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Explainer: Why doesn't the government want Apple to cough up extra taxes?

For the government, it’s all about appearances.

Europe Greece Bailout Finance Minister Michael Noonan ahead of a meeting in Brussels. Source: Virginia Mayo/PA Images

FOR AT LEAST the past three years, Ireland has been trying to fight back against perceptions that the country is a soft touch on tax for multinationals.

The charge was laid out in a very public way in the US Senate when Ireland was labelled a “tax haven” in 2013. Red faces and many a denial followed.

Now, if Apple is slapped with a multi-billion euro Irish tax bill by the European Commission – which is reportedly going to happen tomorrow morning – then the international backlash and consequences could be harder to smooth over.

It is for this reason that the Irish government is hoping that any tax bill is at the lower end of the vastly different estimates that have been predicted.

It’s believed that the windfall for the exchequer could amount to anything from hundreds of millions of euro to €19 billion.

But how did we get to here?

Ireland is called a “tax haven”

Travel Neighborhoods Capitol Hill The Capitol Building in Washington. Source: J. Scott Applewhite

At that Senate subcommittee hearing in May 2013, Apple CEO Tim Cook was grilled on the company’s tax practices. The company was practically accused of taking money from US schoolchildren in avoiding $9 billion in US taxes in 2012.

Ireland was blamed by US politicians for facilitating this and Cook was asked to explain why his firm transferred 64% of its income to Irish subsidiaries

In essence, the world’s most valuable company was being blasted by the US government and Ireland was caught in the middle.

This was big news and had the Irish government scrambling to reassure multinationals that basing themselves here doesn’t carry with it the risk of bad headlines.

But these headlines continued.

Sweetheart deal

In September 2014, the news broke that the European Commission had made a preliminary finding that Ireland had given illegal state aid to Apple for almost 20 years.

Investigators found that Apple’s tax dealings in Ireland broke competition rules by providing the corporation with a “selective” advantage that was “obtained every year”.

The investigations related to the years 1991 to 2007 and further claimed that Apple gained a competitive advantage from what amounted to subsidies from the Irish State.

Following that preliminary decision, Ireland was asked to give further details about Apple’s financial accounts.

Specifically, information on cost sharing agreements between the parent company Apple Inc and two Irish subsidiaries, Apple Sales International (ASI) and Apple Operations Europe.

In a nutshell, Apple was accused of passing billions in sales revenue through ASI after Ireland agreed to fix ASI’s taxable income - the amount it attributed to its local operations.

In 2012, for example, ASI told US authorities its sales revenue was $63.9 billion (€50.9 billion) while Ireland agreed to fix its taxable income that year at between €50-€60 million.

The US Senate was told that its Irish subsidiaries paid an effective tax rate of around 2%, against the headline rate of 12.5%.

Now, two years after their preliminary findings, all the indications are that the final decision will back up what was found in 2014. This is expected to be delivered tomorrow.

Apple-$700 Billion Apple has had a presence in Ireland since the 1980s. Source: AP/Press Association Images

Back taxes

If that does prove to be the case, Apple will be assessed a back tax bill that will ultimately be calculated by the Revenue Commissioners in Ireland.

JP Morgan had previously warned that Apple’s tax bill could amount to €19 billion but it is more likely that the figure will be much lower.

Ireland is expected to appeal the ruling either way because it denies offering Apple a sweetheart deal.

Any appeal would mean that the process drags on for several more years during which time the tax payment could be held in an escrow account, a sort of halfway house, pending the appeals.

Before that, however, the government is hoping that the tax bill will not be so large as to whip up a firestorm of international interest.

Read: Europe accused of ‘undermining the global tax system’ as Apple faces billions in Irish back-taxes >

Read: US companies keep $2.1 trillion profits in overseas tax havens (and Ireland has its fair share) >

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About the author:

Rónán Duffy

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