The Taxation of Apple - is it right?

Is it right that Apple pay 0.005% corporate tax when it should be paying 12.5%?

Why has Apple paid corporation tax of only 0.005% in 2014 when the rate of tax in Ireland is 12.5%?

It is well established that companies can and do locate their head office to jurisdictions which charge a low rate of taxation. Ireland and Cyprus have the lowest corporate tax rates in the EU at 12.5% and attract a lot of business as a result – but this is not the point.

How did Apple get away with paying only 0.005% tax and not 12.5% while based in Ireland? Is it due to some selective treatment of Apple by Ireland or simply a legal provision in the Irish law of which Apple has taken advantage?

In June 2014 the European Commission wanted to get to the bottom of this and so launched an in depth EU ‘state aid investigation’. Under these EU rules, it is illegal for a country to give selective tax treatment to a company which gives significant tax advantage to that company over other businesses subject to the same national taxation rules.

The Commission after an extensive investigation concluded that selective tax treatment was given to Apple by Ireland and ordered Apple to pay Ireland the unpaid taxes for the previous ten years of EU 13 billion.

Ireland (which is debt ridden) and Apple will appeal the decision. Ireland and Apple argue that special treatment was not given, Apple merely used the laws in Ireland in a proper way to minimize the corporate tax payable. So what is going on?

When you buy an iphone in the Apple Store in Regent Street, you enter into a contract to buy the phone direct from Apple Sales International; an Irish registered and resident company. The Apple Store in Regent Street is merely a representative office of the Irish company.

Apple Sales International and Apple Operations Europe, its sister company are both owned by Apple Inc, which is a US resident company. Between them they own the rights to the Apple Intellectual Property which gives them the right to sell Apple products anywhere outside North and South America. The monies you pay to the Apple Store in Regent Street, attract VAT which is paid to the UK Government at 20%, a small proportion of the monies paid will be kept by the Apple Store as compensation for making the sale and the balance is paid to Ireland.

In Ireland a significant proportion of the purchase price, $2billion in 2011, is paid to Apple Inc. as funding for its research and development and makes about half of its total R&D funding requirements. This payment is tax deductible by Apple Sales International and not taxable in the US.

None of this is contentious.

What bothers the European Commission is that in Ireland the majority of the profits of Apple are then allocated away from Ireland to a ‘head office’ which Apple claims is where its mind and management reside. Although the activities of the head office consist only of occasional board meetings, it is at these meetings that decisions are taken which decide the dividend policy, cash management, and administration arrangements of the non-American business. The mind and management of the company is not based in any country, does not have employees and neither does it own any premises. The profits allocated to this part of the business are therefore not taxed anywhere, leaving only a fraction of the profits in the ‘Irish Branch’ subject to tax in Ireland at 12.5%.

In 1991 Ireland gave a ruling supporting Apple’s proposition, which in 2007 was replaced by a similar second tax ruling to the effect that the allocation was within its tax rules. In 2015, this tax ruling was terminated when Apple Sales International and Apple Operations Europe changed their structures. So the taxes under dispute are historic and not ongoing.

Apple Sales International recorded profits of EU 16 billion, but under the tax ruling only around EU 50 million was taxed in Ireland, leaving EU 15.95 billions of profits allocated to the ‘head office’ and not taxed. This is why the tax rate for the Apple is as low as 0.005% in 2014.

The Commission claims, that the allocation of profits in Ireland has no factual or economic justification and therefore for Ireland to accept it amounted to a selective advantage given by Ireland to Apple.

The EU Commission is not just focused on Apple. In October 2015 it concluded that Luxembourg and Netherlands granted selective tax advantages to Fiat and Starbucks, and investigations are still ongoing with Amazon and McDonald’s.

In June 2015, the European Commission unveiled its ‘Action Plan for fair and effective taxation: a series of initiatives which aims to make the corporate tax environment in the EU fairer and more efficient. It includes the automatic exchange of information on tax rulings.

Given that Apple has since 2015 changed its internal structure, and the EU is cracking down on these arrangements, in future it will be the headline tax rate of the jurisdiction which will determine the tax rate and not complex structures which Apple has until recently enjoyed. It is hardly surprising therefore that Theresa May has already announced a likely drop in corporation tax rates to 15% - to make it more competitive for multinational companies to locate to the UK!

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