Debates on tax morality, base erosion and profit sharing (BEPS), tax planning and tax havens are gathering momentum by the day. This has attracted the attention of several governments, who have upped the ante and put years-old tax strategies under the lens. These tax strategies are now being questioned and being tested for fairness and legitimacy.
The latest such development is the letter sent out by the European Commission to the Irish government (made public in early October), wherein the Commission states that it had formed a ?preliminary view? that the tax deals struck with Apple in Ireland constituted ?state aid? as per the Treaty of the Functioning of the European Union (TFEU) and that such state aid might not be compatible with the ?internal market? (read, the common interest of all EU member nations).
To put it simply, the European Commission, prima facie, believes that the tax rulings of the Ireland tax authorities with respect to the Apple group in relation to the attribution of profits to an Ireland branch of the group may be construed as providing an unfair advantage to Ireland vis-a-vis other member states of the EU, since many corporations choose to park profits through structured Ireland-registered companies that are not tax residents of any country, considering the prevalent rules of residency in those specific countries. The Irish government, in the face of the EU questioning its tax practice, has moved to change its tax residency norms and bring such arrangements to taxation, signalling a change in the corporate tax environment.
While a probe of the aforesaid is still at an early stage, a final ruling against the tax deals could result in tax liability for Apple and windfall tax revenue for Ireland.
It may be pertinent to note that Ireland has had one of the lowest corporate tax rates?currently at 12.5%?in Europe. Such a low rate was intended to attract industry and boost the economy of the country.
However, many companies have deployed tax structuring alternatives to take advantage of the Irish code to lower their tax bill considerably than 12.5% by setting up ?paper offices? in Ireland and transferring a great deal of their intellectual property to the country while routing profits accrued elsewhere through the Irish subsidiary.
In the context of Apple Inc, it is alleged that Apple avoided paying tax in the US by setting up subsidiaries in Ireland that had no purpose other than to ensure that these profits were shielded from tax.
This issue arises due to the difference between the US and Irish rules on tax residency. In Ireland, a company must be managed and controlled in the country to be a tax resident. However, under American law, a company is a tax resident of the country in which it was established.
The fallout of this is that a company incorporated in Ireland that is managed and controlled in the US is neither a tax resident of Ireland (since it is not managed and controlled in Ireland) nor of the US (since it is not incorporated in the US), leading to a situation of double non-taxation.
The European Commission?s inquiry into Ireland?s tax scheme for Apple, coupled with the Organisation for Economic Co-operation and Development (OECD) initiatives on BEPS, has increased pressure on governments of various countries to look at taxes differently.
The coming year, 2015, will be interesting, considering the pace of developments in the field of international taxation. It will be interesting to see how the entire BEPS initiative shapes up when the recommendations on all action points are finalised. It will be even more interesting to note how these recommendations are actually implemented across the world. The transition period?that is from now to the new tax world in 2016?will be even more tricky as we are seeing increasing instances of Apple-like cases, making it highly unpredictable for transnational organisations to manage their taxes. It is truly a changing tax world, where the only thing constant is change.
Co-authored by Krishnan TA, manager, M&A Tax, KPMG India
The author is co-head of Tax at KPMG India. Views are personal