Apple Bites

　Some taxing thoughts from our Dublin correspondent:
　
   There has been a lot of news recently involving Ireland and claims that it is a tax haven that encourages tax evasion. I find it curious that American lawmakers are complaining about American companies taking advantage of a loophole in American laws and trying to blame another country. One must remember that American lawmakers are hugely influenced by the lobbyists that are employed by those same American companies.
   Let's look at some of the issues.

   Apple executive Tim Cook acknowledged that the company set up some subsidiary companies in Ireland and do not pay tax in the U.S. on the profits of those companies. In fact, Apple do not pay tax anywhere on the profits of those companies.
   There are a few issues here. The Irish tax laws state that the corporate tax is liable at 12.5% on profits made on trading within Ireland. Another corporate tax rate of 25% applies to profits made on investments. The fact that Apple set up these subsidiary companies is in total conformity with US law. Apple are using a loophole in U.S. law to get around paying the much higher US corporate tax rate. The loophole is in U.S. law and not in the laws of Ireland.

   Tim Cook claimed that a special tax rate of 2% for Apple was negotiated with the Irish government and tax authorities. This is strongly repudiated by the Irish government and Irish tax authorities. Whom do you believe, the politician or the businessman?

   A number of years ago the Irish tax laws were changed to promote advances in innovation by making the income from patents tax free for a number of years. A number of businesses have been able to benefit from this and generally these businesses reinvest the profits in further research and development. These concessions are available to anyone
who has a patent and doing business in Ireland.

   Some non-Irish companies have transferred (sold) Intellectual Property Rights to their Irish subsidiaries in order to avail of these benefits. Apple, Microsoft, Google, and Yahoo are only some of the companies that have done this. Perhaps these transfers should not be allowed, but that is a matter for the countries in which the parent company operates. If that were to happen I believe the laws restricting these transfers would be struck down as unreasonable restraint of trade.

   Ireland have been under pressure to increase its tax rate from countries that have much higher corporate tax rates. The bigger problem in defining corporate tax rate is the income that may be exempt from taxation. For example, France has a nominal corporate tax rate in excess of 30%, but they readily admit that the effective tax rate is closer to 8 %. The nominal tax rate for Ireland is 12.5% and the effective tax rate is about 11.9%.

   Sales tax in Europe is called VAT (value added tax) and Ireland has a VAT rate of 23% (near the upper end of VAT rates in Europe) while some other countries have rates as low as 10% to 12%. Sales over the Internet are taxed at the location where the seller is based, not the buyer. As a result, companies that operate Internet sales are usually more profitable in low VAT rate countries and not high VAT rate countries like Ireland. Ireland has been fairly successful in recent years in attracting foreign companies into Ireland, The low corporate tax rate is one element of the attractiveness of Ireland, but other things are a well educated workforce, being located in the EU, English being the most widely used language in the country, the availability of speakers of other languages, good telecommunications networks, the availability of new factories and offices, and access to international trade routes by air or ship.

   Each country of the European Union makes a contribution to the EU based on the GDP of the country. The corporate tax system in Ireland generally excludes profits for exports. GDP does include exports in the calculation. It is estimated that Ireland is paying an extra 100 million euros annually for the export driven part of the economy, the part of the economy that has not been taxed.

   So maybe the Apple logo should be redesigned, to show a green apple with a smaller bite.