2016 11 – Apple Avoiding Taxes

Biting the state that feeds it: the Apple corporation

by Mark Langhammer

The Apple tax row in Ireland raises more questions about the predatory instincts of modern day global corporations. Apple was ordered to pay €13bn after the European Commission ruled that Apple received preferential and illegal help through tax breaks with Ireland in breach of EU state-aid rules to facilitate the global corporation. The tax rationale behind the Irish state’s orientation is long-standing and examined by Labour Affairs sister publication, the Irish Political Review (IPR, October 2016).  This article focuses less on the EU or Ireland, but on the Apple corporation and its parasitical approach to tax, outsourcing and R&D (research and development).

The Guardian of 30th August 2016, reported:

“Apple has warned that future investment by multinationals in Europe could be hit after it was ordered to pay a record-breaking €13bn (£11bn) in back taxes to Ireland. The world’s largest company was presented with the huge bill after the European commission ruled that a sweetheart tax deal between Apple and the Irish tax authorities amounted to illegal state aid. The commission said the deal allowed Apple to pay a maximum tax rate of just 1%. In 2014, the tech firm paid tax at just 0.005%. The usual rate of corporation tax in Ireland is 12.5%.

“Member states cannot give tax benefits to selected companies – this is illegal under EU state aid rules,” said the European competition commissioner, Margrethe Vestager, whose investigation of Apple’s complex tax dealings has taken three years. Vestager’s ruling prompted an angry response from Apple and from Ireland and is likely to spark a political row between the US and the EU. The US Treasury said the ruling threatened to damage “the important spirit of economic partnership between the US and the EU.”

In a letter to customers, Apple’s chief executive, Tim Cook, claimed the ruling could deal a blow to big companies investing in Europe: “Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe. Using the commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.”

The commission said Ireland’s tax arrangements with Apple between 1991 and 2015 had allowed the US company to attribute sales to a “head office” that only existed on paper and could not have generated such profits. The result was that Apple avoided tax on almost all the profit generated from its multi-billion euro sales of iPhones and other products across the EU’s single market. It booked the profits in Ireland rather than the country in which the product was sold.

Apple and Ireland said they intend to appeal against the ruling. The figure of €13bn plus interest is 40 times the previous record for such a case and the equivalent of the annual budget for Ireland’s health service. Irish campaigners called for the windfall to be invested in public housing.

The taxable profits of Apple Sales International and Apple Operations Europe did not correspond to economic reality, the commission said. Vestager said: “The commission’s investigation concluded that Ireland granted illegal tax benefits to Apple, which enabled it to pay substantially less tax than other businesses over many years.”   Vestager suggested other countries, including the US, might now examine how Apple did business within their borders. These other jurisdictions might then claim a share of the unpaid tax from Apple for the same period. This would reduce the bill owed to Ireland.”

The EU decision follows on the move by Apple, last year, to create a thousand jobs in Cork. Apple argue that a thousand jobs means a thousand more local incomes – created externally but spent internally. Increased income tax and social insurance assists the Irish Exchequer, which also benefits from VAT paid on goods and services. Local retailers, restauranteurs and others will benefit, with a multiplier effect in jobs to follow, a boost to the construction trade in increased housebuilding for local and migrant labour taking up employment with Apple. But, the deal is this: Apple won’t pay any tax in Ireland. The Irish Government appears determined that Apple pay no tax. If it were obliged to do so, it may trigger the age-old corporate threat to ‘up sticks’ and move operations elsewhere.

In an article in the Washington Post titled “Apple may owe Ireland $19 billion, but Ireland doesn’t want the money. Here’s why” Henry Farrell sets out the case[i]

Depending on the outcome of an official investigation, Apple may face a bill that is estimated at between $8 billion and $19 billion for underpaid taxes to the Irish government. The Irish government really doesn’t want to get this money and is fighting as hard as it can to avoid receiving it. That may sound weird to ordinary people, who assume that governments want to squeeze individuals and businesses for as much taxes as they can get. But if you understand the politics of international corporation tax, it all makes sense.

As Gabriel Zucman argues in his book on international tax evasion and avoidance, “The Hidden Wealth of Nations,” many U.S. firms locate as much of their activities as possible in low-tax jurisdictions like Ireland to minimize their tax bills. This is often easier for sophisticated technology firms, since so much of their profit is tied up in intangible activities and assets such as design. Hence, they can structure their operations so that much of the profits go to subsidiaries based in Ireland, Luxembourg and elsewhere, minimizing their U.S. tax exposure and deferring the point at which they have to pay U.S. taxes.

