Apple ruling - the political
economy of tax avoidance
The ruling by the European Commission (EC)
- that Ireland has facilitated Apple Inc in avoiding billions of euros
in taxes on its EU based operations - serves to highlight the nature of
the Irish state and its role in the global economic and political system.
This was illustrated most clearly in the
reaction of the Irish political class. In this their identification
with the US corporation was total. Statements from finance minister
Michael Noonan and Apple Inc CEO Tim Cook - denying any special tax arrangement
was in place or that any taxes were owed - could almost have been delivered
by either. Though what did particularity jar was the
self-righteous tone adopted by the politicians who took offence over the
Irish state being compared to a tax haven while at the same time reassuring
US corporations that such practices would continue.
Of course the disparity between what is
said and what is done has long been a feature of public life in Ireland.
In this case the words of Irish politicians are thrown into sharp relief
by the report of the three-year long investigation that accompanied the
EC ruling which detailed the workings of the Apple scheme.
The EC report found that a number of tax
rulings had enabled Apple to substantially lower the amount of tax it paid.
While the headline rate of corporate tax in Ireland is 12.5% the company
had paid just 1% on its European profits in 2003, and this had diminished
further to about 0.005 percent by 2014. Over that entire period,
Apple paid just €50 million in tax. The EC calculated that Ireland
had granted undue tax benefits of up to €13 billion to Apple.
Apple Inc operated this tax avoidance
scheme using two of its Irish registered subsidiaries - Apple Sales International
(ASI) and Apple Operations Europe - which hold the intellectual property
to Apple products and brands outside of North and South America.
ASI is responsible for buying Apple products from equipment manufacturers
around the world and selling these products in Europe. The sales
operation are set up in such a way that customers are contractually buying
not from the retailers that actually sold
the product but from the Ireland based ASI. In this way Apple recorded
all sales, and the profits stemming from these sales, directly in Ireland.
When these profits got to Apple’s subsidiaries
in Ireland they were then transferred to a “head office” within these
companies where they remained untaxed. These "head offices" were not based
in any country and did not have any employees or own premises. Under
a “cost sharing” agreement direct payments were also made to Apple Inc
in the US. It is claimed that such payments are for research and
development conducted in the US on behalf of the Irish companies.
These payments, which ran to billions of dollars, were deducted from the
profits recorded in Ireland. The consequence of all this is
that Apple paid virtually no tax in Europe.
On paper Apple has cash or near equivalents
of $206bn on its balance sheet and about $181bn was apparently held overseas
— mainly in Ireland. However, in reality there
is no Irish money hoard. The “head offices” of the Irish shell companies
are a compete fiction and the money attached to them is either transferred
to banks in the US or used to buy US Treasury bonds.
Of course Apple is not just an isolated
case but part of broader strategy of attracting of attracting foreign capital
to Ireland. Successive Irish governments have used the tool of low
corporation tax as a means of attracting investment. And while this
policy had been in place since the late 1950’s it reached its height
during the period of the Celtic Tiger in the 80’s and 90’s. However,
the nature of capital investment has changed in more recent years – moving
away from production towards financial speculation and tax avoidance.
This later form of investment accelerated rapidly in the 2000’s and is
Over recent decades about 31 publicly
US listed companies have changed their tax domiciles with about half of
them becoming "Irish." Today Ireland hosts over half of the world’s
top 50 banks and half of the top 20 insurance companies. Fifteen of the
20 “Irish” companies on the listed Nasdaq stockmarket are American.
In 2013 Ireland hosted nearly 14,000 funds (6,000 of these were Irish-domiciled)
administering an estimated €3.7 trillion— that was up from $840 billion
a decade earlier.
The watershed year for this trend was
1999 when the Irish government introduced an exemption for US companies
that allowed them to use Irish offshore companies without having to pay
tax in Ireland. The effect of this was dramatic. Over the next
decade profits of Irish affiliates of US companies doubled from $13.4bn
to $26.8bn as they became the most profitable in the world. In 2010,
the profits per employee at US-owned companies in Ireland were at $970,000
while the corporate tax paid in Ireland was about $25,000 (€19,000).
