The case for the prosecution has been made. At issue are separate tax opinions Revenue issued to Apple in 1991 and 2007. Both the Government and Apple have insisted there is nothing improper going on at all, but competition commissioner Joaquin Almunia doesn’t hold back. His preliminary assessment is damning.
Almunia finds that the two Revenue opinions gave Apple “selective advantage” which is obtained every year and ongoing. Such an advantage is illegal under European law. The company may yet be obliged to repay tax foregone dating back to 2003.
A repayment would deliver a short-term fillip to the Exchequer. But any upfit benefit would be outweighed in spades if the commission decides that Revenue has struck special deals behind closed doors with the world’s largest company.
Such a finding could call into question other arrangements between Revenue and the many major global companies with operations in Ireland. If the certainty of a company’s tax treatment is the bedrock of any corporate tax regime, then there is potential here to destabilise the entire sector.
Adding to the tension is the fact that all of this comes amid sustained pressure on Dublin from the OECD to unwind the infamous “double-Irish” tax scheme, of which Google is a big beneficiary.
Policy bedrock
So Ireland is on the rack over tax yet again, yet tax is a keystone of the inward investment policy that the Government sees as the route back to prosperity. This is tried and tested in the Irish context, but onlookers in Brussels, Paris, Berlin and Washington see something dubious in the whole thing.
The international onslaught has thrust successive Irish leaders into a defensive posture when they would rather stay below the radar .
Almunia’s investigation into Apple follows US senate hearings last year, in which the company was found to pay a 2 per cent tax rate on some of its Irish profits . Apple argued this assessment was unfair, but the proceedings appear to have piqued the interest of competition officials in Brussels.
The official Irish tax rate and other legal trappings, long a source of antagonism in Europe, are not in question here. Rather, it is Revenue’s application of the rules that falls under Almunia’s glare.
It should be noted here that the competition arm of the commission is exceptionally powerful, that it operates with a very high degree of independence from the rest of the EU’s executive branch, and that it has a long track record of successful confrontation with corporate excess.
‘Misunderstandings’
It is Apple’s case that Revenue has always adopted a robust stance with the company over tax. For its part, the Government has pointed to “misunderstandings” within the commission in relation to the engagements between the tax authority and the company.
Almunia’s letter is clear, however. The basis for the 1991 tax opinion was proposed by Apple and agreed by Revenue, and there was “no scientific basis” for one of the figures at the heart of the determination. Highlighted in bold print is a reference from an internal Revenue note, which says a particular profit mark-up in relation to some Irish activities was accepted “in order not to prohibit the expansion of the Irish operations”.
While this suggested that an element of the tax opinion was motivated by employment considerations, Almunia says this is not the basis for a tax reasoning at arm’s length from the company.
He also argues that the 1991 opinion remained in force for far too long without revision, well beyond the duration of similar opinions handed down in 13 other members states. Even if the opinion was watertight, its open-ended nature “calls into question the appropriateness of the method agreed” between Revenue and Apple, given possible changes to the economic environment.
Of the 2007 opinion, Almunia says none of the documents provided contain a transfer pricing report or a cost-sharing agreement between the individual units of Apple whose activities are taxed in Ireland.
He also questions the use of a form of accounting calculation known as the “transactional net margin method” for the allocation of profits to these individual units of Apple.
“The choice of that particular net profit indicator is neither explained by the [Apple] tax adviser nor by Irish Revenue, although that choice results in materially different outcomes in the present case,” the commissioner says.
“The 2007 ruling also fails to explain the choice of operating costs as net profit indicator rather than a larger cost basis, such as the cost of goods sold . . . The commission therefore has doubts as to the appropriateness of the transfer pricing method chosen for the 2007 ruling.”
Shifting profits
Central to all of this are transfer pricing arrangements within Apple, which relate to the practice of shifting profits between individual units of the company to minimise the tax eventually paid.
Citing guidelines adopted in 2010 by the OECD, Almunia says internal transactions within a group of companies should not differ from relations that would be made between independent companies.
While the commissioner says Revenue has not kept with this arm’s length principle, it is Apple’s case that the OECD standards were not in place when the two opinions were handed down.
This is Almunia’s opening gambit, and he is likely to be challenged every step of the way by the Government and by Apple. The stakes for Dublin are huge, given the danger of doubt being cast over other Revenue opinions with big investors in Ireland.
