What does Apple’s $38bn US tax payment mean for Ireland?

Attention now falls on the tech giant’s appeal of the Commission’s €13bn state aid ruling

As well as signalling the repatriation of a massive overseas cash pile, the iPhone maker has said it will invest $30bn on US expansion. Photograph: Getty

As well as signalling the repatriation of a massive overseas cash pile, the iPhone maker has said it will invest $30bn on US expansion. Photograph: Getty

 

Apple’s decision to pay $38 billion in taxes in the US, relating to the repatriation of its overseas tax pile, underlines the international arm-wrestle now underway for tax revenues from big companies. This tax is being paid on the same pot of money on which the European Commission ruled Apple was due to pay €13 billion of tax in Ireland.

Apple’s case is most of the value in its products is “ created” in the US, and this is where it should pay tax. The European Commission took a different view, arguing that the Republic had given Apple unfair and selectively advantageous tax arrangements – amounting to State aid – and that the tax should be paid to the Irish exchequer.

Apple has said itself that “the debate... is not about how much we owe but where we owe it.” This is not the full story – there has been huge debate over the tiny amounts of tax which Apple has previously paid on money earned outsider the US.

But now it has said it will pay – and pay in the US. And the fight in the European Courts will now clearly not be about whether tax was due on Apple’s overseas profit, but rather where that tax is paid. Remember that European Competition Commissioner Margrethe Vestager said at the time of the initial ruling against Ireland that revenue authorities elsewhere in the EU and in the US might want to study the Commission’s findings and argue that some of the tax was, in fact, due to them.

The commission’s ruling related to profits booked through Apple’s Irish operations over a 10-year period between 2003 and 2014. Hence the tax it calculated as owed is less than the amount Apple will pay in the US, which is basically 15.5 per cent of the entire cash pile which has resulted from earnings made outside the US over a longer time period.

But we are still talking about the right to tax the same pot of money and the latest Apple move has a few implications.

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The first is that it will surely feature as part of Apple – and Ireland’s – arguments in the European Courts against the commission’s ruling. Apple will point out that the tax is now being paid in the US and it is thus not liable for payment in Europe. The company has previously said: “The vast majority of the value in our products is indisputably created in the United States — where we do our design, development, engineering work and much more — so the majority of our taxes are owed to the US.”

Illegal state aid

The commission has said that its decision that Apple was given illegal state aid by Ireland remains and that the US payment does not change this. So the process underway in which Apple will pay the money due to the State into an escrow account,managed by Ireland, pending the legal cases will continue. However in reality the nature of the argument to be made before the European courts will now change.

Interestingly, the US government had sought to be a party in the case in support of Apple, largely on the basis that any tax paid in Europe would mean less paid in the US when the overseas money was repatriated to America. Its case was rejected by the General Court, which is the first to hear the appeal before – in all likelihood – it heads to the ECJ.

The second question is what this will mean for Apple’s strategy towards the appeal. If it loses the case against the European Commission’s decision, then it must pay the tax to Ireland. This would generate a tax credit which it could then claim to reduce its US tax bill. So Apple’s financial incentive to pursue the appear in Europe is reduced by the fact that it is now paying in the US.

However, the new US tax law would not allow a tax credit in the US equivalent to the full amount Apple pays in Europe – this relates to the fact that the money being returned to the US will not be taxed not at the full corporation tax rate, but at a special 15.5 per cent rate.

Analysis of the latest US legislation by US tax experts suggests that Apple would be able to claim around €5.76 billion as a US tax credit if the final tax bill paid here was €13 billion, meaning it still does have some financial incentive to continue the legal fight here.

Also, Apple will want to avoid the interest and penalties which the European Commission wants to apply on what it claims is unpaid tax – and the company may also want to continue the fight in the European courts for reputational reason. Ireland, also appealing against the decision, will hope that the company stays the course.

There is one final point to note from what has happened. The US tax reform plan and the “ America first” rhetoric of president Trump has led Apple to announce a big investment in the US. Yes, it has rolled up some stuff it would have done anyway into a big announcement, but bringing its massive cash pile back onshore and investing in the US is an important signal. This is a win for president Trump and a payback for the tax benefits given to business in the new tax package.

FDI

What this will all mean for US foreign direct investment to countries like Ireland in the years ahead is still unclear. US companies will still invest overseas and Ireland will remain an attractive location. But the Apple move shows the pressure and the financial incentives to invest “ at home” – and this may reduce the flow of FDI.

Big multinationals are also under pressure to pay more tax and while the Republic has benefited from this over the last coupe of years, the Apple move shows that the US is now fighting to get as much tax as possible paid in America. Recent developments in Europe have shown big EU countries also want a share of the spoils and so we can expect rows about where tax is paid, dressed up as debates on “reform”.

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