Apple’s announcement that it would pay $38 billion in taxes to the US as it repatriates its cash pile shows the rapid changes now under way in the world of corporate taxation.
For years, big US companies have stored profits earned outside the US out of reach of the US tax authorities. Changes in the new US tax reform legislation mean there is now an incentive for many to repatriate the cash, on which a tax charge of 15.5 per cent is payable.
Apple's move and its announcement of significant investments in the US is a win for President Donald Trump. In the wake of the big tax reform package, a number of US companies have announced new investments at home, or have increased staff wages and salaries. Apple's move is by far the most significant to date.
US companies will still maintain and grow subsidiaries overseas, but in future they may invest more at home and less abroad than has been the case in recent years
It remains to be seen how significant this “America first” policy will be and what it will mean for the plans of US companies to invest overseas in future. However, the combination of a changed political environment and major tax changes will have an impact.
US companies will still maintain and grow subsidiaries overseas, but in future they may invest more at home and less abroad than has been the case in recent years.
The small amount of tax paid by many big US companies on profits earned outside the US – and their resulting hoarding of cash overseas – has been a subject of much controversy in recent years. Companies like Apple arranged their affairs to avoid paying tax on the bulk of these profits, taking advantage of gaps between tax rules in the US and in other countries.
The use of charges related to intellectual property were central to this and as the country which housed the European headquaters of many major US firms, the Irish tax regime has been part of this story.
These tax arrangements were, the companies said, entirely legal. The importance of the European Commission's case against Ireland, in which it ruled Apple had to pay €13 billion in back taxes, was that it alleged that the company benefited from illegal state aid. Apple's argument was that the tax was not due in Ireland – and it will point out that it is now being paid in the US.
Apple is shortly due to start paying this tax into an escrow account which Ireland will manage, pending the outcome of the legal proceedings. The commission will continue to contend that Apple benefited from illegal aid and that the move to pay tax in the US does not change this. However, the nature of the case to be fought through the European courts has now changed.
The argument may still turn on complex legal points of competition law. But in essence the question is now about where Apple will pay tax on its overseas earnings, not whether it will do so.