Monday, May 27, 2013

Apple, Google and the Tax Holidays on Offer in Ireland

Much has been written in the past two weeks about apparent anomalies in the tax regime in Ireland and the ability of two of the biggest corporations in the world – namely Apple and Google, to exploit these anomalies to their advantage, i.e. to avoid paying taxes to the tune of Billions of dollars, to any tax authority, anywhere, for many years. Neither company has broken any law, rather, both have jumped on the incredibly generous tax laws which operate in Ireland, a country that enables large multinationals to register their entities in Ireland while not having to be tax resident there, nor indeed tax resident anywhere.

There have been many vocal objections within Europe in recent years to Ireland’s lowly corporation tax rate of 12.5% which is significantly lower than the EU norm. However, despite the protestations, Ireland managed to convince the Troika during the bailout talks 2.5 years ago that Ireland had to retain this tax rate to ensure the sustainability of existing business operations from multinationals in the country, a sector that currently provides upwards of 150,000 jobs in a county with a population of around 4 million people. The fear was that if this tax rate was increased significantly, it would trigger an exit of multinational firms from the economy, and further depress an already stuttering economy, thus exacerbating the country’s already dire debt problems.

However, the Apple and Google story really has nothing to do with Ireland’s corporation tax rate. Even if the corporation tax rate were 35% (as in the US), this would not have made much difference to the actual tax take Ireland would have netted from either company, as Apple and Google only pay nominal tax in Ireland, reported as being just 0.05% and 0.14% respectively of total income channeled through their Irish entities. The tax anomalies that exist in Ireland permit a company to register there, but if the entity is managed from outside the Irish jurisdiction, it can be deemed to not be tax resident in Ireland, thus the corporation does not have to pay tax to the Irish State for the operations of these companies. In the case of Apple, three of the Group’s main revenue generating companies are registered in Ireland, but are tax resident in Bermuda, where there is no tax. Using this arrangement, Apple managed to restrict its overall tax liability across the globe in 2011, to just 1.9% of the Group’s income. Apple is a US conglomerate with its Headquarters in Silicon Valley, and given the corporation tax rate for American registered companies is 35%, it is easy to see why certain people in charge of the legislature in the US might get quite exercised on this issue.

Similarly, in the UK, the House of Commons were informed two weeks ago, that Google Ireland paid tax of just €70 Million on sales of €47 Billion between 2005 and 2011. Google’s sales in the UK were channelled through its Irish company and Google essentially paid no tax in the UK on UK sales. Google availed of the same tax loophole as Apple, whereby it funneled revenues from non-Irish operations through Irish subsidiaries which although registered in Ireland, were not deemed tax resident in Ireland. The funds then made their way to a Bermuda registered Google company, to avail of the 0% tax rate on offer there. The House of Commons committee subsequently branded Google ‘devious’.

So who is to blame for the tens of Billions of dollars in lost tax revenue? It is hard to blame the companies themselves directly, as ultimately the function of corporate companies is to maximise the wealth of their shareholders. There is an argument that both Apple and Google come up short in terms of displaying corporate moral responsibility, whereby they have deliberately avoided paying their fair share in tax contributions back to the economies that contributed most to their success. However most corporations will generally operate within the legal parameters set for them, and if the legal parameters come up short, and this provides an opportunity, then most companies will take such an opportunity if it helps it to preserve and grow its wealth for shareholders.

The Irish Government has been at pains over the past week to state Ireland is not a tax haven and that the government does not do deals with companies on the tax liability a company must pay. However the fact is that Ireland deliberately operates an accommodative policy surrounding legal registration and tax residency and this accommodation is used by scores of multinationals to avoid paying tax in other jurisdictions. This has nothing to do with the low corporation tax regime already operating in Ireland. Apple and Google between them provide about 6.000 jobs in Ireland and these jobs are obviously deemed more important to the country than the very significant tax revenue the country could earn from both companies, and indeed from other multinationals, were these companies forced to pay corporation tax on all earnings channeled through all their Irish registered entities.

The European Union could introduce a rule that all companies registered in the European Union are automatically liable for tax at the tax rate applicable in the jurisdiction in which the company is registered, closing off the Irish loophole that permits a company to be registered as a legal entity in one country, while being resident for tax purposes in a separate jurisdiction. Of course the EU, US and other major governments could also determine that, for tax purposes, IP has to be registered in the country of origin of the IP, as opposed to being registered in some remote island and thereby by proxy, this would force large multinational companies like Apple and Google to radically rethink their policy in relation to corporate responsibility and tax and their overall economic contribution to all society.

Bob - May 27th 2013