Some Thoughts on Tim Cook’s Open Letter on Taxes in Europe

Thirty-six years ago, long before introducing iPhone, iPod or even the Mac, Steve Jobs established Apple’s first operations in Europe. At the time, the company knew that in order to serve customers in Europe, it would need a base there. So, in October 1980, Apple opened a factory in Cork, Ireland with 60 employees.

At the time, Cork was suffering from high unemployment and extremely low economic investment. But Apple’s leaders saw a community rich with talent, and one they believed could accommodate growth if the company was fortunate enough to succeed.

We have operated continuously in Cork ever since, even through periods of uncertainty about our own business, and today we employ nearly 6,000 people across Ireland. The vast majority are still in Cork — including some of the very first employees — now performing a wide variety of functions as part of Apple’s global footprint. Countless multinational companies followed Apple by investing in Cork, and today the local economy is stronger than ever.

The success which has propelled Apple’s growth in Cork comes from innovative products that delight our customers. It has helped create and sustain more than 1.5 million jobs across Europe — jobs at Apple, jobs for hundreds of thousands of creative app developers who thrive on the App Store, and jobs with manufacturers and other suppliers. Countless small and medium-size companies depend on Apple, and we are proud to support them.

All this first section is fluff…

As responsible corporate citizens, we are also proud of our contributions to local economies across Europe, and to communities everywhere. As our business has grown over the years, we have become the largest taxpayer in Ireland, the largest taxpayer in the United States, and the largest taxpayer in the world.

Because you make more money than most companies in the world. You’re simply paying your share; you don’t get brownie points for paying more than others.

Over the years, we received guidance from Irish tax authorities on how to comply correctly with Irish tax law — the same kind of guidance available to any company doing business there. In Ireland and in every country where we operate, Apple follows the law and we pay all the taxes we owe.

With a sweetheart deal at what is reported to be about 2% corporation tax. My business pays 20% corporation tax, and I’d love a deal like Apple’s.

The European Commission has launched an effort to rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process. The opinion issued on August 30th alleges that Ireland gave Apple a special deal on our taxes. This claim has no basis in fact or in law. We never asked for, nor did we receive, any special deals. We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don’t owe them any more than we’ve already paid.

That’s what you say. What it really comes down to is that Apple got an unfair advantage with this tax deal, and really should have paid a lot more. This means that Apple had an advantage over other, competing companies, and access to the European single market means that you play by EU rules which say that you don’t get that sort of state-granted advantage.

The Commission’s move is unprecedented and it has serious, wide-reaching implications. It is effectively proposing to replace Irish tax laws with a view of what the Commission thinks the law should have been. This would strike a devastating blow to the sovereignty of EU member states over their own tax matters, and to the principle of certainty of law in Europe. Ireland has said they plan to appeal the Commission’s ruling and Apple will do the same. We are confident that the Commission’s order will be reversed.

No, EU member states have to follow a number of guidelines regarding taxes. They don’t have total sovereignty over VAT, and they don’t have the right to favor one company over another with other types of taxes.

It would be different if Apple was only selling digital products; they could then, most likely, legally have a single country subsidiary selling them. And they’d choose the most advantageous country for that; just as Apple bills customers from Luxembourg, because it has the lowest VAT rate in the EU. But apparently they still funnel that money through Ireland…

At its root, the Commission’s case is not about how much Apple pays in taxes. It is about which government collects the money.

See below…

Taxes for multinational companies are complex, yet a fundamental principle is recognized around the world: A company’s profits should be taxed in the country where the value is created. Apple, Ireland and the United States all agree on this principle.

In Apple’s case, nearly all of our research and development takes place in California, so the vast majority of our profits are taxed in the United States. European companies doing business in the U.S. are taxed according to the same principle. But the Commission is now calling to retroactively change those rules.

Research and development are one thing; if it was all taxed in the US, then why does Apple have some $200 billion stashed away overseas that it doesn’t want to repatriate because of US corporate income tax rates?