One of the companies to take advantage
of Irish tax arrangements was Microsoft. In this tax avoidance scheme one
its Irish subsidiaries - Round Island One Limited – came to control more
than $16bn in Microsoft assets. Virtually unknown in Ireland,
on paper it quickly became one of the country's biggest companies, with
gross profits of nearly $9bn in 2004. Through another Irish shell
firm, Flat Island Co., Round Island licensed rights to Microsoft software
throughout Europe, the Middle East and Africa. By routing license
sales through Ireland and Round Island Microsoft paid a total of
just under $17m in taxes to about 20 other states that represented more
than 300m people. This is the tax avoidance model that became known
as the “Double Irish”.
Another “Double Irish” scheme saw an Irish
subsidiary of Facebook shift profits of €1.75 billion in 2012 to another
subsidiary in the Cayman Islands and post a pre-tax loss of €626,000
instead. Google dodged $2 billion a year in taxes using a “Double Irish”
scheme via the Netherlands and Bermuda. King Digital Entertainment
Plc, the maker of the popular Candy Crush Saga smartphone game, which has
a market valuation of $5bn, is also registered to an Irish holding company.
Fake "Irish" companies have a total payroll of over 600,000 which is more
than three times the head count of all foreign-owned exporting firms in
Ireland. Medtronic, together with Eaton Corporation, which became
Irish in 2012, together employ 180,000 while Accenture,
the US consultancy, which changed its tax domicile from Bermuda in 2009
to Ireland - - to avoid the tax haven tag -- has a global payroll of 275,000.
For a long time the issue of corporate
tax avoidance was a taboo subject in Ireland. It really only came
to public attention following a US senate investigation into Apple’s tax
affairs in 2013. Throughout this period – as they still do today
- political leaders and officials maintain the deception that the Irish
state does not facilitate tax avoidance. However, their actions have
always been far from their words. In 2008, the then finance minister
Brian Cowan told Daily Telegraph that Ireland would not encourage "brass
plate" operations, and that he wanted to see "real substance in investment”.
Yet the same edition of the newspaper reported that the IDA was actively
pitching deals to UK companies to switch their tax domiciles to Ireland.
In 2013, Labour’s Brendan Howlin made
his now infamous statement that: “The Irish tax rate on corporate
business is very clear - - it’s 12.5% - - we don’t have any brass plate
companies like others do have. The tax rate in Ireland is what it says
on the tin.” Yet just two years earlier Arthur Cox, Ireland's biggest
corporate law firm, the main external adviser to the Department of Finance
during the financial crisis, produced a briefing paper that claimed
that the effective corporation tax rate could “be reduced to as low as
2.5% for Irish companies”.
A consequence of a strategy so dependent
on tax avoidance activities is a grossly distorted economy. The disparity
between reported economic output and actual production in Ireland has become
so great that official statistics are now the subject of ridicule, with
the latest batch of data being dubbed as “Leprechaun economics” by the
economist Paul Krugman. According to these figures the Ireland’s GDP “grew”
by a staggering 26.3% in 2015; exports rose 34% per while investment was
up 27 per cent. In this year alone Ireland’s stock of productive assets
increased by €300 billion.
Based on these figures the average worker’s
annual income would have reached €130,000. Of course it hadn’t
for these figures in no way reflected what was going on in the Irish economy.
What is growing is not the economy but the amount of profits from
multinationals that are being transferred through Ireland for no other
purpose than tax avoidance. Ministers brag about rising exports
as an indication of success but €45bn or almost half of service exports
derive from tax avoidance schemes. So in 2013, Google, Microsoft
and Facebook alone, accounted for €35.5bn or 39% of Ireland's services
exports. The same goes for manufactured exports, with “contract manufacturing”
- i.e. products produced outside of Ireland - accounting for the bulk of
exports in this category. A startling example is Dell Products
Ireland, which despite closing its operations in Limerick in 2009,
remains one of Ireland's biggest exporters and manufacturers by booking
the output of its Polish plant here.
To justify this strategy successive Irish
governments have claimed that there is a benefit to the Irish people.
This is not true. We are told that the economy is recovering
– and on the latest figures it is booming – but it is bypassing the vast
majority of the population. The economy outside of the multinational
sector is struggling while conditions for workers continue to stagnate.
