Apple launched its next line of products, the iPhone 6 and the Apple Watch in California this week, but a nagging question still hangs over the company in Europe. This summer, European Commission (EC) regulators launched inquiries into the tax affairs of Apple, along with Starbucks and Fiat, about deals they had reached with the governments of Ireland, The Netherlands and Luxembourg.
The E.C.’s competition chief, Joaquín Almunia warned the three companies must “pay their fair share” of tax on the continent. “Under the E.U.’s state aid rules, national authorities cannot take measures allowing certain companies to pay less tax than they should if the tax rules of the member state were applied in a fair and non-discriminatory way.” Also under fire, said Brussels, were so-called ‘patent boxes’ that allow companies to pay less tax on patented innovations.
But, says George Bull, senior tax partner at Baker Tilly, no-one has done anything criminal. Red Herring spoke to the London-based expert to get a lowdown of the laws, loopholes and outcomes that have been discussed across Europe – and which may have huge implications for Apple’s European future.
RH: Is Apple exposing a loophole in European tax law?
GB: Tax regimes for intellectual property are generally not loopholes. Instead they are consciously thought-about, carefully crafted tax incentives set up by the policy makers in sovereign nations in full knowledge of the facts. The U.K. has for years benefitted from the research and development tax credit. It does what it says on the can. And more recently, as part of a bid to become the most competitive tax regime in the G20, the U.K. government has, again entirely consciously, legislated to create the patent box with a preferential tax regime for IP created or held here.
RH: What effect are those methods having on tax rates?
GB: It is already having dramatic effects. If you look at the U.K.’s positioning on headline corporation tax rates, which come down to 20% next April, as compared with up to 39% in the U.S.. The U.K.’s big pharma industry has become very attractive to U.S. corporations who want to perform ‘tax inversions’. We saw an example earlier this year with Pfizer’s bid for Astra Zeneca. There’s talk of whether the conscious aim of the U.K. Treasury to attract multinational businesses to the U.K. will prejudice the interests of large UK corporations who find themselves being acquired by overseas competitors.
RH: What is the E.C. looking for here then?
GB: While public perception is that the problem is one of large corporations organizing their affairs to reduce their tax bill globally, that’s not the whole story. Sovereign nations are competing with each other to secure the biggest slice of the tax cake paid by those corporations. The E.U. is looking at this issue and other tax questions too one of them being whether Luxembourg has entered into a favourable tax deal with Amazon, and whether that arrangement amounts to State Aid.
From an E.U. perspective, if a nation does something which amounts to anti-competitive financial support that can be called unfair state aid. So for example when the U.K. was introducing its patent box, the Treasury went to Brussels to ask for confirmation that the patent box wouldn’t be blocked as a form of state aid.
The E.U. is concerned to ensure that, in the competition for GDP or tax revenues between nations, individual countries aren’t using their financial clout to give financial preference to any particular organisation. Within the E.U., state aid provisions would be invoked. Outside the E.U., the World Trade Organisation antidumping rules are used to tackle unfair trading advantage.
RH: What is Apple accused of, specifically?
GB: I don’t think anyone is saying that Apple has acted illegally. It is just that collectively around the world, individuals maybe some of Apple’s competitors, and maybe some governments too, don’t like the sound of a big corporation perhaps not paying much tax anywhere. Even if you love Apple’s products you’re still going to have this odd feeling that perhaps the company’s commercial pricing is supported by not paying much tax anywhere in particular.
That is the nub of it. If you go back a few months, when Ireland was challenged over the arrangements which Apple is using, the public statements from the Irish government seemed to indicate that they are blocking this loophole, and will not be allowing this structure to be used in the future. While tax authorities might challenge Apple using transfer pricing rules, there’s an argument that transfer pricing might not catch Apple while it controls all of its manufacture (unlike the PC market which is incredibly fragmented) and all of its sales.
But the big issue is what’s called base erosion, and profit shifting (BEPS). The OECD (Organization for Economic Cooperation and Development) in Paris is working on a BEPS project right now. The aim is to ensure that companies pay the right amount of tax in the right countries.
Companies like Apple will actively monitor two things hour-by-hour. One is its brand value, public profile and approval rating against all the issues it faces. That may include apps not working, kit failing, conditions in the factory, and public reactions to not paying much tax. Multinational corporations will have established a policy where there is a risk management element in respect to the chosen tax policy.
RH: What may Brussels eventually do about this situation?
GB: The E.U. might determine whether the earlier Irish support for this structure amounted to an indirect form of state aid. If Apple was shown to have specific beneficial tax agreements exclusive to itself in different jurisdictions, then Brussels would want a look at all the European ones, similar to its review of Amazon and Luxembourg. That doesn’t seem to be happening. If you looked at it through European consumer eyes, important concepts would include some sort of social justice, social contract, the idea that we all work hard when we work and pay taxes as part of a contract with our home nations, but if individuals fall on hard times then it’s legitimate to look to the state for some kind of support. That’s a basic idea of the European social contract, and that, by extension, applies to businesses that operate in Europe.
In the U.S. there is a completely different view. Taxes are almost universally frowned upon but conversely the U.S. has very high corporate taxes. Although there are many pressure groups in America, the general individual view is to expect less from the state, and therefore to push far more onto your own ability to sink or swim. And that again propagates through to the corporate environment.
RH: What would constitute a success for the E.U.?
GB: There would be two elements to what looks like success. One is proving beyond doubt that specific countries’ tax arrangements with multinational corporations don’t amount to state aid and if they do, to do something about it. There is a convention that if a company has received a specific grant which is subsequently found to be state aid, then that has to be repaid. But if a tax treatment is found to have represented state aid, then the company doesn’t have to repay the tax benefit, but the arrangement has to be terminated by the country, which usually results in a change of law. That would be success number one for the E.U.: either prove it’s clean or change the law in that country.
Success number two, which is a little less direct, is to keep the whole issue on the agenda. If the OECD is going to be able to produce something that’s sustainable and workable on this issue of BEPS, then it needs time and an environment where public and corporate opinion are really aware of the issue.