Apple is saying that sales in EU countries are actually made by Apple’s Irish subsidiary; that any brick and mortar or online store in another country is actually part of Apple Ireland. That the store where I buy my iPhone in the UK isn’t really in the UK, as far as taxes are concerned. Sorry, that’s just wrong.

Beyond the obvious targeting of Apple, the most profound and harmful effect of this ruling will be on investment and job creation in Europe. Using the Commission’s theory, every company in Ireland and across Europe is suddenly at risk of being subjected to taxes under laws that never existed.

Seriously? This only affects companies that have subsidiaries in multiple countries, and that funnel profits into one country. So, companies like Apple, Google, Facebook, Amazon, and others; not businesses like mine.

Apple has long supported international tax reform with the objectives of simplicity and clarity. We believe these changes should come about through the proper legislative process, in which proposals are discussed among the leaders and citizens of the affected countries. And as with any new laws, they should be applied going forward — not retroactively.

Yeah. But, no. There’s nothing special about a tax being applied retroactively when it was wrong to start with.

We are committed to Ireland and we plan to continue investing there, growing and serving our customers with the same level of passion and commitment. We firmly believe that the facts and the established legal principles upon which the EU was founded will ultimately prevail.

Yes, one of those principles was that everyone plays on a level playing field. Apple – and some other big companies – try to skirt that rule. And Apple’s complex offshore holdings make it look like the company clearly goes out of its way to exploit every loophole they can to avoid taxes.

Apple is simply not a good corporate citizen. They should pay taxes in the countries where they sell their products. It should be that simple.

Source: Customer Letter – Apple (IE)

26 thoughts on “Some Thoughts on Tim Cook’s Open Letter on Taxes in Europe

  1. Kirk:

    You say “My business pays 20% corporation tax, and I’d love a deal like Apple’s.” Until the law changed on January 1, 2015, it was completely open to you.

    You needed to create a company in Ireland; all the Irish banks would have been happy to help with this. Say you had called it McElhearn Publishing Ireland (MPI), solely owned by yourself. You would then have signed contracts between MPI and yourself where you would assign worldwide copyright to MPI for any and all works that you write in exchange for a fixed amount per piece. MPI would then offer these works to MacWorld or any other publisher. Given your stature (excepting in multinational tax matters), I’m sure MPI could charge millions for these articles. The difference between MPI’s revenues and expenses would have been income taxed at the very favourable Irish corporate rate. MPI’s cash balance would have grown as it took in millions and paid you–effectively as a freelance–very little.

    Sound familiar? Just like Apple; except for the scale of the numbers.

    Assuming you are subject to UK income tax, you would be able to pay dividends from MPI to yourself and end up with a reasonable tax liability on that aspect. Apple, on the other hand, faces the punitive US tax rates on repatriating such accumulated earnings.

    Apple did NOT get an “unfair advantage with this tax deal”. They took advantage of existing LAWS in place in Ireland at the time. The Irish government wrote these laws to try to bring more economic activity to Ireland. The same laws applied to any other company able to organize their affairs to take advantage of the situation. That would have included MPI.

    Finally, there is your idea that it is OK to retroactively change the laws because you don’t like how it turned out. Good lord, how can you be serious? Think about this. How would anyone or any corporation make any kind of plan to grow a business in such an environment? If one achieves some success, the government is free to swoop in and retroactively create laws to tax it all away? That is certainly not a society I want to live in.

    Craig
    Disclaimer: The above does not constitute tax advice as I am not legally permitted to do so in your jurisdiction.

    • “…How would anyone or any corporation make any kind of plan to grow a business in such an environment? If one achieves some success, the government is free to swoop in and retroactively create laws to tax it all away? That is certainly not a society I want to live in…”

      Wow, is that your worry?
      You may have heard about the Panama Papers, it was kind of the straw that broke the back of the have-nots.

