The Core of the Apple (Inc) Issue

May 28, 2013

Piigs_Icon_MusingsDid Apple use advantageous tax rates in Ireland improperly to avoid paying tax due to the American Treasury (and so the American people?)

On May 21 last, the US Senate Permanent Subcommittee for Investigations, tasked with investigating Apple’s tax situation, released their findings (WATCH here) which bluntly accused Apple of ‘shielding’ its profits, exploiting loopholes in the US tax code to shift its profits to ‘offshore tax havens’ , in particular Irish owned holding companies. This allowed Apple to pay a corporate tax rate of 15% far below the headline US rate of 35%. Senator Carl Levin (Democrat – Michigan) outlined how US corporate tax accounts for only 9% of federal revenue, thanks to these loopholes. The overall estimated loss to the US Treasury is $1.9tn in corporate profits to non-US tax havens.

The Double Irish Rule Loophole

In the US, like most major Western economies, a company must pay tax in the country it has been incorporated/registered. In Ireland, a company must pay tax only if its operations are managed on Irish soil. This means companies can register in Ireland (or ‘new’ subsidiary companies of the big US giants like Apple) but not physically operate here, meaning they pay no corporate tax.  This allowed an Irish registered Apple subsidiary to be managed and operated in the US but pay not one dime/cent in tax. Bizarre, but legal. More here

Such a company Apple Sales International did pay some tax, 0.05% on its profits in 2011, as ‘high’ as 2% other years. Apple Sales International generated $74bn in sales revenue between 2009-2012. Another Irish company, Apple Operations International, managed $30bn. The estimated combined tax loss to the US Treasury? $44bn, or nearly $15bn pa – a not unsubstantial figure. Interestingly, these subsidiaries are not technically registered….anywhere.

The Sweetheart Deal

That’s not the whole story. It has since been alleged that Apple received a ‘sweetheart’ tax deal from the Fianna Fáil Government in 1990 under Taoiseach Charlie Haughey, to avail of an incentivised rate, approximately 2%. In exchange, Apple has since provided Ireland with an estimated 3,500 direct employees.

The problem here is whether Apple received incentives or breaks to reduce its bill or whether is purposely sought to negotiate a ‘2% sweetheart deal’. The latter is serious, the former is perfectly legal.

The Irish Finance Minister Michael Noonan and Taoiseach (Prime Minister) Enda Kenny have denied such the sweetheart deal was made. The Committee reject this, and have been supported in this contention by Apple CEO Tim Cook. In any event, Noonan is technically correct. If a company is not tax resident in Ireland (i.e. like Apple Sales International, which has been registered in Ireland but does not manage its operations here) then quoting a figure of $30bn in revenue and proportioning a tax rate (however miniscule) is ridiculous. It should be zero, because there it is inactive in Ireland. The money is ‘held’ offshore from the US and never ‘repatriated’ i.e. paid to the US Treasury. The US wants to get its 35% on this sum but its task is to somehow decipher a labyrinthine tax code.

As Minister Noonan said – “It appears the rate that is being quoted is got as follows: the tax charged in Ireland on the branch activities in Ireland of companies that are not resident here on the one hand, is divided by the entire profit of the companies concerned, as if they were resident here, which they are not, on the other hand.” If Ireland was, in fact, a tax haven then shouldn’t Ireland benefit somewhat from this amount? Yes. Does Ireland benefit? Nope.

Ethics

The question here is ethics and fairness, not legality. In a time of continued austerity, bailouts and hardship – the idea of a cash wealthy American super-company which provides flashy iPhones, iPads and iPods to nearly every man, woman and child (you would nearly think, anyway) trying its best to avoid paying its fair share in tax while the the public are hounded and squeezed for every last euro/dollar/pound/ruble seems just a tad unfair and inequitable.

However, multinationals employs anywhere between 100,000 and 150,000 employees in Ireland and in a recovering country with over 14% unemployment, jobs are currency. The Irish corporation tax level has long been a bone of contention with its EU partners, keen to harmonise taxation to promote fiscal unity across the eurozone and bolster the euro. With the issues of tax havens and fraud featuring strongly on the EU agenda going forward, this issue is not expected to disappear soon. Thens there the issue of being a good team player, especially considering Ireland’s huge efforts to assiduously adhere to the troika bailout programme despite demands to burn the unsecured bondholders, notably those in Northern European banks.

