A new iPhone 7 without a headphone jack may be turning consumers’ heads, but global businesses might consider looking more closely at another recent development from Apple Inc. — the €13-billion in back taxes that Europe is trying to bite away from the company.
The bill, which amounts to approximately $18.9-billion (Canadian) in back taxes and interest, comes from a ruling by the European Commission (EC) that may have implications for other companies engaged in global commerce.
The EU’s salvo against Apple is part of a worldwide effort that began several years ago, seeking to crack down on “base erosion and profit shifting,” or BEPS. The crackdown has been slow – the Organisation for Economic Co-operation and Development (OECD) came up with a 40-page Action Plan back in 2013, when its member countries met in St. Petersburg, Russia – but it’s steady and it’s evolving. By last October the OECD’s initiative, which proposed 15 steps for countries’ tax policy-makers to take, grew to 1,600 pages.
“This process isn’t over yet,” says Peter van Dijk, partner and national tax policy leader at PricewaterhouseCoopers, in Toronto. The countries, which include Canada, involved in the OECD’s ongoing BEPS project make up 84 per cent of the total world economy.
Earlier this year, U.S. President Barack Obama’s administration introduced tax rules that effectively blocked a deal that would have allowed pharmaceutical giant Pfizer Inc. to merge with Allergan, a pharmaceutical company based in Ireland, criticizing companies “trying to get out of paying their fair share of taxes at home.
Canadian companies need to be aware of this issue, notes Cameron Graham, associate professor of accounting at York University’s Schulich School of Business in Toronto. The targeting of this profit shifting is leading countries around the world to review the tax treaties they have with neighbours and trading partners, seeking to plug tax-haven loopholes.
“Corporations have been almost immune to regulation by countries,” he says. “They move their jobs, they move their plants, they move their intellectual property elsewhere. It’s a hold they’ve had over individual nations.”
The profit shifting, or BEPS, that Dr. Graham is talking about is multinational companies’ practice of moving their profits to countries with the lowest corporate taxes. While multinationals often move their goods or services between headquarters and subsidiaries in different countries – a practice known as transfer pricing – BEPS is an offside version that raises eyebrows among tax authorities.
The EU ruled that Apple’s juicy tax benefits in Ireland were not simply a tax dodge allocating profits to a country with low corporate taxes. Apple’s deal was a form of state aid, the EU says. Apple’s 2011 corporate tax rate in Ireland was just 0.05 per cent. Both Apple and the Irish government contend that this low taxation rate is legal and they dispute the EU’s ruling.
The part that rankles European regulators is that Apple used the low Irish tax rate to reduce the huge profits it has reaped on its intellectual property – all those iPhones, iPads, MacBooks, iTunes sales, the cut it takes from App Store developers and so on.
Apple’s IP is held by a subsidiary called Apple Sales international (ASI), which belongs to a parent company called Apple Operations International (AOI) and is headquartered in Ireland.
“ASI uses transfer pricing to reduce the taxable profits on Apple’s international subsidiaries around the world,” explains Dr. Graham. “Basically, [ASI] charges international subsidiaries just enough for the use of Apple’s intellectual property to reduce their taxable income to zero. This puts all the profits in ASI. But under Irish tax law, it can pass those profits on to its ‘head office,’ which is AOI [in Ireland].”
He says this transfer of worldwide profits to a low-tax country, which is rankling regulators around the world, is an issue that should be monitored by multinationals, including those based in Canada. Dr. Graham says that a low corporate tax rate is not the only factor that a company needs to look at when locating its head office.
Though it will take years to go through appeals and become final, the EU’s ruling on Apple makes country shopping tougher anyway. European Competition Commissioner Margrethe Vestager, who announced the ruling in August, said that the EU’s “member states cannot give unfair tax benefits to selected companies – no matter if they are European or foreign, large or small, part of a group or not.”
In the EU’s view, if a huge company like Apple shifts its profits to Europe, those profits should be taxed at reasonable corporate rates and not be given a special deal – a form of “state aid,” as she put it — by any particular country in the EU.
It is not a new idea, Ms. Vestager added. “EU state aid rules have been in force since 1958 and apply to all companies that choose to operate in the EU Single Market,” she said, referring to the EU’s predecessors.
The dispute between Apple, the EU and Ireland is likely to become more complicated, as the plot thickens in Europe over the very future of the European Union. It comes at a sensitive time, as leaders across Europe figure out a way forward for the EU in the wake of the June 23 vote for Brexit, Britain’s move to leave.
And Ireland’s Finance Minister, Michael Noonan, said the ruling must be appealed “to defend the integrity of our tax system, to provide tax certainty to business, and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation.”
While Canadian companies that are doing business abroad, or are potential merger partners, try and determine how tax crackdowns might affect them, Canadian policy makers would do well to examine how our own tax policies affect business here, Dr. Graham says.
“Ultimately lowering taxation for corporations does not save jobs, [as] Canada’s corporate tax rates are already competitive.”
In 2011, the year of Apple’s now-disputed Irish tax bill, Canada’s corporate tax rates were 17 per cent lower than U.S. rates and half those of France.
“The better strategy is to have a fair taxation policy and deliver fantastic value,” Dr. Graham says, “with an educated workforce [and] health care, so Canada is a good place to do business.”Report Typo/Error
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