      Better still, ever heard of ethics? Apple have, Apple loooooove to talk about ethics, or tell you anyway, what you can read on their news site, listen on your iPod, or see on your Apple TV – just don’t mention (the lack of) tax payments.

      Kirk hits the right tone for conversation. Apple got a, although (barely) legal, sweet deal.

      This subject splits people, we have those like Craig who see nothing wrong with it because it’s legal and applaud companies that swerve their financial duties with a 24hr global legal team, then question people for calling it out.
      and then there are people who never liked it because put simply – it’s not fair.

      In an increasingly uneven playing field this greed cannot go on. If it means a slowing down of business at the extreme end of the scale, I’m ok with it, and IS the society I want to live in.

      (sent from a macbook pro)

    • A fundamental principle of taxation is referred to as the “Westminster Doctrine” and was first articulated by Lord Tomlin…a staggering 80 years ago.

      [i]Every man is entitled, if he can, to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.[/i]
      http://oxfordindex.oup.com/view/10.1093/oi/authority.20110803121911242

      No rational person wants to pay more tax than they are legally obligated. Nor will a corporation run by rational people. Anyone who wants to whine about Apple’s tax situation needs to show how they voluntarily paid more than was required. (Buying lottery tickets isn’t exactly the same. Although close.)

      • Craig, do you cheer when murderers (and recently rapists) get off lightly thru legal technicalities? Probably not. Tax isn’t life or death but it is a scalable moral responsibility. Whether what Apple do is legal isn’t the point, It’s not fair, and it will change. If anything Apple should be for it – given their penchant for moral positions.

        When under paying tax, albeit legally, on the this gigantic scale, Apple benefit. it doesn’t benefit Apple customers or American workers or out-sourced labor.

        No whining here, Apple and their like have had it good for quite a while, living on borrowed time, you might say.
        T Cooks “fluff” is fooling no one, is quite distastful, and is the only whine I can hear.

        • Exactly–the laws need to be changed. And you might have noticed that Tim Cook has said repeatedly that tax laws are not in step with the modern global economy. Apple has always stressed that they comply with the law in every country they operate in. If those laws are changed going forward then I expect Apple will continue to comply.

          But…not every country is going to have the same tax rate on every source of taxable income. Given that, and the Westminster Doctrine, smart tax planners are always going to find creative tax schemes that lower the overall tax bill. At least until SkyNet takes over and eliminates money (and the human race).

          At one point I worked for a stodgy risk-adverse mid-size Canadian company. And we used exactly the same kind of Irish-Dutch structure as Apple. No laws were broken or even bent. The opportunity was there and one would have to be an idiot not to want to keep the cash. Being non-idiots, we kept the cash.

          BTW, Apple has the problem where the US levies punitive taxes on bringing accumulated earnings home to the US. They could solve that problem by becoming a Canadian-headquartered business. Burger King did exactly that after buying the Canadian chain, Tim Hortons.

    • Yes, this idea of retroactive taxation is rather mind-numbing. At least in Ireland’s case, they aren’t the ones attempting to pull a bait and switch on Apple. California actually did this to businesses recently:

      http://www.businessinsider.com/california-entrepreneurs-retroactive-tax-2013-1

      I don’t have any illusions that Apple is some kind of corporate saint, and I disagree with a lot of what the company does. But the idea that a jurisdiction should be able to lure a company in with tax breaks and then retroactively pull the rug out from under its gulls is absurd.

      As is the idea that the tax money righteously bled from these evil companies (i.e., employers) will be given to the people, rather than to the bureaucratic barnacles drawing overgenerous pensions in early retirement.

