By Cormac Lucey
The Irish constitution, Bunreacht na hEireann, contains some important yet mostly overlooked provisions on financial matters. There are only two members of the cabinet who must, according to the constitution, be members of Dail Eireann: the taoiseach and the finance minister. And only the Dail can initiate legislation that provides for the raising of taxes or the spending of money.
The logic of the constitution is that, as the raising and spending of money is central to the existence and operations of the state, such decisions should be reserved to the directly elected house. Despite detailed legislative machinery to approve state expenditure, however, it appears that key state officials approved tax rulings that saved Apple Inc at least €13bn in corporation tax without ever being sanctioned by a democratic vote.
Is that apparent encroachment on the democratic prerogatives of Dail Eireann not something that should arouse its urgent attention? The Oireachtas finance committee has held hearings into the EU Commission’s August 2016 ruling on Apple’s tax liabilities, but they focused on what should be done now instead of how the ruling came about in the first place.
There is remarkably little interest in how the state opted out of receiving such a large amount of money or who was responsible. Contrast the political silence on this €13bn question with the ongoing debate on water charges that, in 2015, generated revenue of €232m for Irish Water — less than 2% of Apple’s bill.
The EU Commission concluded that two tax rulings issued by Revenue to Apple “substantially and artificially” lowered the tax paid by Apple in Ireland since 1991 by allowing Apple to channel most of its non-US sales and profits through artificial corporate entities not required to pay tax anywhere.
According to the EU, almost all profits recorded by two Irish incorporated companies of the Apple group — Apple Sales International and Apple Operations Europe — were attributed to a “head office”. The profits allocated to these “head offices” were not subject to tax in any country under provisions of the Irish tax law (since rescinded). The commission’s assessment is that these “head offices” existed only on paper and could not have generated such profits.
Ireland’s tax treatment allowed Apple to avoid taxation on almost all profits generated by Apple sales across the entire EU single market. Because of the allocation method permitted by the tax rulings, Apple paid an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits of Apple Sales International.
In its statement announcing the €13bn ruling, the EU Commission admitted that the Irish tax structure is outside the remit of EU state aid control. It then added menacingly: “If other countries were to require Apple to pay more tax on profits of the two companies over the same period under their national taxation rules, this would reduce the amount to be recovered by Ireland.”
Margrethe Vestager, the EU’s competition commissioner, seems to be inviting our EU neighbours to a tax feeding frenzy at Apple’s expense and possibly at the expense of Apple jobs in Ireland. The primary line of reasoning in the EU Commission ruling is that Ireland should have taxed all the worldwide profits of the two companies that were not resident in Ireland. That really makes little legal sense and, if generally applied, would unleash considerable uncertainty regarding the future tax liabilities of many foreign multinationals with dealings here. Yet this logic lies at the heart of the final decision and is the basis for a €13bn Apple tax liability estimated publicly by the commission.
The second and “subsidiary” line of the EU Commission’s reasoning is that the Irish branches of the companies should have paid more Irish tax based on a transfer pricing methodology different from that actually used. The EU has not specified any alternative basis for calculating the recovery amount on this basis, although it would probably be significantly smaller than under its primary line of reasoning.
The third “alternative” line of reasoning is that the Irish legislation allowed the Revenue to exercise discretion and that it then conferred a selective advantage on Apple. This is also only referred to in the commission’s final decision but it has not specified a basis for calculating a recovery amount based on this logic.
There is a problem with the government’s legal challenge to the EU Commission ruling: whatever the legalities of past tax minimisation practices, by subsequently changing the law to prevent their recurrence, the government has tacitly admitted it was wrong. Former US president Richard Nixon said of Watergate that he gave his political opponents “a sword”. Ireland provided opponents of our successful low corporate tax rate a sword when Revenue gave Apple that tax ruling which the firm exploited.
Ireland has lost out heavily in terms of tax revenues and, perhaps more importantly, in terms of international reputation as our tax regime faces renewed external assault. That being so, the citizenry of Ireland is entitled to answers to four questions.
How did Revenue’s Apple tax ruling come about in the first place and who approved it? What form of ongoing review, if any, was put in place to ensure that the ruling was not being abused? What wider form of accountability is in place today to ensure that the upholding of constitutional requirements for similar tax rulings, which are in effect state money decisions? What oversight procedures are in place to ensure that those Revenue officials who approve favourable tax rulings today don’t end up in the direct or indirect employment of the beneficiaries tomorrow?
The silence of public representatives on these important questions is telling. It suggests either that they are fools (who fail to understand the constitutional significance of what is happening) or knaves (who have their own personal or collective interest in averting their gaze from what Revenue does).
In fairness to the EU Commission, it has done much more in a few years to shed light on what is going on behind the tax scenes than our own representatives have managed since 1922.
Published in The Sunday Times (Ireland edition)
February 18th 2018