Today’s Apple decision confirms that the European Union’s rules against state aid are not up to the job of preventing EU member states operating as tax havens. Powerful tax justice reforms are needed, rather than broader application of state aid rules. Neither the EU nor any other countries will be able to raise the revenues needed to invest in health services and to fight the pandemic, if the scourge of corporate tax abuse is not challenged head-on.
Ireland, in common with the Netherlands and a number of other EU member states, have based their national business models on procuring profit shifting at the expense of their neighbours. Meanwhile the OECD’s second attempt at reforming the international corporate tax rules has lost its way, much as the first effort failed to deliver the changes needed.
Firstly, what can be said about Apple? Will they be celebrating the possibility that they could get away with a multibillion euro tax bill? Or might they eventually come to regret, in the heart of a pandemic, appearing to put their own net profits ahead of the public health funding of countries where they make their money?
On the one hand, Apple is merely a symptom of a sick system, exploited ever more aggressively by too many multinational companies and their tax advisers from the big 4 accountants and international law firms. But of course Apple has also long had one of the most high-profile and egregious corporate tax behaviours, with previous analysis for a European Parliament grouping suggesting a Europe-wide tax rate of less than 1%.
Just this month, the 2019 accounts of Apple’s UK arm confirmed concerns over their approach. The results show Apple Retail UK Ltd declaring a level of profitability on its sales that is a fraction of the margin that Apple Inc makes on its worldwide operations – and paying an equally minimal amount of tax to the UK exchequer. Specifically, Apple Inc’s 2019 filings show that more than 20% of its global sales were pure profit – whereas the UK operation apparently cannot manage a 3% margin.
Globally, Apple Inc paid tax equivalent to 4%-5% of its worldwide sales in the last two years. Apple Retail UK, in contrast, managed to pay less than half of one per cent of its sales in UK tax – making it around about one tenth as good as the global operation at generating taxable profits, in one of the richest countries in the world.
Maybe Apple is just exceptionally badly managed in the UK. Or maybe the demand for iPhones just isn’t what it used to be (although little profit was apparently possible then either).
But the average person looking from outside might reasonably conclude that Apple shifts its profits away from the place it makes its money, in order not to pay a fairer level of tax in the UK. Tax that would otherwise contribute to the costs of public health and all the other elements of civilisation, the importance of which the pandemic has provided a stark reminder.
While it’s clear that we need the systemic changes to tax rules outlined above, people may also want to ask themselves whether they want to keep giving their money to a company that seems to go out of its way to give back as little as possible.
For policymakers, two immediate steps are available. Requiring public country by country reporting would ensure that Apple and all large multinationals have to show, on a comparable basis, just how badly their taxable profits are ‘misaligned’ from the locations of their real economic activity. That would allow the public to make choices about companies they buy from, and to see if policymakers are serious about making progress against tax abuse.
And as the need for revenues grows, to fight the pandemic and its economic impact, Apple seems to make a good case for a temporary pandemic profits tax, based on a country’s activity-weighted share of global profits (in order to avoid the avoidance). That would lay the basis for the necessary long-term reforms too.
EU solutions to a global problem
The real issue goes far beyond Apple, of course. Tax Justice Network’s newly published research indicates that annual profit shifting by the largest multinational companies is of the order of $1.3 trillion a year. This scale of abuse results in direct revenue losses exceeding $300 billion a year, with the indirect costs – from countries lowering their tax rates in a needless race to the bottom – likely to bring the total to $500 billion or more, in line with previous estimates.
It is time now for the EU – and indeed other regional groupings around the world – to take effective action against corporate tax abuse, both by member states and by tax havens elsewhere. We welcome the European Commission’s commitment today to pursue progress. This should include three key elements.
First, this case highlights the critical need to reform the EU’s corporate tax rules so that each member state can effectively tax the profits arising from economic activity in their jurisdiction. A version of the long-discussed Common Consolidated Corporate Tax Base, or CCCTB, including a fully global application of unitary taxation such as the G24 countries have proposed, provides the way forward. This would follow well from a pandemic profits tax.
In addition, the Commission has expressed a willingness to take serious measures against member states that continue to act as tax havens – which would represent an important step forward from the current list of ‘non-cooperative’ jurisdictions, which excludes member states by default.
Finally, and repeating the point above: perhaps the most important immediate step the Commission could initiate today, would be to require multinational companies to publish their country by country reporting. At a stroke, this is likely to raise substantial additional revenues because this transparency has been shown to curb the most aggressive tax abuses. Moreover, it will provide the ongoing public accountability for both multinationals and EU member states (and other jurisdictions), to show that they are not procuring profit shifting at the expense of others.
At a time when the pandemic has highlighted weaknesses in public health provision, and deep inequalities in the human cost, it is crucial that countries are able to defend their corporate tax base and raise fair levels of revenue in the places where companies’ real economic activity takes place – which is of course also where the human health needs arise. Our human need for nurses and doctors, their personal protective equipment and the intensive care units and ventilators that we all rely on, cannot be shifted to tax havens – we should not allow profits to be manipulated in this way either.