  2. Well, well, well, well may we all say God Save the Queen, because nothing will save Apple from paying its taxes. First thing to say is Brexit. Maybe Ireland should have Irexit. The fact is people all around the world are sick of world Government. Look at the USA. The only reason Donald Trump has any moment is things are being forced upon countries by the Government of the world, and people have had a gut full, and the Local Government of the country appears not to be listening to the people’s concerns. EU Government I believe is a basket case. Look at Greece, who in world EU Government allows an individual country, gets to a state it is in today. Will EU fall apart at some point in time? I say this; Magna Carter!!!! From Wikipedia in part. “First drafted by the Archbishop of Canterbury to make peace between the unpopular King and a group of rebel barons, it promised the protection of church rights, protection for the barons from illegal imprisonment, access to swift justice, and limitations on feudal payments to the Crown,”. Feudal payments to the Crown. Will Apple pay its Feudal payments to the World EU Government or stand in Magna Carter proportions with other companies and take them on? Personally; whilst I believe Governments can increase/decrease taxes at any time, it should not be retrospective.

  3. Kirk,

    Obviously (given the previously posted comments) this topic is clearly flame-war fodder par excellence, but I just want to thank you for writing a bold, fearless, and highly critical opinion on Apple’s multinational tax shenanigans. Looking through my Apple news and blog feed today I’m seeing lots of nervous avoidance of the topic and lots of walking on eggshells among the Apple commentariat when the controversy is broached . I appreciate your honesty and openness.

  4. This whole thing is not a matter of taxes or tax deals. It is a matter of illegal support by an EU government in the form of a tax reduction. And an obscene one in this case. Anti-competitive law has been part of EU for a long time. An IRExit is not going to help there. And also, an IRExit will also have a very negative effect on the position of Apple in the EU (import levies anyone?). Apple as an international company should be familiar with EU law and how that influences tax breaks and other illegal subsidies.
    From a moral standpoint imagine what the Irish government could have done with 13 billion dollar in that timeframe? Take care of good infrastructure. School people so they are fit employees for Apple and other companies. Etcetera etcetera. By engaging in this illegal behavior the Irish government does Apple and other companies a disservice.
    Cook is sitting on a moral high horse while in fact he has absolutely no right to that. And it shows. A lot of things in the letters are fluff (talented community? low wages you mean) and insults to the EU as a whole. We are not in the business of rewriting laws to suit our needs. We have a democratic process for that. We decided that it is illegal for governments to take measures that are anticompetitive. That is the law. And that is the law for Apple and the Irish government too. Abide by it. Apple has no right to representation as long as it is not fulfilling its taxation.
    Kirk: as for VAT: VAT is since some time calculated by the rate of the country you sell your products or services to. That loophole has been closed for some time.

  5. Kirk,

    Very good post. Actions can be perfectly legal yet not really ethical or moral. To me Apple’s actions were (probably) legal, but were somewhat unethical.

    On substantive question, for anyone. Cook says that Apple is the highest tax payer in Ireland, yet the rate Apple paid was a rate of 0.0005 % or something ridiculous like that.

    That seems…unlikely ?

  6. I expect Kirk and his readers to meet a higher standard of consistent rational argument and fact-based discussion than is the norm for the Internet. When this is not met, I feel I should be able to retroactively attain additional compensation. So pay up, Guys. Give me good logic and fact-based argument, starting from yesterday!

    “There’s nothing special about a tax being applied retroactively when it was wrong to start with.” It’s interesting (by which I mean, “tedious and unenlightening”) that the “rule of law, rule of morals” folks present arguments like this, saying that the law must be obeyed, even when it is not the law, and future laws must govern past actions. While Kirk sees nothing wrong with it, the practice was considered so important and egregious that it is prohibited explicitly in two places in Article 1 of the USA Constitution. European law is, of course, not governed by the USA Constitution.

    From Wikipedia: “Ex post facto laws are expressly forbidden by the United States Constitution in Article 1, Section 9, Clause 3 (with respect to federal laws) and Article 1, Section 10 (with respect to state laws).”

    • While I have no legal education, I ask this: how is this any different from a tax audit finding that you have been cheating, and impose repayments and fines? This is what’s happening here: the Irish government was found to be doing something that is not permitted according to EU treaties, and the decision reflects that.

