revenue could get spread out among a few different countries. Each country has its own incentives for wanting a specific settlement.
The US Treasury is backing Apple’s claim not to have to pay these taxes. “The EU is claiming that this is a one off specifically meant for Apple — it’s illegal and therefore, they need to collect all these back taxes for Apple,” says Robert. “Apple says they didn’t break any law. The US says that you can’t go back and pretend this is an Apple specific law.”
Multinational companies choose locations to operate based on the quality of the labour force, the sanctity of the rule of law and the cost for operating in that jurisdiction, which includes taxes. Despite the uncertainty regarding the sanctity of law and operating costs, the likelihood of Apple moving out of Ireland is small at the moment. In the meantime, Apple will have to fight the claim by employing an army of lawyers.
Double Irish sandwich
Because of Ireland’s favourable corporate tax laws, Apple made Ireland its European headquarters where all its intellectual property resides. The company then charged the individual subsidiaries operating in other counties with licensing and franchise fees paid to the Irish subsidiary.
Apple says they didn’t break any law. The US says that you can’t go back and pretend this is an Apple specific law.
On its Irish tax forms, Apple claims that much of the income in Ireland was generated from operations not domiciled in Ireland and didn’t have to pay taxes on that income. “They weren’t paying any taxes on that money because they were basically finding this wedge and this anomaly tax thing that they could claim that they weren’t domiciled in Ireland or the US, so they didn’t have to pay taxes on much of the income they earned in the European content,” says Robert.
While the EU says that Apple received special treatment in Ireland, Ireland says that any company was able to do the same thing. But how many companies are able to benefit from this law? Was the law general enough for every company or just Apple? The answers to these questions will come out as the dispute moves forward.
Trading taxes revenue for jobs
There are reasons why Ireland made this decision — having Apple employ 6,000 of their citizens was more beneficial to their economy than not having Apple operate in their jurisdiction. “They made a quid pro quo and a reasoned decision that to lower their tax structure for all multinationals was advantageous to them because it resulted in jobs for their citizens,” says Ed Liva, Professor of Practice and Director of the Graduate Tax Program at Villanova Law School. “That’s a logical thing for a country to do.”
Within the US, states do offer incentives to encourage companies to move their operations within a particular jurisdiction. The EU is saying is that within the EU, the incentives that Ireland offered are unfair to other countries. “What the EU is trying to do is prevent apple from competing,” says Ed.
The US bears the burden
When Apple decides to repatriate cash that’s sitting overseas, the US government has a claim on taxes up to the difference between the corporate tax rate and any taxes paid to other jurisdictions. Whatever part of the $14 billion that is paid to Ireland is money that the US government won’t receive in tax revenue because Apple will receive a credit for this amount.
“Fortunately, for Apple, they have more than enough money to pay it, but in this situation, it’s the US government that ultimately bears the burden of this payment,” says Ed. “In high likelihood, Apple will able to claim this as a foreign tax credit, which will reduce what Apple pays in the US.”
While there will be much dispute regarding where the profit belongs, the US is long overdue for comprehensive tax reform that includes how multinational corporations are taxed. The US system that’s in place forces this behaviour when it comes to multinationals.
Worldwide versus territorial profits
“We’ve got a worldwide system of tax where a US company gets taxed on a worldwide basis and almost all countries tax on a territorial tax system, meaning that the country will only tax profits that are earned in that country,” says Ed.
Along with how companies are taxed, how much they pay in different countries varies significantly. The US tax rate is nominally high when compared to other countries. The federal rate is at 35% and then there’s an additional 3% to 10% taxes at the state level, as compared to Ireland that has a 12% tax rate. Low taxes and favourable tax policies attract businesses, and countries want to attract businesses to their jurisdictions.
“There’s a real tax problem that we have in the world because companies are engaging in regulatory arbitrage and trying to take advantage of areas with the lowest tax liabilities,” says Robert. While the US will continue to make legislative changes, there’s a greater need for global coordination on tax policies.
Apple’s next steps
Whether Apple moves out of Ireland remains to be seen unless Ireland changes its tax laws. “My understanding of their new laws is that it’ll still be significantly friendlier than what it is on other places in the continent,” says Robert.
Many of the countries where Apple operates or sells their products will likely take notice of the EU’s recent action and will begin to evaluate whether or not they should receive more tax revenue from Apple than what they’re receiving now.
While Apple may make contingency plans and begin to align their tax structure such that they’re more mobile and can have an efficient exit from Ireland if need be, this case does create uncertainty as there is need for tax reform. “This upends everything because now they won’t know what their tax situation will be in any given jurisdiction,” says Ed.