The European competition authorities have ruled that Apple has wrongly benefitted from a tax deal with Ireland that allowed Apple to avoid almost all company taxes on its sales in Europe, the Middle East and Africa. The €13bn company income tax Apple is estimated to have saved on the taxes has been classified as state aid to industries. Hence illegally and to be refunded to the Irish government in the first instance- plus interest. No doubt other European governments and maybe even South Africa (assuming the Treasury is not otherwise engaged) will be looking to Ireland for their share of the taxes unfairly saved on the Apple income generated in their economies and transferred through their tax haven in Ireland.
The principle that taxes should be levied equally – at the same rate – on all companies generating income within a particular tax jurisdiction seems right. But it is a principle much more honoured in the breach than the observance. The effective rate of tax (taxes actually paid on economic income consistently applied) will vary widely within any jurisdiction, with the full encouragement of their respective governments. The company tax rate may vary from country to country – in Ireland it is a low 12.5% is levied on income that may be defined in very different ways from one tax authority to another from company to company.
A company may benefit from a variety of incentives designed to stimulate economic activity generally and capital expenditure in a particular location, perhaps in an export zone or a depressed region or blighted precincts of a city. They may utilise incentives to employ young workers or to train them. Investment allowances may far exceed the rate at which capital is actually depreciating to encourage capex. And governments may well collaborate in R&D that effectively subsidises the creation of intellectual property. A further important source of tax savings comes from the treatment of interest payments on debt. The more debt, the higher the tax rate, the less tax paid or deferred. And so every company everywhere (not just Apple) manages its own effective tax rate as much as the law allows it to do. It would be letting down its owners (mostly affecting the value of their shares in their retirement plans) if it failed to pay as little tax it can.
But then this raises the issue that Apple has already raised in tis defence as has the US government. How does one value the intellectual property (IP) in an Apple device? And who owns the IP and where are the owners of the IP located? In Europe – at the head office post box in Cork or in California where much of the design and research is undertaken? Operating margins are very large – maybe up to 90% of the sales price in an Apple store. What if Apple California charged all its subsidiaries everywhere heavily for the IP that accounts for the difference between revenues and costs? Profits and income in Europe and Africa could disappear and profits in the US explode given very high US company tax rates. The reason Apple does not or has not run its business this way is obvious enough; it has been able to plan its taxes and cash holdings to save US taxes.
The insoluble problem with taxing companies and determining company income is that company income is not treated as the income of its owners – or as it would be in a business partnership. In a partnership (which can be a limited liability one) all the wages and salaries, interest, rents, dividends or capital gains are treated as income and taxed at the individual income tax rates. Total taxes collected (withheld) by the partnership could easily grow rather than decline given that there would be no company tax to shield. And the value of companies absent taxes would increase greatly, calling for a wealth as well as a capital gains tax on their owners. The problem with company tax is company tax. The world would be better without it.1 September 2016