      • Kirk,

        You say “cheating” but both Apple and the Irish government say that Apple was abiding by the laws in place. The EC apparently says those laws are or were not allowed. Even though said laws have been in place since the 80’s! Thus predating the European Union.

        So the fight is really between the EC and Ireland. Claiming Apple owes billions of euros is grandstanding at its worst by the EC.

        BTW, when Ireland created these tax incentives, they had nothing to lose. Ireland’s economy had been in the toilet for years (decades?) as The Troubles chased away any foreign companies even thinking of basing on the island. Now, Ireland has developed the banking and other infrastructure that facilitates multinational business. And while Ireland doesn’t collect a tonne of taxes from these businesses, they would have had NOTHING otherwise.

        Should the EC manage to nullify the tax advantages that Ireland has offered, other poor countries will likely line up to try to fill that void. And rational companies will restructure their affairs to take advantage.

        • I’m glad to read your cogent analysis, Craig. Another aspect of the point raised in your last paragraph, is that if this ruling stands, poor countries will have lost their major tool in attracting industry. While they frequently use this tool imprudently, this decision will lead to even more economic power being concentrated in Germany, the UK, and France, at the expense of all other EU countries.

          Better rules, GOING FORWARD, is a great idea. Applying new rules capriciously, GOING BACKWARD, is, well, a big step backward.

          • Well, not the UK, because they’re leaving the EU…

            It’s worth noting that corporation tax in the UK is 20%, and the current government has pledged to bring that down to 18% in the coming years, making the UK one of the lowest rates outside of Ireland.

    • Again, missing the point.

      The argument, going forward, from the EU, is that this was illegal in the first place. That’s how it works in the real world – charges are (usually) brought after the offence was committed, not before…

      Just because something happened, or is happening, doesn’t automatically make it ok or untouchable in law.

      The US Constitution is faulty here. The Constitution is not an infallible doctrine. There are holes in it, and when they are found, they get patched – until that time, Apple et al, will exploit it (whilst moralising to rest of us…).

      • “The US Constitution is faulty here.” We have at least two thousand years of experimentation with this question, in many countries, and opposition to ex post facto laws has increased during that entire period. I’m surprised at anyone who is not terrified by the possibility, that the government can, at any time, pass a law and punish a person, for doing something in the past, which was totally legal at the time. Governments attempt to do this all the time, and frequently succeed. It is only through strong laws prohibiting ex post facto laws and regulations that we can fight, reverse, and sometimes avoid this most capricious and corrupt example of common government problems. The Constitution isn’t infallible, but this is certainly one of the things that it got right, from the beginning.

        This situation is the exact opposite of a tax audit, in which cheating is found. The audit insists that taxes must be paid under the established rules in the time and place when the taxes were due. This ruling insists that the established rules in that place and at that time must be ignored, and that rules from another time and place should be applied to the past.

        The question of differing regulations at different levels of jurisdiction is more complex. It’s common for a higher authority to decide that the regulations of a lower authority are invalid. Usually, this decision means that a citizen cannot be punished under the lower level laws. When the local laws are more permissive, a decision countermanding them is usually applied _from that day forward_. As usual, it is a mess, and examples of stupid decisions are easy to find.

        In this case, the EU has, for decades, voiced no opposition to national governments creating their own development-guiding tax laws. Nor are they contesting that principle now. The EU still says that nations are free to create their own tax laws. “Just not THAT free.” This, too, is a reasonable position. It makes sense to clarify the limits and guidelines for all EU countries, going forward. In the current case, it is reminiscent of the scene from the movie Casablanca, where the policeman says he is shocked to learn that gambling is taking place at Rick’s Café (while he pockets his winnings). I fully agree that many rules in the EU need to be changed and/or clarified. And some of the relevant tax rules already have been. But if there is a case to be made for this ex post facto ruling, which I doubt, then much better arguments are needed than those that I have seen published so far.