Answer to the original question we posed at the beginning? Apple did nothing illegal. Your own definition of improper is needed to answer the rest.

More detail on this issue is available through this article

*UPDATE 1*

May 30: Joanne Richardson, Chief Executive of the American Chamber of Commerce (Ireland) writes an OpEd piece in the Irish Times, declaring that Ireland is not, despite the Committees findings, a tax haven. Her reasoning is straightforward. As the article states:  The OECD identifies four key indicators of a tax haven, none of which she declares applies to Ireland.

  • No taxes or only nominal taxes (Ireland has a 12.5% Corporate tax rate)
  • Lack of transparency
  • Unwillingness to exchange information with tax administrations of OECD member countries
  • Absence of a substantial activity requirement

She also heralds the fact that, “in December 2012, Ireland became one of the first countries in the world to sign an agreement with the US to improve international tax compliance and implement FATCA (Foreign Account Tax Compliance Act) – an emerging international standard for the automatic exchange of tax information.”

*UPDATE 2*

May 31: The Irish Ambassador to the US, Michael Collins writes to the two US Senators (an unusual step). The letter states:

  • No ‘special’ tax deals are possible under the Irish tax code
  • Restates that the Irish corporate tax rate (12.5%) is only levied on companies which operate in Ireland, and so are tax ‘resident’. That is, after all, Ireland’s definition of a ‘tax resident’ company. By using a US formula for calculating taxable income (as the US Committee does), they are being factually misleading
  • Restates Joanne Richardson’s point on the (4 factor) OECD identification of a ‘tax haven’ which he repeats does not apply to Ireland
  • Ireland is playing a strong role against ‘profit shifting’ and ‘aggressive tax planning’ with the OECD and EU, as part of Ireland’s Presidency of the Council of the European Union through the ECOFIN council.

IrishEMBASSYUS

 

*UPDATE 3*

June 1:  The US Senators reject the interventions, arguing again that Ireland is tax haven.

“Testimony by key Apple executives, including CEO Tim Cook and head of tax operations Phillip Bullock, corroborates that Apple had a special arrangement with the Irish Government that, since 2003, resulted in an effective tax rate of 2pc or less,” the senators said in their statement.

“Most reasonable people would agree that negotiating special tax arrangements that allow companies to pay little or no income tax meets a common-sense definition of a tax haven,” they added.

 

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Resolutions from European Movement International Federal Assembly (Dublin, May 24/25)

May 27, 2013

Piigs_Icon_Good-ReadsA very busy few days for European Movement International which has just held its Federal Assembly in Dublin, in association with the (nearly complete…) Irish Presidency of the Council of the EU (Council of Ministers).

Delegates agreed resolutions on a huge and impressive range of issues including:

  • European political parties
  • A new European Convention in 2015
  • EU-Ukraine association agreement
  • Civil society in Greece
  • The Multi-annual Financial Framework (MFF)
  • Agreeing new members including European Movement Azerbaijan, SOLIDAR, Erasmus Students’ Network and the College of Europe.

More detail is available here from European Movement International’s website

 


YEUr Tidbit: Mortgage Credit Directive (MCD)

April 28, 2013

Next up in the PIIGSty YEUr Tidbit Factsheet series, the Mortgage Credit Directive (MCD).

The MCD proposes a more integrated pan-European market for mortgages which gives borrowers more choice, stronger ability to compare mortgage products and greater protection while making cross-border mortgage lending much easier for banks. The EU home mortgage market is currently worth close to 50% of European GDP or €6.5tn.

Full version PDF here  YEUr PIIGSty Tidbit: Mortgage Credit Directive

YEUr Tidbit Mortgage Credit Directive


YEUr Tidbit: Single Supervisory Mechanism (SSM)

April 26, 2013

The Single Supervisory Mechanism (SSM)  is one step (of three) in achieving a full European banking union, a key part of the EU Single Market in financial services. The others are the Deposit Guarantee Scheme (DGS) and the proposal on Banking Resolution and Recovery (BRR).

Full version PDF of the PIIGSty YEUr Tidbit Factsheet here: YEUr PIIGSty Tidbit: SSM

YEUr Tidbit SSM image


Your PIIGSty ECOFIN Explainer

April 23, 2013

On April 12/13,  EU Finance Ministers met at an informal meeting in Dublin. These ministers meet in a EU Council configuration known as ‘ECOFIN’ for Economic and Finance Ministers (and was preceded by a meeting of the Eurogroup).  PIIGSty has produced a handy explainer with the key terms and acronyms.

