Apple may face hefty tax bill

Ireland’s role in Apple’s affairs means the sums involved are material to Ireland

Ireland has done extraordinarily well at attracting foreign direct investment, and the politicians and public servants involved must be hoping that when the current fuss over global tax competition subsides, that will continue to be the case.

It may cross their minds at times, however, that the winds of change currently sweeping the multinational globe might result in the occasional – unsought – windfall gain.

Certainly the warning this week from Apple in relation to the European Commission’s state aid inquiry into Ireland and its tax dealings with Apple, holds out such a prospect.

Apple books a huge amount of its sales through subsidiaries registered in Ireland. These companies also play a huge role in its tax strategies.

In a letter to the Irish Government in June, commissioner Joaquín Almunia said it believed agreements between Apple and the Irish Revenue Commissioners in 1991 and 2007 may have amounted to State aid. Ireland has said the commission is wrong.

Mr Almunia quoted figures from a committee of the US Senate which found that the Irish-resident company, Apple Sales International (ASI), had the following pre-tax profits for the years 2009 to 2012: $4 billion, $12.1 billion and $22 billion.

Turnover

Turnover at the company grew by an extraordinary 415 per cent from 2009 to 2012, with the turnover in 2012 being $63.9 billion, the letter said.

However, documents given to the commission by the Irish authorities showed that the taxable profits for ASI were €30 million-€40 million for 2009 and 2010, €50 million-€60 million in 2011, and €40 million-€50 million in 2012.

The gap between the two sets of figures is obviously huge. In essence, ASI paid a tiny amount of tax here, and its income was otherwise under the radar of any tax authority anywhere on the globe.

The commission inquiry is looking at a second Irish Apple subsidiary, Apple Operations Europe (AOE), which appears to have had the same characteristics as ASI. The AOE pre-tax profits relevant to Ireland, according to the commission letter, were between €10 million and €20 million each year, between 2009 and 2012. The information came from the Irish authorities. There is no information in the letter as to AOE’s overall turnover or profitability.

Both companies paid €1 million-€10 million in corporation tax in Ireland each year from 2010 to 2012, according to the letter.

The contested rulings made by the Revenue Commissioners concerned how the two companies’ Irish taxable profits were calculated. Because no other tax authorities were involved, these rulings determined the global tax rate the companies would pay.

Annual return

The Apple annual return filed to the Securities and Exchange Commission listed provisional effective corporation tax rates of between 26 per cent and 25 per cent for the company, for the years 2012 to 2014, and said these were less than the 35 per cent rate that applied in the US, “due primarily to certain undistributed foreign earnings, a substantial proportion of which was generated by subsidiaries organised in Ireland, for which no US taxes are provided because such earnings are intended to be indefinitely re-invested outside the US.”

US law allows US multinationals to not pay tax on foreign earnings if those earnings have been earmarked for indefinite re-investment abroad. The Apple return said that the bulk of such foreign earnings were generated by subsidiaries “organised” in Ireland and gave a figure for how much would have to be provided for in the accounts, if these profits were to be taxed in the US.

Subsidiaries

“Substantially all of the company’s undistributed international earnings intended to be indefinitely reinvested in operations outside the US were generated by subsidiaries organised in Ireland, which has a statutory tax rate of 12.5 per cent.

“As of September 27th, 2014, US income taxes have not been provided on a cumulative total of $69.7 billion of such earnings. The amount of unrecognised deferred tax liability related to these temporary differences is estimated to be approximately $23.3 billion.”

In other words, the figures are huge.