        • I tend to agree with your sentiment. I differ on a few moot points, which I won’t bore readers by going thru them one by one… (i.e. I need to go out…)

          The US Constitution, while it has many honorable features (drawn up by mostly white, male, slave-owners, let us not forget), suffers in some of the finer details of 20th and 21st century life, here it becomes an exercise in interpretation, and that interpretation will depend on who you can afford to represent you in court. It’s too rigid for a truly great society.

          Apple have colluded, as they have done many times in the past, to fashion a sweet deal, now the case against is prepared and has been presented, let’s see what happens…

          • The Constitution provides within itself a mechanism for changing it. Absent those procedures, the idea of a “living constitution” strikes me as having no constitution at all. Which may seem great if you think you can change the laws to your liking. But these things have a way of backfiring.

            But that’s a side conversation. The problem with retroactively punishing Apple is that it’s pretty clear they didn’t break Irish law. The EU has a beef with Ireland. So, in order to punish Ireland for allegedly breaking the rules, it will…. force Ireland to accept billions in tax dollars.

            Rather crazy world over there. Brexit is looking more sensible all the time.

    • TO Vere Nekoninda

      Again, missing the point.

      The argument, going forward, from the EU, is that this was illegal in the first place. That’s how it works in the real world – charges are (usually) brought after the offence was committed, not before…

      Just because something happened, or is happening, doesn’t automatically make it ok or untouchable in law.

      The US Constitution is faulty here. The Constitution is not an infallible doctrine. There are holes in it, and when they are found, they get patched – until that time, Apple et al, will exploit it (whilst moralising to rest of us…).

  7. And while the moral crusaders are insisting that all tax laws must be fair and equal, I’m noticing an interesting quirk or two. Governments at every level have always made tax law unequal, with enthusiasm both inside and outside the government. Suppose that any government suddenly said that tax exemptions on charitable giving are unfair, and all those donations over the years are now going to be taxed equally, and retroactively. Almost everyone would begin foaming at the mouth. Special tax rules are used constantly by governments to influence corporate and private actions. Sometimes those special rules attain the stated goals and often they don’t. Improving the rules is a good idea. Punishing those who follow the rules is rather problematic.

    Let me ask you, if special tax rules cannot be used by governments to attain their development goals, what alternative mechanism can be implemented to support undue corporate influence and enrich both the legislators and the companies that pay them to write advantageous legislation? Or, to state things in a less snarky way, no government or voting population has shown any interest in a completely fair tax code. It’s fantasy logic to argue that absolute fairness is the foundation for tax laws and regulations. It’s valuable to have clear laws, which say what is and isn’t legal. It’s valuable to pass laws that direct development in ways that are consistent with public goals. Defining these things will always be a mess, and require hard work and vigilance against corruption. Attempting to claim an ex post facto moral high ground is rather silly.

    • The way things are now is unsustainable. In some ways, life on Earth is at risk.
      Apple are not to be taken seriously when they spout platitudes about equality while benefiting from an (extremely) unfair tax system. It is, however, convenient for those who like things the way they are.

      Changes, even suggestions of change, will be resisted (whined about) by those in power, and those who are comfortable beyond the dreams of avarice.

  8. Need to fix the spelling error in the title (Thougts).

    Otherwise spot-on observations – the most sensible response I have read thus far to the sanctimonious BS spouted by Cook. Cook’s utterances are an insult to the intelligence, quite frankly.

    This is a long-overdue action by EU. Let’s hope they go after all the other money-laundering, non-ethical corporate tax evaders such as Google, Microsoft, Amazon etc.

  9. Kirk, a smart CEO or private taxpayer exploits ALL tax loopholes to the fullest. It’s just a fact. After the EU breaks up, all these deals will be done country-by-country again, as it should be, IMHO.

    • Looks likely Apple/Ireland broke the law, as well as exploit.

      Where should loophole savvy CEOs draw the line? Pay no tax paid at all? Is there no responsibilty at all?

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