Our expert on the Apple brand being bitten

Thursday 01 September 2016

The Apple tax storm has rocked the fiscal world this week, but what are the implications for Jersey?

Oliver Stones, Investment Manager at Quilter Cheviot, says it could be good for the Island, although the ripple effect of the controversial EU tax judgment could take a while to reach these shores.

He said: “It’s that moment before a penalty kick in football when every player on the field is shouting and gesticulating at the referee who is disdainfully ignoring them all, having made his decision, dubious or not. 

“Apple have been penalised this time to the tune of £11billion (13billion Euros) by the EU for doing something that Apple and the Republic of Ireland legitimately agreed almost 25 years ago. It was a simple tax agreement that managed to happily scratch each other’s back. The eye-watering scale of the fine initially caught the eye of the media but it is now, strangely, not the main issue to the world’s largest company with deep pockets full of an estimated USD 150 billion. It’s more the principle behind the fine.

“Pandora’s proverbial box of tricks has well and truly been crowbarred open by the EU Commission and now the accusations are flying with all sorts of axes being sharpened and finely-honed after the EU shouted foul play. Apple can pay the fine with some ease which has been calculated on the basis of Ireland’s 12.5% corporation tax multiplied by the decades of non-payment. 

“To actually only pay just 0.005% tax over that time period (‘ratcheted’ up to 1% more recently) does appear to be a trifle unfair, but the flip-side was that Apple employed 6,000 workers in the Irish Republic. It was a simple symbiotic relationship that the EU has eyed jealously for decades and now they have launched their envious attack.

“If successful, the EU will consider it two birds killed with one stone. Ireland’s low 12.5% corporation tax has always been a subject of much scrutiny, envy and criticism by countries who have corporation taxes of anything between 20% (UK) all the way up to 33.3% (France). This has given Ireland an ‘unfair advantage’ in what is meant to be a harmonious and flat EU tax structure (cue huge amount of chortles and hilarity from ‘Brexetiers’ here). But it doesn’t stop there, and here’s the hard–to-prove conspiracy theory; it has also given the EU a chance to have a pop at the much detested, envied and super-successful US Technology companies.

“Detested might be a too strong a word, but I use it advisedly as the EU has not one single technology corporation who can shine a light on the giant of Google, Apple and Microsoft. As for these companies, their overseas earnings outweigh their domestic earnings and those overseas earnings are subsequently kept overseas to avoid the punitive attention of the IRS back home.

“There has been considerable US Congressional attention paid to the various multi-billion tax ’dodges’ such as the spate of ’inversion’ M+A deals between foreign firms and domestic US firms and the subsequent shifting of head office to the cheaper tax jurisdiction. 

“These have fallen out of fashion of late, so now the fashion police that is the EU Commission are chasing the easy US corporate targets and the USA doesn’t like it. It’s not just US technology companies at it, the pharmaceutical and drug companies also earn vast overseas earnings that they keep from the clutches of the IRS by a bevy of wonderfully descriptive tax dodges such as a ‘Double Irish with a Dutch sandwich’ or a ‘Bermudan Black Hole.’

“The outcome of all this is hard to imagine but we know initially ‘Apple will appeal’ (pun intended) and that will go for many years just as the three-year EU investigation did before this announcement. The US are already threatening fire and brimstone on the EU and the Irish are positively vitriolic in their anger with the EU. It could be an own goal by the EU, but hang on, they’re the referees aren’t they? They make the rather vague rules and apply the random fines.

“Talking of vague, and this is where the pigeons come home to roost for the UK, are we about to see a gentle morphing of the term ‘morally-repugnant’ to today’s more welcoming and tax-avoiding empathetic ‘we are open for business’ from the British government ?

So how does this leave the Channel Islands? I would hazard a guess that it leaves us in a strong position if the UK takes down the barriers to this type of corporate business that will occur wherever there’s an incentive to manage tax affairs efficiently. It is reckoned that it could be as soon as the Autumn budget that Chancellor Hammond reduces UK corporation tax to 15%. This is good for business generally and what’s good for the UK is good for us. This type of business has taken place for hundreds of year and it will continue to do so, the EU focus will, rightly or wrongly, gently re-focus elsewhere over time."