No doubt you will have all heard the news that Ireland Inc is refusing the €13 billion in back taxes from Apple. If you add on the interest the amount climbs to €19 billion. This is a massive sum of money that Ireland could certainly do with.
The purpose of the article is to give a brief explanation of the case and that you’ll leave the moral hazard discussion to the politicians to keep them busy during their prolonged holidays.
2 questions came to mind when I first heard the news:
1. How did Apple get away without paying the tax in the years that the EU claimed it arose?
2. Why is the Irish government refusing to accept €19 billion euros?
The first question is rather difficult to explain whilst the second one is surprisingly fairly straight forward.
How did Apple get away with paying very little tax?
The corporation tax rate in Ireland is 12.5%. Apple ended up paying in the region of .05% for the period under review. It did this by setting up an Irish resident company along with 2 other entities who were considered stateless companies. This means that these companies were not resident in Ireland or any other country. Billions of euros from EU sales were put through these stateless companies. The Irish government then agreed with Apple that only a portion of these sales related to Ireland and therefore only that portion of sales would be taxable in Ireland. As these companies were non-resident in Ireland they could only be taxed on their Irish source income. The rest of their income (which was the vast majority) remained untaxed.
While the use of stateless companies is now prohibited in Ireland it was allowed for the years under review. The EU are instead saying to Ireland that the amount of sales that were taxed in Ireland were too low and that the Irish government at the time were complicit in calculating this rate. It is also suggesting that Ireland gave Apple favourable treatment and didn’t offer the same deal to other companies.
It appears to me that if Ireland appeal this decision there is every chance it will be overturned. Apple used the Irish tax legislation to the letter of the law and so no rules were broken. From my reading of it the Irish government didn’t do anything untoward either.
If the EU win this case then it is clear that they can now intervene in our tax law and this could have serious consequences.
Why is Ireland refusing the €19 billion?
If we end up receiving these funds we are then saying that the EU can control our tax laws, even more than they are doing so already. Foreign multi-nationals may reconsider coming to Ireland as there will be instability in our tax rate and legislation. They may end up going to the UK, where they may pay more tax but at least they will have certainty and will not have to deal with EU interference.
This could be disastrous for foreign direct investment in Ireland and I believe the government are right to fight it. However coughing up 19 billion in order to prove our stability is a big price to pay.
Ireland will appeal this decision and the case will most likely drag on for years. This can only have negative implications for Ireland, whether we win or lose on appeal. On the plus side if we do lose on appeal we will have an extra €19 billion in our coffers, so it’s not all bad.
Article written by Dave O'Brien, Tax Director, Quintas