Irish anticipated EU's Apple move after US Senators' tax hearings
It's May 2013 and a tense meeting is taking place in a cramped, airless room in the Department of Foreign Affairs. Days earlier two US Senators, Republican John McCain and Democrat Carl Levin, had shredded the reputation of Ireland and its corporate tax offering at a charged US Senate hearing in Washington.
Their vitriol is aimed at Apple, one of the world's most valuable companies, but Ireland is depicted throughout the hearing as a facilitator of industrial-scale tax avoidance, a 'tax haven' serving the interests of a constellation of stateless or 'ocean companies', of no fixed tax abode.
Senator Levin in particular sculpts the soundbite of the day, accusing Apple of achieving 'the Holy Grail of tax avoidance' and for the first time two obscure Apple companies, AOI and ASI, are name-checked as being part of this holy grail (these two companies later form part of EU Commissioner Vestager's investigation, as do many of the Apple documents the US Senate obtained).
At the meeting, an apprehensive-looking Irish Ambassador dialled in from Washington while civil servants from all over the Government system and senior officials from the IDA piled into the room. The Government system was gearing up, the US hearing was a public relations disaster, the comments could not be allowed stand, the use of the term 'tax haven' was a provocative red line, all assembled agreed, a diplomatic démarche must get underway, a marketing effort must be funded, something must be done and quickly.
But one Department of Finance civil servant couldn't contain himself anymore at the meeting, brushed aside talk of diplomatic rebuttals and pointed a finger at the others, and warned: "I'm telling you this is going to lead to a State aid investigation, just watch''.
By June 12th a letter had arrived from the Commission requesting Ireland to provide information on tax rulings. In particular, the Commission requested information on any rulings granted in favour of Apple, including AOI and ASI.
The highly negative association of Ireland with tax avoidance of that time was a major millstone, making companies nervous about putting jobs here and even more nervous about referring to their investments publicly. But there was no way to fend off the EU questions, although from the start the view in Government circles about what became the Vestager investigation was one of slight bafflement.
While the debate about how much corporations should pay, or what is a 'fair' system is ubiquitous, there was always slight surprise in Dublin that the Apple case was the one on which the Competition Commissioner decided to make her stand - particularly when the contested tax rulings involved were so old.
Apple had been in Cork from 1980 and for a substantial portion of its history was not a hugely profitable company. In addition, the advance pricing arrangement (APA) the company had agreed with the Irish Revenue from 1991 was left in place for fifteen years without revision. While not best practice, there may have been a view that the Commission might view this benignly as a type of legacy issue. That view would prove naive.
But there were other reasons for the surprise.
The issue of companies being Irish registered non-resident (IRNR) - incorporated in Ireland but not resident for tax purposes here - was also very out in the open. Throughout the 1990s Irish media coverage of such companies was extensive and there were Irish government reforms of the area. Financial details for both AOI and ASI were available in the Irish Companies Office and the idea that you could be incorporated in one country but tax resident elsewhere was a long-established principle, at least in British tax law, which Ireland inherited.
As far as Irish tax law was concerned - but not US tax law - as long as certain Apple subsidiaries were not 'managed and controlled' in Ireland, they were not tax resident here. Critics suggested Ireland should have asked: "well if not tax resident here, where then?" But that was never the Revenue Commissioner's approach and all overseas companies knew that and many others - not only Apple - had extensive non-resident companies incorporated here.
In addition, while Ireland has been accused of playing host at times to so-called 'brass plate' companies, Apple had - and has - real substance on the ground in Holyhill, Cork, with thousands of employees. While the company was known to have intellectual property (IP) elsewhere, this issue concerned the so-called 'double Irish' tax structure.
But instead of targeting those structures directly, the Vestager investigation focused on more esoteric territory - the actual methods Apple used to internally allocate profits to its various subsidiaries.
At all times, the EU investigation sought to make it clear the 12.5pc rate used by Ireland to tax company profits was not in question, but seemingly the EU had grown weary at Ireland's perceived arbitraging of the international tax rules.
Ireland and much of the rest of Europe were in the midst of a culture as well as a legal clash. For Ireland inward investment - usually from the US - has over the decades been about jobs, not tax, whereas for Europe its often been about tax, not jobs.
It's worth remembering, for example, that foreign investment in Ireland initially was all about export profits tax relief. At times, the tax on income generated overseas has been set at zero in Ireland. At other times, it's been at 10pc and since the late 1990s its been at 12.5pc. The combination of adopting the British 'managed and controlled' test and the comparatively low rates on the income taxed here, delivered significant jobs benefits for Ireland and secondary spin-offs. But that narrative has attracted a legion of critics, who see it as a race to the bottom and a 'beggar-thy-neighbour' economic model.
As a result, the Government and IDA have been trying to emphasise the broader attributes of Ireland's proposition - based on the so-called 4Ts - talent, technology, track record.. and then yes - tax, although stateless companies and the 'Double Irish' were abolished several years ago.
But to limited results, and the Margrethe Vestager investigation became the most serious threat yet to Ireland's inward investment model - there will be more. While Levin and McCain had heft in the US Senate, Commissioner Vestager has executive power in Brussels.
With European governments desperate for revenue from corporate and individual taxpayers in future due to the Covid crisis, there is no doubt the long drawn-out skirmish with Commissioner Vestager won't be the final threat to the tax components of Ireland's FDI model.
So, there is much wisdom in Ireland changing the conversation around to the other reasons companies come here and the result in the General Court makes that slightly easier.
This article was written by UCD Quinn School lecturer Emmet Oliver and first appeared in the The Irish Independent July 16, 2020.