Oireachtas Joint and Select Committees
Thursday, 2 February 2017
Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach
EU State Aid Rules - Investigation into Preferential Tax Rulings: Minister for Finance and Office of the Revenue Commissioners
We will resume in public session. This is item 7 on our agenda, EU state aid investigations into tax rulings, with Deputy Michael Noonan, Minister for Finance. It is to conclude by 11.30 a.m.
Today, the joint committee will continue its consideration of the EU state aid investigation into the Apple tax rulings. In our first session, we will hear from the Minister for Finance, Deputy Michael Noonan, and in the second session from the Chairman of the Office of the Revenue Commissioners, Mr. Niall Cody. I welcome the Minister to the Minister and invite him to make his opening statement.
Good morning. I thank the Chairman and the committee for inviting me to attend today to discuss this important issue.
The topic of today's discussion is the subject of ongoing litigation before the European courts involving the State, Apple and the European Commission. As a result, I am required to fully respect the constraints placed on me by both Irish and EU law as regards public discussion on open legal proceedings. This means that I will not be able to engage in a substantive discussion on material that relates to either the investigation or the legal appeal. This includes, although is not restricted to, the following: the State's annulment application; the opening decision; the final decision; any documents and exchanges with the Commission during the investigation; and any underlying facts with which the investigation was concerned. The committee will be aware that these matters also refer to the private and commercially sensitive business operations of an identified taxpayer, namely Apple. It is important to give due account to this today also. That said, I am conscious of the importance of the work of the committee and trust that the members will take full account of the legal parameters that underpin my ability to speak today.
Over the past number of years, the Competition Directorate of the European Commission has been gathering information from all member states on tax rulings. So far, it has examined more than 1,000 rulings across Europe. Ireland has always complied with such requests – which are issued on an ongoing basis to all member states – and we will continue to do so as we believe we have nothing to hide. Aside from Apple, no other state aid cases have been opened against Ireland and the Commission has not indicated that any further state aid investigations will be initiated in respect of Ireland.
The European Commission's final decision in the Apple case marked the end of a three-year process. The Commission first wrote to Ireland in June of 2013 asking for information on the practice of tax rulings in Ireland. In particular, the Commission requested the information on any rulings granted in favour of Apple.
The process was later formalised as a full investigation into the dealings between the State and Apple. That happened in June 2014. Ireland co-operated fully with the Commission’s inquiries. Over the course of those three years, detailed and comprehensive responses were provided to the Commission demonstrating Ireland’s view that the appropriate amount of Irish tax was charged. No selective advantage was given, and there was no state aid. In August 2016, the Commission announced that the Apple investigation was concluded and that it had reached a negative decision. At the same time, the Commission privately sent a detailed and technical legal document to the State setting out the analysis that underpinned its conclusion. This was published in December 2016 and the committee will have seen that the Commission has three distinct and indeed contradictory bases for the negative conclusion. Its primary line of reasoning is that Ireland should have taxed all the worldwide profits of the two non-resident companies. This is the heart of the final decision and the basis for the enormous recovery amount estimated publicly by the Commission. The second and subsidiary line of reasoning is that the Irish branches of the companies should have paid more Irish tax than they did on the basis of a different transfer pricing methodology. This is only referred to in outline in the final decision and the Commission has not specified a basis for calculating the recovery amount on this basis, although it would likely be significantly smaller than under the primary line of reasoning. The third alternative line of reasoning is that the Irish legislation allowed the Revenue Commissioners to exercise discretion which conferred a selective advantage on Apple. This is also only referred to in the final decision and the Commission has not specified a basis for calculating the recovery amount on this basis.
In September, the Government decided to appeal the Commission decision to the European courts. This is necessary to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation. As I have already explained, I am mindful of the need to avoid cutting across Ireland’s legal case in my contribution today. In the interest of being as transparent as possible, in December my Department published a summary of the legal pleas we have lodged in this case, which also explain what each plea means. I, therefore, do not propose to repeat those here today or to expand up these points. I will leave them to be debated before the courts. That said, it is important that I outline, in high-level terms, what I believe are the key persuasive arguments for taking an appeal.
