Apple - Ireland Tax Saga and Associated Issues
UPSC GENERAL STUDIES
PAPER II: Bilateral, regional and global groupings and
agreements involving India and/or affecting India's interests (Discuss the background that led to the emergence of BEPS Plan.)
PAPER IV: Ethical Issues in Corporate Governance (Are companies such as Apple correct in paying pittance for taxes, even if they manage to do this by legal means?)
Table of
Content
- Summary of Ireland-EU-Apple Taxation Saga
- What will happen hereafter?
- How is it that MNCs are able to undertake BEPS so easily to begin with?
- Origin of BEPS Plans
- What is BEPS?
- Consequences of BEPS
- Analysis of BEPS Proposals forwarded by OECD
- Challenges in Implementation of BEPS Proposals (in whatever form)
- BEPS & India
- Further Reading
- Bibliography
OECD estimates that tax avoidance through base erosion and profit
shifting has resulted in loss of tax revenue to the tune of $100-240 billion
every year - that is around 4-10% of global corporate income tax revenue. The
BEPS plan aims to improve transparency - for business and governments - by
introducing commonly agreed minimum standards for tax administration across
countries. This includes alignment of taxation with the location of economic
activity and value creation, reinforcing substance requirements in tax rules
globally.
 |
| Starbucks became the poster child for corporate tax avoidance in 2012 after details of its meagre tax contribution emerged. It was accused of using artificial corporate structures to shift profits out of the UK into lower tax jurisdictions. |
Summary of Ireland-EU-Apple Taxation Saga:
Autonomy to fix tax rule: Each EU
member has fiscal autonomy to fix its own tax rates and expenditures, and hence
its own tax rules.
Ireland fixes ultra-low rates to attract investments: Ireland had introduced the lowest corporate profits tax rate in the EU
in the hope of attracting foreign direct investment. Its success was
remarkable, with giants like Apple, Google, Facebook, Twitter and eBay all
setting up their EU headquarters in Ireland.
Apple sets base in Ireland: The Irish
government had allowed Apple to set up an Irish branch and an Apple head
office. Apple brought its international profits outside the United States of
America into Ireland and then split its profits into those showing in the books
of the Irish office and those in the books of the Apple headquarters.
Ghost company with almost all profit pays no tax: The Apple headquarters was a ghost company and the allocation of
profits was heavily skewed. For instance, in 2011, Apple made 16 billion euros
in profits, of which only about 50 million euros were allocated to the Irish
office. The Apple Headquarters was not liable to pay any tax since it was,
according to Irish statutes, a stateless company.
Abysmally low tax paid in Ireland: Apple
paid the local Irish corporate tax on its Irish office's profits. The Irish
office paid tax dues at the rate of 12.5 per cent. Hence the de facto tax rate
paid by Apple was 0.005 per cent, which turns out to be about 50 euros per million
euros earned.
European Union’s Stand: The EU is
claiming that this is tantamount to illegal government assistance to a
particular company in the form of a subsidy, creating a huge competitive
advantage for Apple. Hence the EU is asking that Apple pay $14.5 billion plus
interest to correct the unfair help.
What will happen hereafter?
Both the Apple Corporation and the
Irish government will fight the demand.
Apple claims it is fully obeying host
country laws.
The Irish government will defend its fiscal sovereignty.
The EU
will fight about discriminatory subsidies and the need for a level economic
playing field.
How is it that one global MNC after another are getting entangled in such disputes?
OR, How is it that MNCs are able to undertake BEPS so easily to begin with?
There are big loopholes in the global
system for taxing multinationals.
The reason is that the patchwork of national
rules and bilateral treaties governing how much tax companies owe, and to whom,
is horribly dated.
It was designed for the manufacturing age.
Business today is
increasingly digital, services-based and driven by intangible assets, including
rights to exploit intellectual property (IP), from patents to logos.
These are
easier than physical assets to shuffle from subsidiaries in high-tax countries
to those in low-tax ones. In short, they make the old rules easier to game.
Origin of BEPS Plans
Two years ago the Group of Twenty
(G20), a forum for big economies, asked the OECD to produce reforms aimed at
curbing these corporate-tax gymnastics and ensuring that multinationals were
taxed “where economic activities take place and where value is created”. This
exercise resulted in the emergence of BEPS proposal. They are the biggest
shake-up of multinational taxation since the basics of the current framework
were put in place in the 1920s.
What is BEPS?
BEPS refers to tax planning strategies that exploit
gaps and mismatches in tax rules to artificially
shift profits to low or no-tax locations where there is little or no
economic activity. Although some of the schemes used are illegal, most are not.
Illustration of above: Profits
are shifted from jurisdictions that have high taxes (such as the United States
and many Western European countries) to jurisdictions that have low (or no)
taxes (so-called tax havens). BEPS can be achieved through the use of
"transfer mispricing" (contracting between subsidiaries in different
jurisdictions at prices that are not arm's length).
Consequences of BEPS
Unfair advantage over domestic enterprises: This undermines the fairness and integrity of tax systems because
businesses that operate across borders can use BEPS to gain an unfair competitive
advantage over enterprises that operate at a domestic level.
Disincentives tax compliance: Moreover,
when taxpayers see multinational corporations legally avoiding income tax, it
undermines voluntary compliance by all taxpayers.