Apple has approximately $200 billion salted away overseas[ii]. Businesses like Apple have also sought individualized tax “rulings” from countries like Ireland and Luxembourg that legitimize their specific tax arrangements. Critics describe these rulings as sweetheart deals, while defenders say that they assure long-term confidence and stability.

Other European countries are very unhappy with the low tax rates in Ireland, Luxembourg and other corporate tax havens. They believe that these countries are deliberately trying to lure business and investment away from them. However, under E.U. law, they haven’t been able to do much about it. Corporate taxation policy is mostly left to the discretion of individual European countries, providing few angles of attack for countries or officials who don’t like tax havens. However, the European Commission, the executive and administrative body of the European Union, has recently come up with a clever new legal argument. Even if E.U. law doesn’t cover corporate tax laws, it does allow the E.U. to act against “state aid” — arrangements under which E.U. member states provide specific help to businesses in ways that distort market competition. If the European Commission treats tax rulings for individual firms as forms of state aid, it may be able to undermine them. This is what is happening to Apple. The European Commission is investigating whether Apple’s special tax deal with Ireland is a form of state aid. If it concludes yes, as everyone expects it to, it can make Ireland stop its special treatment for Apple and force Apple to pay whatever taxes to Ireland the commission thinks it should have paid.

You might expect that Ireland — a country with heavy debt emerging from a serious recession —-would be delighted to get its hands on up to $19 billion of unanticipated tax revenue. It isn’t. If Apple is forced to pay these taxes to Ireland, then Ireland will seem much less attractive to other footloose multinationals looking to minimize their tax liability. For example, Google too uses Ireland as a haven to minimize tax payments. The Irish government has clearly decided that the long-term economic costs of getting the money will outweigh the short-term boost to revenues, and is lobbying against a large tax settlement.

Every presidential election sees a lot of political rhetoric aimed at low tax jurisdictions overseas that are tempting U.S. businesses to locate their activities outside America. You might think that U.S. officials and legislators would be delighted to see these low-tax jurisdictions running into trouble. Again, you’d be wrong. The Senate Committee on Finance has just announced that it considers the European Commission’s investigation to be a “direct threat” to U.S. interests.

The likely reasons are two-fold. First, companies like Google and Apple have a lot of political clout on Capitol Hill. Second, and likely more important, if Europe succeeds in forcing U.S. companies to pay more taxes, Uncle Sam will probably have to foot much of the bill. The affected companies are likely to claim tax credits in the United States for taxes that they have to pay overseas, leaving the U.S. government and U.S. taxpayers’ worse off.

In short, Apple sets up various subsidiaries in corporate tax havens such as Luxembourg, Ireland, the Netherlands and the British Virgin Islands to shuffle profits around. A complicated web of companies and subsidiaries has the net effect of making the company’s finances opaque and reducing Apple’s obligations to pay tax. This is most notably so in the US itself, where the public purse took the risk to develop all the technologies that Apple has so skilfully exploited.

 

Research and Development

Apple, however, doesn’t stop at tax. It also rides on the back of the publicly funded research and development. The balance of risk and reward is demonstrated by UK based academic Mariana Mazzucato[iii].

“What is uniquely apparent in the case of Apple however is that the company’s executives and shareholders are not the sole (nor the largest) bearers of risk that was part of developing innovative  products such as the i-Pod, the iPhone and iPad. Rather…the success of these technologies is overwhelmingly due to the foresight of the US Government in envisioning radical innovation in the electronics and communications fields going back to the 1960’s and 1970’s.”

Mazzucato stresses that Apple incrementally incorporated in each new generation of iPods, iPhones and iPads technologies that the state sowed, cultivated and ripened – and the point is that:

“Apple understood this game: creatively pioneering the field of consumer electronic dreams by stepping up to the plate and playing off the positive externalities left behind by the government’s heavy hitters….Apple is far from the ‘market’ example it is often used to depict. It is a company that not only received early stage finance from the government (through the SBIC programme) but also ‘ingeniously’ made use of publicly funded technology to create ‘smart’ products. In fact there is not a single key technology behind the iPhone that has not been state funded. Besides the communications technologies, the iPhone is smart because of features such as the Internet, GPS, a touch screen display and the latest new voice activated personal assistant, (SIRI)….the fact that the iPhone/iPad empire was built on these state funded technologies provides a far more accurate tale of technological and economic change that what is offered in mainstream discussions.”