It is untrue that Ireland provided favourable tax treatment to Apple. The chairman of the Revenue Commissioners has stated emphatically that there was no departure from the applicable Irish tax law by Revenue; there was no preference shown in applying that law; and the full tax due was paid in accordance with the law. It is important to take this seriously, as it is very damaging for our reputation to be called into question in this way. This affects how Ireland could be treated by other jurisdictions, damages Ireland’s credibility in the international tax debate and inhibits Ireland in pressing arguments that serve its national interest. A further concern is that the Commission is undermining the fundamental principle of international law that tax should be paid where the value is created. The central aspect of this case is that the economic activity that created the value in Apple’s business operations was not conducted in Ireland. Everyone knows that the iPhone and other well-known Apple products were developed in the US, not Ireland. Our tax legislation, which reflects international norms, only allows us to tax non-resident companies on the profits they make in Ireland. As a result, the bulk of Apple’s profits were not subject to Irish tax. In the decision, the Commission is attempting to rewrite Irish corporation tax legislation. Taxation is a core member state competence, which is enshrined in the EU treaties. This decision encroaches on member state sovereignty in the area of tax by extending competition rules into the tax area to an unprecedented and unjustified extent. In doing this the Commission creates uncertainty for business and investment in the European economy, both in its novel interpretation of longstanding rules and its unfair retroactive application.
It is important to emphasise that the bringing of appeal proceedings is not in any way an endorsement of aggressive tax planning arrangements nor is it a defence of the extremely low effective tax rates that can be achieved under the broken international tax system. It is the mismatch between the applications of the law in at least two tax jurisdictions that allows certain multinational companies to pay such low levels of tax globally. The reaction to the Apple decision has, at times, painted an outdated and unfair caricature of Ireland’s position on tax that is at odds with the evidence and overlooks our proven track record in recent years. The facts show our constructive engagement at the international table, with early implementation of reforms ahead of many of our partner countries. This has been confirmed by the head of the OECD, Angel Gurría, and was conformed more recently to this committee by the tax Commissioner, Pierre Moscovici. Despite the decision, Ireland remains committed to international efforts to reform international tax rules to ensure the correct tax is paid by multinationals in the correct place. Our view remains that it is important that this is done in the appropriate way, moving forward in tandem with other countries on the basis of a global consensus.
On foot of the Commission's decision, and notwithstanding the appeal, Ireland is legally required to recover the alleged state aid from Apple. In the press release for the announcement, the Commission said that it expects that the amount of aid totals €13 billion, plus EU interest. However, as members will have seen, there is no such figure in the final decision and instead Ireland is required to calculate the sums on the basis of the methodology set out in the decision. This looks back over a ten-year period for two companies and involves over 20 separate computations, taking into account any relevant tax paid in other jurisdictions. The EU interest provisions are then applied to the amounts applying a methodology that is set out in an EU Directive. It is too early to speculate on what the final figure will be as it requires complex calculations, but this work has been ongoing since September 2016 in co-operation with the Commission and Apple.
Some of the public debate on the case has been to the effect that Ireland should take the money and spend it. The Government disagrees with this position and is instead exploring how to place the sums in a ringfenced escrow fund pending the outcome of legal proceedings. It would be irresponsible and extremely short-sighted to consider the decision as a windfall for the State. An appeal has now been lodged that questions the validity of the Commission’s decision under EU law. As a result, there is a genuine question of who is entitled to these sums. If the appeal is successful then we will have to repay Apple. Based on the Commission’s view that the recovery sums may be reduced if other countries were to require Apple to pay more taxes, the ultimate entitlement of Ireland to this money in the face of competing claims from other jurisdictions is highly uncertain. We simply cannot spend money that we are not confident we are entitled to. Irish officials are currently negotiating the terms of such an escrow fund which may be established by a commercial contract with Apple, subject to the views of the Commission. The terms of such an escrow fund are subject to confidential and commercially sensitive considerations and as a result I am not in a position to discuss them at this time. I will provide an update on the contract and the figures involved when the process has been concluded in the coming months.
The formal deadline set out in the decision for recovery is 3 January 2017, which has now passed. It is not unusual and not at all uncommon for member states to require more time for recovery. For example, the Starbucks case related to an estimated €20 million to €30 million and took much longer than four months specified to be recovered. We therefore requested an extension, noting the complexities involved in the Apple decision and the fact that the four-month deadline imposed is the usual state aid deadline without any recognition to the magnitude of the recovery in our case.
While the Commission has not formally granted an extension, it did confirm that it is satisfied with Ireland's progress on this issue to date. This committee heard Commissioner Vestager attest to that fact herself this week. Work has long been ongoing to ensure that the State complies with the recovery obligations and this will continue in regular contact with the Commission to ensure that it remains satisfied with Ireland’s progress.