Development and Welfare activities of government stymied: BEPS is of major significance for developing countries due to their
heavy reliance on corporate income tax, particularly from multinational
enterprises.
The effect on countries hosting investment from multinational
companies is laid out in, for example, comments made by Oxfam South Africa to
the UN: "The negative impact of base erosion and profit shifting (BEPS) on
South Africa is evident in the escalating rates of poverty, inequality and
unemployment. This continues despite some impressive developmental strides
taken by the government. The reason for this is that only 1.6 out of 2 million
registered companies in South Africa are active and pay their tax
revenue".
Analysis of BEPS Proposals forwarded by OECD:
Good Parts
Article 13 of BEPS Project: Companies will be required to do more
country-by-country reporting of where they really earn their revenues, hold
their assets and employ people, and where they book their profits—information
that is often lacking in their published accounts. This will give tax
authorities (though not the public) a clearer picture of how much profit is
being shuffled around for tax purposes.
Article 5 of BEPS Project: National tax authorities will also
get more information on “comfort letters” that other countries’ taxmen have
provided to companies, blessing their tax arrangements.
Not so good parts
Interest Deductibility:
Subsidiaries operating in high tax regions transfer almost their profits to
corporate cousins in low tax regions. Thereafter the former run their
operations on debt taken from the latter. Debt has to be serviced by interest
payments which are further deducted from the revenues being generated in high
tax regions, thus resulting in further lower tax liabilities. (READ TWICE, COMMENT FOR FURTHER CLARIFICATION, IF REQUIRED)
Independent Entity Principle Maintained: Fictitious assumption that the various parent and subsidiary companies
in a corporate group act like separate legal persons that transact with each
other at arm’s length. They often do not, because transacting at non-market
prices, to shift profits to tax havens, was precisely why some subsidiaries
were set up. BEPS reforms seek to toughen the already complex rules on transfer
pricing, but in doing so they add to the complexity. Rather the independent
entity principle itself should be dropped and subsidiaries must be treated as a
single legal person. (READ TWICE; COMMENT FOR FURTHER CLARIFICATION, IF REQUIRED)
Challenges in Implementation of BEPS Proposals (in whatever form)
Governments are the ones who will
have to implement BEPS. Or not. “There is bound to be a significant variation
in the timing of implementation and interpretation of how the rules are applied.
Some of the proposals would have to
be approved by national parliaments, raising the bar higher still.
Some countries, including Britain,
with its new “diverted-profits tax”, have pushed through anti-avoidance laws
that may be hard to make fit with BEPS principles. That is probably because
they have little faith that other countries will implement them in a way that
produces a coherent international framework.
Only G-20 alone cannot implement BEPS
proposals. Other developing countries need to be included too as base can be
shifted to anywhere.
BEPS & India
As part of G20, India has been very
active in the Base Erosion and Profit Shifting (BEPS) project, working closely
with the Organization for Economic Cooperation and Development (OECD) officials
in preparing rules and participating in deliberations.
155 Indian companies would qualify
for country-by-country reporting that is likely to be the first visible BEPS
measure to hit corporates.
The concern among tax experts is the
low level of awareness among Indian companies on how the BEPS measures will
impact their business operations and the need for increased compliance.
Tax experts say the success of
measures against BEPS will depend on the manner in which they are implemented.
There has to be a balance between competitiveness and compliance. Driving that
balance is the challenge for tax administration. If the measures are
appropriately implemented then they are not expected to negatively impact the
investment climate.
Associated Issue
What is Multilateral Convention on Mutual Administrative Assistance in
Tax Matters?
It is seen as the most powerful
instrument against offshore tax evasion and avoidance.
The MAC is the most comprehensive
multilateral instrument available for all forms of tax co-operation to tackle
tax evasion and avoidance, and guarantees extensive safeguards for the
protection of taxpayers’ rights.
It was developed jointly by the OECD
and the Council of Europe in 1988 and amended in 2010 to respond to the call by
the G20 to align it to the international standard on exchange of information
and to open it to all countries, thus ensuring that developing countries could
benefit from the new and more transparent environment.
Today it is the world’s leading
instrument for boosting transparency and combating offshore tax evasion and
avoidance.
MAC also serves as the premier
instrument for implementing the new Standard for Automatic Exchange of
Financial Account Information in Tax Matters developed by the OECD and G20
countries.
It can also be used to swiftly implement
the transparency measures of the OECD/G20 Base Erosion and Profit Shifting
(BEPS) Project such as the automatic exchange of Country-by-Country reports
under Action 13 as well as the sharing of rulings under Action 5 of the BEPS
Project.
Further Reading
Vodafone Tax Issue - India
Bibliography
- OECD Website (Accessed on: 16.09.16)
- http://www.oecd.org/ctp/beps-about.htm
- The BEPS effect: Is India ready?
- http://www.business-standard.com/article/opinion/the-beps-effect-is-india-ready-115101800760_1.html
- New Rules, Same Old Paradign
- http://www.economist.com/news/business/21672207-plan-curb-multinationals-tax-avoidance-opportunity-missed-new-rules-same-old
- Taxing Issue
- http://www.telegraphindia.com/1160913/jsp/opinion/story_107753.jsp#.V9fZZJh97IU
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