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Apple in the Hot Seat

Posted on August 22, 2016 by Stuart Gibson

 

In a recent widely publicized interview, Apple CEO Tim Cook discussed the company he runs, as well as his personal life. The public saw a serious, yet sensitive businessman trying to carry on the legacy of innovation left by his predecessor, the late Steve Jobs. And while most readers may have been mesmerized by Cook's story of personal and business success, tax professionals focused on some of his more incredible claims about Apple's global and U.S. tax strategies.

Most outrageous was Cook's claim that Apple's cozy tax arrangements with Ireland were not part of some calculated strategy. Tax professionals viewed with extreme skepticism his statement that "we didn't look for a tax haven or something to put [profit] somewhere." In fact, all but the most naïve observers would be hard pressed to accept Cook's suggestion that Apple just happened to arrange for the bulk of its sales to be booked through a subsidiary in Ireland, whose 12.5 percent corporate tax rate attracts other multinationals whose CEOs are far more candid than Cook about their tax strategies.

It would appear that the European Commission has not been hypnotized by Cook's slick PR or his fancy linguistic footwork. Its Directorate General for Competition, headed by Margrethe Vestager, has been examining Apple for more than a year, looking specifically into whether the company's sweetheart transfer pricing arrangements with Ireland violated the state aid provisions of the Treaty on the Functioning of the European Union. Vestager is expected to release the commission's findings soon. And while many observers expect her to rule against Ireland, it remains to be seen how much in illegal state aid the commission will direct that country to recover from Apple. It is entirely possible that number could reach 10 figures.

It is one thing for Apple to shift profits out of the United States to avoid paying 35 percent in U.S. corporate income taxes on billions of dollars in annual profits. It is quite another for Cook to ask U.S. taxpayers to foot the bill for his company's successful efforts to wrangle tax concessions from Ireland over the past 10 years. Yet that is precisely what he is poised to do should the commission direct Ireland to recover 10 years' worth of illegal state aid it granted to Apple.

It is widely expected that Apple will seek to claim U.S. foreign tax credits on whatever amount of state aid it eventually repays to Ireland. Andrius Bielinis analyzes the commission's state aid rulings involving Fiat Finance and Trade and Starbucks in the context of the U.S. foreign tax credit. It is entirely possible that not only will Ireland reap a windfall from having provided illegal financial aid to the company Cook calls "the largest taxpayer in the U.S.," but American taxpayers will end up footing the bill.

One way that tax administrators can unearth and investigate abuses in international taxation is by requiring taxpayers to make meaningful disclosures of their structures and tax arrangements. Another is by exchanging information with their counterparts in other countries. The OECD's base erosion and profit-shifting project seeks to institutionalize these practices through its plan for filing and exchanging country-by-country (CbC) reports. But some nongovernmental organizations say the OECD's plan for transparency does not go far enough. These NGOs have called for CbC reports to be made public. Mindy Herzfeld reviews the NGOs' unsuccessful efforts to convince the G-20 and IRS to require public CbC reports. She explains how the same NGOs that lost that battle may yet succeed with financial and securities regulators like the Financial Accounting Standards Board and the SEC.


Stuart Gibson is editor of Tax Notes International.