In conclusion, the Government is of the view that there was no breach of state aid rules in this case and that the legislative provisions were correctly applied. By appealing the decision, the Government is taking the necessary course of action to vigorously defend Ireland's position. Ireland has done nothing wrong. We have a proven track record in international tax reform and a strong commitment to meeting the best international standards. As I said earlier, I am mindful not to damage the important appeal that is now before the European courts, but I will engage with the committee to the fullest extent possible.
I thank the Minister for attending. I understand the constraints he is under in the context of discussing this matter. I have a couple of broad points to make. Among the reasons given for taking the appeal against the Apple tax ruling and for the refusal to collect the money was that it may not all belong to Ireland. In light of Commissioner Vestager's comment that the vast majority of unpaid taxes would be due in Ireland and not to another EU country, does the Minister for Finance now accept that this can no longer be offered as a valid reason to go ahead with the appeal? I cite France and Germany in particular, both of which have clearly stated that they have no claim whatsoever to this tax. Can we take that reason off the table at this stage in the context of why we should appeal?
No, we cannot because it was contained in the original decision. I do not know if the Senator has read the full decision by the Commission. The latter referenced this as a possibility. There was an accompanying press statement which also said that some of the €13 billion - if that is the correct figure - might be due to other countries. At ECOFIN, Spain and Austria have publicly said that they are considering making claims. It had become a political issue in Austria around the time of that first ECOFIN meeting, when the opposition in that country was demanding that the Government there should seek claims. The difficulty about this is that it suited the Commission that other countries would come in and start demanding extra tax from Apple. It meant that Ireland would be left with few friends when other people around the table thought there was a windfall due to their countries. From a public relations point of view, the Commission was very clever in its presentation and it seems to me that the Commission is now rowing back from that position. What it wrote, however, is what it wrote and what it put in the report is what it put in the report. There is another trap also, which I am sure the committee has seen, where if a country on continental Europe was to pursue a claim to the effect that it was entitled to part of the €13 billion because tax that accrued to Ireland subsequently should have been paid in its jurisdiction, would it not then be opening itself up to a similar state-aid inquiry? If such countries did not collect the appropriate amount of tax from Apple in their jurisdictions, does that not constitute the very essence of state aid?
Is the Minister disputing what the Commissioner has explicitly stated to the committee at its meeting earlier this week, namely, that the large majority of the money is, in her opinion, owed to Ireland? Is there a basis for the Minister disputing that?
No, I am not disputing it. I am simply saying that the assertion that there could be third-country claims to the €13 billion - if that is the figure - was much stronger on the day the decision was made in late August and was more emphatic in the accompanying press statement. It was also reflected in the full report that was published in December. The Commissioner is now putting a lighter emphasis on that but she may have had further information on the issue. As the Senator stated, France and Germany have already said they are not entering claims and this may have reinforced her opinion that it is not a big issue. My point is that it had been made a big issue initially.
No, we cannot take it off the table because the Commissioner is not doing so. The Commissioner has said that there is a possibility that countries which believe that Apple did not pay sufficient tax in their jurisdictions could make claims against the escrow account of the €13 billion when this is all resolved, if that is the way it goes. We cannot take it off the table because we would probably be subject to legal proceedings if that is the way it goes.
With regard to the Commissioner's comments about her staff investigating approximately 1,000 tax rulings being offered by European governments to companies and which investigations concern the amounts of tax they owed. The Commissioner also confirmed that there are no further open investigations into tax arrangements in Ireland or elsewhere. Does this prove that the investigation into Apple's operation in Ireland was not an attempt to get at Ireland's corporation tax through the backdoor and that it just happened to involve one of the world's biggest companies? Does the Minister accept her verdict in that?
I accept the information that she gave. I worked with Margrethe Vestager when she was the Danish Finance Minister for three years. When Ireland held the EU Presidency, I worked closely with her on banking union. There were particular issues in banking union in Denmark as it was outside the eurozone but there was going to be a banking arrangement that would apply across the European Union. I have no personal antipathy towards her. She is a good Commissioner and an effective person, but I disagree with the decision that was made. That is the issue and we are appealing it in the courts. We shall let the courts adjudicate.
We do not know how long this will last. It could go on for four years. I will give the Senator the information I have to hand. The legal process could take several years to conclude and, therefore, it is not possible to provide a comprehensive estimate. We expect further expenses at this time. The case has involved a significant degree of legal and technical complexity and additional expertise is being engaged where required. It is an important issue for the State and the case will continue to be resourced appropriately. It is €1.8 million but the other figures are billions of euro-----
No. The Minister is used to talking about billions. When Revenue is setting out taxation for indigenous companies it has a strict methodology for that. Was a methodology used for Apple and other multinational companies?