ECOFIN infographic new

Eurozone/Euro Area

The 17 Member States of the EU (of 27) who have adopted the euro as their official currency. The 17 are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain.

ECOFIN

Chair: Rotating position (currently Michael Noonan, Irish Finance Minister)

Michael Noonan 2Economic and Financial Affairs Council (ECOFIN) is a meeting of the Economics and Finance Ministers of all 27 EU Member States. When budgetary issues are discussed, Budget Ministers also attend.

The ECOFIN Council meets once a month in Brussels to discuss economic policy and budgetary policy and once (informally) in the country holding the Presidency of the Council of the EU (previously known as the Council of Ministers).

They receive a report of the Eurogroup meeting taking place before ECOFIN, and consider any legislative or other issues that arise from Eurogroup which may require decision by the 27 Member States.

The Finance Minister of the country holding the Presidency chairs ECOFIN, so from January to June 2013 the Irish Minister for Finance, Michael Noonan, chairs these meetings.

For more information see the Irish Presidency (eu2013.ie) website’s  ‘Who Chairs What’ EU council publication

Eurogroup

Chair: Permanent position (currently Jeroen Dijsselbloem, Dutch Finance Minister)

dijselbloem208 2The Eurogroup, the main forum for the management of the single currency area, is an informal body that brings together the finance ministers of countries whose currency is the euro.

The Commissioner for Economic and Monetary Affairs, as well as the President of the European Central Bank (ECB), also participate in Eurogroup meetings.

The Eurogroup meets at least once a month, usually on the day before the ECOFIN to discuss matters particular to the euro. They can also call additional meetings when required.

This group has a permanent chairperson. Currently, it is the Dutch Finance Minister Jeroen Dijsselbloem, who took over this position in January 2013.

European Commissioner for Economic and Monetary Affairs

olli rehn 2Olli Rehn is the (Finnish) Commissioner for Economic and Financial Affairs and the euro. He is also one of the Vice-Presidents of the European Commission.

http://ec.europa.eu/commission_2010-2014/rehn/about/cv/index_en.htm

Economic and Financial Committee (EFC)

thomas weiser 2Chair: Thomas Wieser (Austrian senior finance official – elected by members)

The Economic and Financial Committee promotes policy coordination and reports regularly to the Council and Commission on economic and financial matters among Member States. It representation includes officials from Member States and their central banks, the ECB and the European Commission. The Committee also meets in a eurozone (EZ-17) configuration called the Eurogroup Working Group (EWG).

http://europa.eu/efc/

Eurogroup Working Group (EWG)

Chair: Thomas Wieser (Austrian senior finance official – elected by members)

The Eurogroup Working Group (EWG) prepares the work of the Eurogroup. It is composed of senior finance ministry officials from eurozone members (or deputy finance ministers) and representatives from the ECB and the European Commission. Its full time President (currently Thomas Wieser) is also President of the EFC.

http://eurozone.europa.eu/eurogroup/eurogroup-working-group/

European Central Bank (ECB)

Mario_Draghi_World_Economic_Forum_2013_crop 2President: Mario Draghi (former Chairman of the Italian Central Bank)

The ECB is the central bank for Europe’s single currency, the euro. The ECB’s stated main task is to maintain the euro’s purchasing power and thus price stability in the euro area. EU members are represented through national central bank governors who sit on the ECB Governing Council, the main decision making body (eurozone governors only) and the General Council (EU-27 governors).

http://www.ecb.int/home/html/index.en.html

 

 


PIIGSty Presents: Your PIIGSty Guide to Econ101

February 17, 2013

Eco Guide Cover

In celebration of 10,000 page views, PIIGSty proudly presents our very own comprehensive reference guide to basic economics – or – as our transatlantic cousins might put it, ‘Econ101′

This guide represents the culmination of our very hard work over many months in response to many reader requests and we are delighted to offer our readers this guide for FREE for the very first time. The component chapters have already been uploaded in the Econ101 section (feel free to pilfer them at your leisure) but this is the final, finished, polished version, ready to sit pride of place on your coffee table. If you’d like a fully published version, contact us for a price (yeah,  thats not free…)

Your PIIGSty Guide to Econ101 eBook

Many thanks to all our PIIGSty readers. Comments/criticism welcome at editor@piigsty.com


YEUr Tidbit: The Multiannual Financial Framework (MFF) Q&A

February 10, 2013

Q1. What is the MFF?

