It's not a recent development for tax offices to look behind sham/artificial
structures in dissecting schemes to reduce tax. In recent years the abuse in the
CT area has also focused on sham arrangements.
The House of Commons Public Accounts Committee in 2013 rejected Google's
argument that sales of corporate advertising were completed and thus invoiced in
Dublin as Google UK staff only partially handled sales issues with
clients — "an argument which we find deeply unconvincing on the basis of
evidence"; "Google has also conceded that its engineers in the UK are
contributing to product development and creating economic value in the UK";
"HMRC needs to be much more effective in challenging the artificial corporate
structures created by multinationals with no other purpose than to avoid tax."
Edward Kleinbard, professor of law and business at the University of
Southern California, is a former chief of staff of the US Congress's Joint
Committee on Taxation, and he testified at the US Senate hearings on Apple in
May 2013. Prof Kleinbard wrote this week on The European Commission ruling that
Ireland provided Apple with illegal state aid:
Tax here was just the instrument for delivering state aid. The US
Treasury is expert in detecting tax shams used to disadvantage US tax
collections, and should have recognized that the EC similarly is making a
sham arrangement argument.
Kleinbard says Jack Lew, US Treasury secretary, and Apple
are wrong when they argue that only the
Internal Revenue Service has a legitimate claim to Apple’s $230bn in largely
untaxed offshore cash, technically in Irish offshore shell companies but
actually in the United States. "This is a misstatement of US law."
Apple says 65% of its earnings are foreign-related but it also contradicts
itself by saying most profits are generated in the US. However, the the profits
it books overseas puts overseas tax offices other
than the IRS ahead in the taxing queue. Apple settled a tax fraud case last
year with Italy and there are more to come.
For nearly 100 years the nation has followed the principle that the
jurisdiction in which income arises (the “source jurisdiction”) has priority in
taxing cross-border income. To prevent double taxation, a US company can claim a
credit against its US tax bill for levies already paid to source countries.
So US tax on a dividend repatriation is a residual liability of the company,
payable only to the extent that source countries have not first taxed the
income.
Kleinbard
says the United States aids and abets US multinationals in their stateless
income tax gaming, whose object is to skim profits from countries where income
actually is earned, and then to deposit those profits in a zero or near zero tax
receptacle. That is the source of Apple’s offshore cash hoard totaling more than
$200 billion.
Distilling
the facts to their essence, in Europe, Apple has deployed the almost farcical
charade that its income from retail sales in Germany, for example, really is
earned by an Irish subsidiary that hovers just beyond the German border, doing
all the value-added work to offer Apple products to German retail customers, but
never quite putting a foot down in Germany.
For the United
States, the game is different, but just as artificial. Apple’s plan, authorized
in broad outline by IRS regulations, was to create an Irish subsidiary, stuff it
with seed money, and to pretend that the subsidiary had its own independent
business agenda. Apple Cupertino and Apple Ireland then entered into an “arm’s
length cost sharing agreement” of the sort that two independent drug companies
might employ to jointly develop a new drug.
The Irish shell companies were available to Apple for massive tax avoidance
with reported sales in several countries artificially suppressed. The EC views
the structure as a sham and it's unlikely that it was commonly available to
other companies.
What
makes this a state aid case rather than a tax one is that there is no plausible
explanation for Ireland ceding its tax authority other than its understanding
that jobs would follow. The parties reverse engineered a methodology to yield an
agreed minimal tax take.
Edward Kleinbard:
Apple’s Ireland tax avoidance should spur major reforms
Fortune magazine:
Nearly 50,000 people have signed two
petitions calling on the US Treasury Department to launch an investigation
into Apple’s tax practices.
Finfacts:
Apple's stateless firm tax claims likely broke Irish law
Apple's tax woes as Irish conventional wisdom fails again
Ireland's Apple tax appeal to European court likely to fail
EU vs Apple: Ireland's €13bn tax windfall will be shared
How Apple found a bigger tax loophole than the Double Irish
The fable of the frog and Ireland's response to Brexit
Apple's foreign tax rate fell from 12 to 2% in a decade
Top 10% rich world incomes up 40% in 20 years as growth slowed
Italy's lost decades but average Irish standard of living lower
