Does Apple’s humiliation spell the end for 12.5% tax rate?

Tanaiste Eamon Gilmore has said that the alleged role of two Irish subsidiaries in helping Apple to avoid paying tax to the US authorities was not an issue for the Irish tax system
Tanaiste Eamon Gilmore has said that the alleged role of two Irish subsidiaries in helping Apple to avoid paying tax to the US authorities was not an issue for the Irish tax system

Dan White explains why our authorities need to crack down on companies using this country as a "conduit" through which profits earned elsewhere can be protected from tax, if we want to keep our 12.5% corporate tax rate



18 June 2013

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Computer giant Apple’s humiliation in front of a US Senate Sub-Committee is very bad news for Ireland. With all of the major economies now seemingly determined to crack down on tax-avoidance by multinationals, is our low-tax foreign investment model dead?

Ever since this country effectively went bust in November 2010 our 12.5% corporate tax rate has been under fire. We came under intense pressure from our European "partners" to raise the 12.5% rate in advance of them agreeing to the November 2010 "bailout". 

Pressure to reduce 12.5% tax rate

Then former French president, the loathsome, "nasty" Nicolas Sarkozy spent most of the first half of 2011 repeatedly blocking Ireland’s efforts to reduce the penal 6% interest rate we were paying on the portion of the bailout funds contributed by the EU, in what was widely seen as a further effort to pressure us into raising the 12.5% tax rate. 
However, despite an extraordinarily weak bargaining position, the Irish government successfully resisted this pressure. The decision by the EU to halve our bailout interest rate in July 2011 was one of the newly-elected Irish government’s first major triumphs.

Not paying UK taxes

However, despite our successes in 2010-11 the issue of tax avoidance by big, mainly American, multinationals has not gone away. Far from it. Last November the House of Commons Public Accounts Committee (PAC) hauled in Starbucks, Google and Amazon and took them to their task for their (non) payment of UK taxes. 

Shocked MPs were told that, despite having annual sales in the UK of £3.3bn, Amazon paid less than £1m in tax in the UK the previous year. Starbucks managed to get away with paying just £8.6m in tax on UK sales of £3.1bn over the previous 14 years while Google, despite having a global profit margin of 33%, paid just £3.4m tax on UK sales of $4bn in 2011. 

At around the same time it emerged that the French authorities had slapped a €200m tax demand on Amazon.

Routing sales through Irish operations

During the course of the PAC hearings it emerged that Google was able to avoid UK taxes by routing its non-US sales through its Irish operation which allowed it to pay a tax rate of just 3.2% on its non-US profits. For the first time those of us who aren’t accountants were treated to a discourse on such devices as the "Double Irish" and the "Dutch sandwich" that the big multinationals routinely employ to reduce their tax bills to an absolute minimum. 

It might be legal but it isn’t right. 

Shining a bright light on such murky practices has already had an effect. With its UK operations facing a boycott from angry consumers, Starbucks "volunteered" to pay an extra £20m of British taxes over the next two years. About as "voluntary" as having one’s arm twisted half way up one’s back we suspect!

Key issue at G8 summit

Last year’s events in the UK and France demonstrated clearly that the tax issue hadn’t gone away. The fact that ensuring tax compliance across international frontiers is one of the key issues being discussed at this month’s G8 summit in Co. Fermanagh is further evidence that our 12.5% tax rate and the tax breaks being offered by other countries to footloose multinationals are going to remain on the international agenda for the foreseeable future. 

However, it was what happened in Washington last month that should give this country the greatest cause for concern. Apple, which employs close to 4,000 people in this country, was dragged before the Senate Sub-Committee on Investigations to explain its use of offshore tax havens, primarily Ireland, to reduce its tax bill. 

According to the Sub-Committee, Apple used Irish-registered companies, to avoid paying $44bn of US taxes. Even more damagingly the Sub-Committee alleged that Apple had agreed a special 2% tax rate with the Irish government and tax authorities. Although this allegation was strenuously denied by the Irish government and the Revenue Commissioners, mud sticks. 

Regardless of the rights and wrongs of the matter, the fact is that Apple’s average tax rate on its non US profits is approximately 2%. 

Sending corporate America a message

While it was the Senate rather than the White House which humiliated Apple, is it conceivable that it would have done so without at least the tacit approval of the administration? The Senate after all is controlled by President Obama’s own Democratic Party. Was it a case of the Obama administration sending a not-too-subtle message to corporate America: If we can do this to Apple we can do it to anyone?

If this is in fact the case then we are in even worse trouble than we thought. With President Obama and the Congressional Republicans locked in dispute about the shape of the future US budget it is clear that any compromise between the two sides will involve a reduction in the current US tax rate, which at 35% is one of the highest in the developed world, offset by a massive crackdown on the use of offshore tax havens such as Ireland. 

At the very least the current practice under which companies such as Apple and Google can keep profits from their non-US operations offshore virtually indefinitely, out of reach of the Internal Revenue Service, looks set for the chop. 

Major consequences for Ireland

All of this has very serious implications for Ireland. Almost 150,000 people work in IDA-supported companies. These companies pay nearly €3bn in Irish corporation tax and spend more than €16bn on Irish raw materials, labour and services. How much of this would survive a major US clampdown?

At the very least the mauling of Apple should serve as a warning to this country to clean up its act. While the 12.5% tax rate on profits actually made in Ireland may be just about defensible, allowing this country to be used as a "conduit" through which profits earned elsewhere can also be sheltered from tax definitely isn’t. 

If we are to retain the 12.5% tax rate then it is vital that the ability of the multinationals to use Ireland as a conduit in the manner of Apple or Google is removed. Unless we do so ourselves, then the decision will almost certainly be taken by others, regardless of our views on the matter. 



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