US Enabled Apple’s €13bn Tax Avoidance

Over the past 15 years, Ireland has been continuously labelled as a tax refuge, charged with fostering large-scale corporate tax evasion, even of pilfering tax income from its neighbouring countries. The European Union’s Court of Justice (ECJ) tax decree against Apple appeared to reinforce the conception that Ireland offered the tech giant preferential tax agreements in exchange for significant investment in the country, acts that the European Commission indirectly tried as violations of EU state aid system.

Nonetheless, this portrayal is only a partially accurate account of the events. Apple, and several similar tech corporations, took advantage of not so much the Irish tax structure, but disparities within the US’s own system. These inconsistencies resulted in the offshoring of hundreds of billions of business earnings that could have otherwise been added to US tax revenue.

The US tax framework essentially enabled Apple to make its main foreign subsidiary vanish for tax reasons. The final technique in this scheme was to position a branch of this subsidiary in a low-tax jurisdiction and channel global sales through it. This is where Ireland’s role lies, although it played a relatively minor part in this larger scheme.

Potentially, Ireland’s prime wrongdoings were maintaining the so-called “double Irish” structure, which let firms be registered there while being tax residents elsewhere, for an extended period and then offering those utilising it a notably lenient period for phasing it out. Former Finance Minister Michael Noonan declared the termination of this structure in 2015 but allowed companies a transition period till the end of 2020.

However, the “double Irish”, which became a subject of global censure, was not specifically conceived as a tax dodge. Under classical corporate tax residence principles, where a firm is administered and supervised is a critical factor. Consequently, if a company is set up in Ireland but administrated from a different location, it was considered as a tax resident in the other territory, not Ireland. This meant Ireland’s Revenue didn’t have the power to tax the majority of Apple’s foreign profits under its own rules.

The principle of administration and supervision determining corporate tax residency was not exclusive to Ireland. Many tax systems included, and still do include, similar guidelines.

The question is still up in the air whether tax evasion tactics by tech giants Apple and Google were carried out with the complicity of US regulatory bodies who might have been content to see their most successful corporations thrive. These tactics, which had not been questioned for a considerable length of time, do not appear to have changed dramatically despite recent declarations, particularly from ex-US president Donald Trump.

Moreover, the so-called Gilti tax rate, introduced by Trump in 2017 with the aim of targeting gains from intellectual property such as patents, licenses and trademarks, is reputedly too intricate to implement and faces compliance problems.

Ireland, which receives substantial foreign direct investment (FDI) from Washington, isn’t expected to vigorously defend itself in this global tax clash. Those who voiced disapproval of the government’s choice to support Apple in contesting the commission’s case require a reality assessment. Supporting the Commission against Apple would have first required agreeing that Ireland violated state aid regulations and that its Revenue department incorrectly executed tax regulations, suggesting competency concerns.

This even ignores the potential fallout from opposing the state’s largest tax contributor and one of Ireland’s chief employers, arguing it was taking advantage of a loophole in the US tax system.

Many were taken aback by the unambiguous decision of the ECJ. The communications team handling EU competition commissioner Margrethe Vestager was reportedly ready to issue a very different press release, assuming the ECJ would be indecisive and refer the case back to the lower court.

While the decision was oft-labeled as a “reputation headache” for Ireland, business insiders maintained that it wouldn’t likely impact FDI in the country. They added that the decision provided a ‘sense of closure’ to a case that seemed to drag on indefinitely.

Michael Lohan, IDA CEO, pointed out that even though the verdict is historically significant, it has not been a topic of concern among client companies. He shared at the Dublin Economic Workshop in Wexford on Friday that “Clients value the certainty that Ireland presents. They acknowledge our full compliance from an OECD perspective and are focused on the future.”

Naturally, that would be his response. However, the real issue for Ireland isn’t the complexities of global tax – a system that, in fact, may secure higher corporate tax returns once a baseline worldwide rate is implemented and certain capital allowances expire. The actual quandary lies in whether Ireland, in light of its infrastructural deficiencies including housing, transportation, energy, and water, can maintain its appeal to firms intending to invest. This is further complicated by its notably dismal track record in handling large-scale projects.

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