It is also the case that size of the proceeds from multinational activity
that goes to Irish people in the form of wages and the revenue raised through
corporation tax is small - just a fraction of what goes to the shareholders
of these companies.
On some social indicators - such as housing
– the situation is deteriorating. Much is this is a result of the
policies of austerity that have been ongoing since the financial crash
- itself another example of a distorted economy that came in the form of
a credit fuelled property boom followed by a bust and a bank bailout.
Moreover, the so called recovery is dependent on those policies continuing.
The sacrifices made by workers during the period of crisis – and which
many believed were temporary – are now being made permanent.
On a broader level the Apple ruling and
the reaction to it is another illustration of the growing tensions between
different political and economic blocs in the world. The dispute
over where Apple should pay its tax is a struggle between the US and the
EU over which states have the right to lay claim on that revenue.
It is also related to the competition between corporations and the efforts
by European owned companies to end the advantages gained by their US rivals
through tax avoidance. Indeed, the EC ruling on Apple was on the
basis of competition law. Commentators who dismiss this
as just a cover for attacking Ireland’s tax system ignore the importance
of competition as a dynamic within capitalism. In the current era
this competition is not just between individual capitalists or corporations
or even capitalist states but between capitalist blocs that encompass
multiple states. We see this in the tensions and conflicts
that have arisen in the various trade negotiations that are ongoing between
North America, Europe and Asia.
This competition is also at work on a
military level. This is evidenced in the coup in Ukraine and the
attempt at regime change in Syria and most clearly and directly in the
build up of US forces on the borders of Russia and off the coast
of China. This is causing tension not just with those states that
that are being targeted by the US but also between the US and its allies
(particularly in Europe) who would be most affected by conflict in these
regions. In this field also the Irish state plays the role of facilitator
for imperialism. As with its official rejection of tax
avoidance its constitutional adherence to neutrality is no more that words
that have been disproved by the sight of US military personnel and equipment
transiting through Shannon airport.
Ireland is a country that is completely
dominated by imperialism. This is the fundamental fact that is exposed
by the EC investigation of Apple’s tax arrangements. Unfortunately
this is ignored by many on the socialist left who claim to represent an
opposition. For the most part their response has been to draw up
a wish list of public services the potential €13bn windfall could
be spent on. In reality the windfall is unlikely to arrive and even
it did an Irish government would be unlikely to spend it improving the
health service or reducing homelessness.
The biggest weakness in these types of
argument is that they implicitly accept the role that the Irish state is
playing in the world - that is all right for Ireland to facilitate tax
avoidance by US corporations as long as Irish workers get a slice of the
action. These are reformist arguments that really aren’t so far from
removed from those of the government. They are also nationalistic
in their assumption that Irish workers should have first claim on any recovered
tax revenue. But why would their claim be any greater than that of
workers in China where Apple products are manufactured or workers
in other European sates where the products are sold? It could be
be argued that workers in Ireland - as citizens of the state that facilitated
tax avoidance - have no legitimate claim at all.
The outworking of these reformist arguments
can only lead to a scenario in which workers of different nations are encouraged
to identify with their own state as they are pitted against one another.
That the socialist left should deploy them shows the degree to which they
have accommodated themselves to the dominant ideologies in Irish society
- particularly that of social partnership. Within the confines to
this framework the foundations of capitalist rule in Ireland - imperialist
domination and the co-option of the trade union movement - are ignored
and therefore go unchallenged.
The coming years are likely to witness
great upheaval as capitalism and bourgeois politics continue
to decay. We have already seen the precursors of this with the Brexit
vote and the rise of nationalism and racism across Europe and in the US.
Ireland will not escape any of this, and given its precarious position
of balancing between the EU and US, will likely be one of the states where
the consequences are felt most severely.
In this scenario Irish workers could see
their conditions deteriorate even further. This is not inevitable
but for a different scenario to unfold the working class will have to renew
itself in terms of politics and organisation. The current prevailing
ideas that workers share a common interest with the capitalist class or
that their well being is bound up with that of US corporations such as
Apple have to be overturned.