The Multiannual Financial Framework (MFF) is a 7 year ‘big picture’ EU spending tool which will last from 2014 to 2020. It details the maximum level (ceilings) of what the EU expects to spend on its priorities to fund new and existing programmes such as Horizon 2020, ERASMUS for All, Connecting Europe Facility and the Common Agricultural Policy. It also ensures the annual EU budget is devised and spent correctly to achieve the best results for all EU taxpayers.

Q2. So, Its a big budget?

Not really. The MFF only sets out the upper limits (ceilings) of what the EU can spend; it doesn’t mean any money can yet be spent. As such, discussions over the MFF are more about politics than economics. Annual EU budgets add the missing specifics, usually at levels below the ceilings.

Q3. Why do we need the MFF?

Beginning in 1988 with Delors 1, multiyear EU funding packages sharpen the EU focus on headline programmes and priorities. For a Union of 27 Member States (soon 28 with Croatia joining on July 1 2013), there needs to be limits and coherence between annual budgets to make sure they are cost-effective and focus on what the EU hopes to achieve. The MFF will run alongside the EU2020 Strategy with shared priorities in the areas of employment, research and innovation, education, social inclusion and climate/energy.

Q4. What’s the process for reaching agreement on the MFF?

The three main EU institutions have a role in the process; the European Commission, European Parliament and European Council (Heads of State and Government). The Commission proposes while the Parliament and Council work together known as ‘co-decision.’ Roughly speaking, the process is as follows:

MFF Box-Graph_New1

The Commission (as the EU executive branch) proposes a package which sets out the terms for negotiation (called a ‘negotiating box’).  Discussions take place in the General Affairs Council (GAC) of EU Foreign Affairs ministers where Member States make their views known.

The proposal must first be passed by the European Parliament before being unanimously agreed by the Council (EU Heads of State and Government). Due to the requirement for unanimity, Member States through the Council have huge power.  Negotiations are led by the permanent President of the Council, Herman Van Rompuy as the real work lay in bridging the gap between Member States to reach collective agreement (reached last week). It will now go to the Parliament for consent.

Q5. I heard agreement wasn’t easy. How come?

In June 2011, the European Commission led by President José Manuel Barroso proposed a €1.025tn MFF but before that could come into force, the Commission, European Parliament and all 27 EU Member States through their Presidents/Prime Ministers (called the European Council) have to work together to achieve agreement on the political side. On the 7th of February/early morning of the 8th – the European Council finally agreed to a slimmed down €960bn MFF. This was not what most Member States, the European Commission or the President of the European Parliament (Martin Schulz MEP) most wanted. It now passes to the European Parliament for consent.

The MFF negotiations were mainly a tug o’ war between those Member States who contribute more than they get back (from benefits from the Single Market or rebates) and those Member States who need EU monies for infrastructural development or to boost their domestic economies . The two groups were as follows:

A. Friends of Cohesion – FOC

Goal: A big MFF with the same/more spending than before

  • States which see higher spending as benefiting them most and any reduction in this hurting them in equal measure.
  • 15 members mostly those new members who had joined in the 2000s plus Greece, Spain and Portugal.

B. Friends of Better Spending – FOBS  

Goal: A targeted, smaller, more efficient MFF

  • States who demand restraint and more efficient spending – mainly mature and stable economies.
  • 8 members in total.

The FOC had powerful friends in the President of the Commission José Manuel Barroso and European Parliament President Martin Schulz. They preferred the €1.025tn version and met a number of times to confirm/restate their position. The most recent ‘Joint Declaration’ by this group was in October 2012.

This excellent graphic from the European Commission/Financial Times sums up the positions well.

FT-budget-visual

In negotiations, the two opposing camps fought it out. While it might be argued the Friends of Better Spending ‘won’ the argument, the devil is in the detail which is yet to come. Although yes, the Friends of Cohesion have 15 members (of 27), their economies represent only 19.3% of total EU GDP while the ‘Friends of Better Spending’ represent a whopping 74%.  The economic argument speaks for itself.

Group

Source: Eurostat