Apple and other tech giants, including Google, which have based their international headquarters in Ireland, could have to pay significant sums in additional taxation if a European Commission investigation rules that tax arrangements entered into by Ireland with the companies are ruled as subsidies (state aid).
The impact of a ruling that declared the arrangements as illegal under European law would see companies such as Apple having to repay the subsidized tax for up to ten years. Corporation tax in Ireland is already low at 12.5%. Apple however has been extended a 2% taxation rate. If the company is forced to repay 10% of profits for the past 10 years, and was obliged to pay the full tax rate from thereon, the impact on the company would be 'material,' which prompted a warning to Apple stockholders in the company's quarterly filing lodged with the SEC this week.
What is at the heart of Apple's problems is not its earnings in Ireland, but its business worldwide, profits for which are largely channeled to its two Irish subsidiaries. Its core problem is not just the low rate it is paying in Ireland, but the tax avoided being paid in almost every country it operates. This could result in a litany of tax rulings from around the world, not only against Apple, but counterparts such as Google and Microsoft. It should be stressed however that Apple maintains all its taxation arrangements, worldwide, are perfectly legal under current law.
The U.S. Internal Revenue Service is investigating Apple's taxation arrangements as its 2% tax rate in Ireland is a significant variance from the U.S. corporate tax rate of 35%. The company's accounts for the period 2010 to 2012 are currently being audited by the IRS. The company also notes in its quarterly filing, it is subject to state and municipal taxes which could also be varied by audits. The company however does indicate it has accrued provisions to allow for any adverse audit findings. For its part it also points out that it is "likely the largest corporate income taxpayer in the U.S." The company told a Congressional hearing in mid-2013, "(Apple) paid nearly $6 billion in taxes to the U.S. Treasury in [the fiscal year of 2012. These payments account for $1 in every $40 in corporate income tax the U.S. Treasury collected last year," the company said.
An adverse decision in Europe may prompt a reorganization of the company's worldwide operations, although significant investment has been made in Ireland to establish offices, facilities and plants, and to employ its large Irish workforce, comprising several thousand people, so dislocation is not a major concern for Ireland. The official 12% tax rate is also extremely favourable in comparison to tax rates paid in the United States, which Apple avoids as it maintains profits earned outside the U.S. are invested outside the U.S. It is also significantly less that what it would be paying for profits it is generating in other countries, but are siphoned off to Ireland. For Ireland, while it loses the benefit of 10% of its 12% taxes it could be taking in domestically, it is gaining 2% of virtually all Apple's worldwide profits. Ireland also generates significant income tax from the many thousands of workers Apple has employed in its more than 3 decades of the company's operations in Ireland. In February, Apple announced it was reinvesting further with the construction of a 166,000 square metres data centre in Athenry, Co. Galway (pictured) at a cost of nearly $1 billion. It is expected to be operational in 2017.
Meantime other countries are also looking at the impact on their tax revenues. Australia is investigating Apple as its Australian operations are wholly-owned by its Ireland corporations, subjecting its income in the main to the Irish entities, effectively avoiding Australian corporation tax which is at 30%.
A report in the Australian Financial Review by investigative journalist Neil Chenoweth published last month set out how Apple moves its profits around the world to avoid taxes. Australians have paid $27 billion to buy Apple products since 2002, yet the company has paid only $193 million in Australian tax) - just 0.7% of turnover, the newspaper reported, saying it estimated that about $9 billion in profit had been shifted offshore to minimise tax paid in Australia.
"Apple worldwide in the past four years have avoided paying tax on $US44 billion," the AFR quoted Antony Ting, a senior lecturer in taxation law at Sydney University, as saying. Ting is researching how companies such as Apple, Microsoft and Google exploit tax laws to their advantage.
"The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company's subsidiaries are organized," Apple said in its SEC filing this week. "Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change."
"The Company's future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation of Ireland to examine whether decisions by the tax authorities with regard to the corporate income tax to be paid by two of the Company's Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to conclude against Ireland, it could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material," the filing stated.
"The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company's effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company's taxes owed is for an amount in excess of amounts previously accrued, the Company's operating results, cash flows and financial condition could be adversely affected," Apple said.
Dr Ting believes Apple will avoid repercussions in the U.S., telling the AFR last month he believes the United States government is aware, and supports, Apple's tax arrangements internationally, and by default, in the U.S. "Because the US tax law provides or facilitates Apple to avoid foreign tax on their foreign income and the U.S. government knows that this is the problem for over 10 years, but they do not take any action at all," he said. "What Apple convinced the U.S. government of is that by helping Apple to avoid foreign tax, you are helping Apple to be more competitive in world markets."
In relation to the European Commission investigation, Apple says its assertions are without merit. It does however concede that having to repay 10 years of subsidized tax could materially affect the company, but says it is unable to assess the impact it would have on the company. "On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company," Apple said. "The Company believes the European Commission's assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of March 28, 2015 the Company is unable to estimate the impact," the quarterly SEC filing said.
On the subject of its tax arrangements in the United States, Apple noted, "The Company's effective tax rates for the second quarter and first six months of 2015 and 2014 differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings, a substantial portion of which was generated by subsidiaries organized in Ireland, for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S. The higher effective tax rate during the second quarter and first six months of 2015 as compared to the same periods in 2014 is due primarily to a different geographic mix of earnings."
"The U.S. Internal Revenue Service is currently examining the years 2010 through 2012. In addition, the Company is subject to audits by state, local and foreign tax authorities," the company said in the filing. "Management believes that adequate provisions have been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company's tax audits are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs."
The SEC filing was lodged on Tuesday by Luca Maestri, Apple's Senior Vice President and CFO. The company posted quarterly revenue of $58 billion and quarterly net profit of $13.6 billion, more than 23% of turnover.