The failure of the Labour Party and movement is in not explaining and standing-up for the positive, pioneering role of the State. That has allowed the public narrative to be dominated by self-serving ‘Private good, Public bad’ rhetoric, and leads to a parasitic relationship in terms of risk and rewards.

 

Outsourcing

The parasitic orientation of Apple is now under the spotlight not just for its parasitic approach to R&D and its aggressive tax avoidance, but is also under fire for its offshore production and manufacturing strategies. Outsourcing is a key strategy with less than 20% of jobs created in the enterprise directly employed by Apple.  Extreme inequities in pay rewards within Apple as well as labour disputes in Chinese production facilities are rarely scrutinized. Aditya Chakrabortty’s recent Guardian article[iv] explored Apple’s production outsourcing strategy:

“Whatever marvels have been shoved into the new iPhones, the devices serve to increase the gulf between the super-rich and the rest of us, milk countries of rightful tax revenues, and oppress Chinese workers even while depriving Americans of high-paying jobs. Arrogant towards critics and governments, glutted with cash and yet plainly out of ideas, Apple is elegant shorthand for a redundant economic system….If you own an iPhone it was assembled by workers at one of three firms in China: Foxconn, Wistron and Pegatron. The biggest and most famous, Foxconn, came to international prominence in 2010 when an estimated 18 of its employees tried to kill themselves. At least 14 workers died. The company’s response was to put up suicide nets, to catch people trying to jump to their death. That year, staff at Foxconn’s Longhua factory made 137,000 iPhones a day, or around 90 a minute.

Over the past year, the US-based NGO China Labor Watch has published a series of investigations into Pegatron, another iPhone assembler. It sent a researcher on to the assembly line, interviewed dozens of Pegatron staff and analysed hundreds of pay stubs. Among its findings are that staff still work 12 hours a day, six days a week – one and a half hours of that unpaid. They are forced to do overtime, claims the NGO, and provided with illegally low levels of safety training….The researcher was working on one iPhone motherboard every 3.75 seconds, standing up for the entirety of his 10.5-hour shift. Such is the punishment endured at Apple’s contractors to make a living wage, apparently.

At another of Apple’s major contractors, Wistron, a Danish human-rights NGO last year found extensive evidence of forced student labour. Teenagers doing degrees in accountancy or business management were sent for months to an assembly line at Wistron. This is a serious violation of International Labour Organisation convention, yet investigators for Danwatch found evidence that thousands of students were doing the same work and backbreaking hours there as the adults – but costing less. The teenagers told Danwatch that they were working against their will. “We are all depressed,” one 19-year-old girl said. “But we have no choice, because the school told us that if we refused, we would not get our diploma.” Despite several requests for comment, Wistron did not respond.”

So, what is to be done? The first thing is to develop a mind-set which does not consider state-level action impossible. The EU have acted. Richard Murphy at Tax-Research-UK has long set out the case for country-by-country accounting and tax and well as an agenda (including a Financial Transactions Tax) which would dampen unproductive speculation and the ‘financialization’ of otherwise productive companies.

There is also company law. Labour should argue to legislate for a more broadly based, civilised, conception of company law. Traditionally, companies were invented by “companions” who banded together to share risk to perform a vital economic or other function from which they would profit. They would petition the state for a licence to practice and accept reciprocal societal obligations in return.  This conception of company has been debased by the narrow notion of short term shareholder return a notion which will consider quicker routes to shareholder return than investing in people to develop a great organisation. Merger and acquisition to extend market share, tying senior management to stock market performance through share options, increased managerial opportunism and the use of performance related pay for middle and junior managers to effect cost minimisation all serve to reinforce the short term view of the company, rather than the need to invest in skills development.

Put simply, we, as a labour movement, need to develop a narrative around what a broadly defined and progressive company, with environmental and societal obligations, should look like.

[i]                      [i] Henry Farrell, Washington Post, 29th January 2016

[ii]                    [ii] The Observer of 9 October 2016 puts this figure at $214.9 billion

[iii]                   [iii] The Entrepreneurial State: Debunking Public Vs. Private Sector Myths  Mariana Mazzucato, 2013, Anthem Press www.anthempress.com ISBN 978-0-85728-252-1

[iv]                   [iv] Guardian, 19th September 2016

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