It is very difficult to be absolutely certain of the detail in retrospect. The first opinion was in 1991, which is 26 years ago. The Senator may recall, if she has done some research into corporation tax, that Apple came to Ireland in 1980. Right through the 1980s - like other exporting companies - it had export sales relief. Export sales relief meant that exporting manufacturing companies paid zero tax. Under Irish law, no manufacturing company that was exporting paid tax. This exemption was given by the European authorities under state-aid rules. Apple manufactured right through the 1980s, principally in Cork, and it did not pay tax because that was the agreement around export sales relief. It was only in and around 1991 that Apple began to come into the tax net. It was at that point Apple looked for an opinion on what its tax liability would be under the new rules.
If one traces it through the 1990s, first there was a 10% rate, which applied to manufacturing industries that were exporting. There was a case that ran all the way to the Supreme Court involving McCanns, the banana people. They asked to define the machine turning bananas to ripen them on the other side as a manufacturing activity. They won their case. I am speaking from memory now so members should not take this as a legal opinion but this is the story. As a result of that it was extended to all manufacturing companies. Manufacturing was defined very widely and included packaging, for example. Putting teas in tea bags would have been within the exemption or mechanically turning bananas over to ripen them. When one is trying to get a fix on what actually happened in 1991, there is a totally different context under Irish tax law. Revenue is absolutely categoric that the methodology it used was fully in accordance with Irish law.
It is my last point. Since tax is a sovereign competence, it is Irish law that applies in Irish tax cases. Revenue applied Irish law. There is a retrospective run on it now. There was another opinion in 2007. That is a long time ago as well.
Does the Minister think it is right that, as a Government, we allow companies like Apple to set up phantom companies with no employees or assets? Does that not ring alarm bells? Why would a company do that? Is there something in legislation that we can do to stop that happening?
Multinational companies structure themselves in different ways. Some of the structures are quite complex. It does not just apply to Apple. In Ireland's case, the legal advice and the opinion of Revenue was that only the profits generated from economic activity in Ireland were taxable. Apple paid the full 12.5% on the profits made on the economic activity in Ireland.
The two companies were non-resident companies. The opinion of Revenue was that the profits made by non-resident companies were not amenable to Irish tax. They were amenable to tax back where the parent companies were in the United States. The assumption was that while Apple did not pay tax on the profits which were accrued to the United States, they had a tax liability at 35% but that tax liability would only be crystallised into tax paid if the profits were repatriated to the United States. There was no attempt by the Irish authorities to open gaps or doors or anything else for Apple. We were very surprised that several years later there is a retrospective reach by the Commission in a way it had never done before. That is what we are appealing.
The Minister and his officials are very welcome. In speaking about the Commission's decision a few moments ago, the Minister said there was a mix of tax law and politics. Is he saying the Commission has an agenda against Ireland in respect of corporation tax? Can the Minister clarify what he means by saying a mix of tax law and politics was at play?
The Commission, as well as being the administration arm of the European Union, is also a political forum. The Deputy has dealt with Commissioners. It is a political forum where the political impact of what it does is assessed as well. It is part of the way Europe is run. I do not think it was focusing on Ireland in particular. It shares a view that I shared, and which I still share, that multinational companies, because of the mismatch of tax law in different jurisdictions, are not paying the amount of tax they should be paying. That is not the issue. I do not think Apple was paying sufficient tax worldwide. The argument is that the tax liability was not in Ireland; it was where the economic activity occurred. One can see the big debate that is starting again in the United States about reforming US corporation tax. To answer the Deputy's question on whether the Commission was having a go at Ireland, I would say not particularly. The issue was to give an edge to the reforms being conducted principally by the OECD but also by the Commission so that these mismatches, which give rise to a reduction in the payment of taxes, could be taken out of the system. It was not particularly directed against Ireland.
The question is how the politics influenced their decision, if at all. Does the Minister accept that from the Commission's point of view the decision was based on its interpretation of state aid rules and how they related to Ireland's application of tax law to Apple? What role did politics play? The Minister raised the issue. He said it was a mix of tax law and politics. I am trying to clarify, in the Minister's opinion, what role politics played in this decision?
I hope so but there is another difficulty there. The judges are not as familiar with common law and we are a common law jurisdiction. Sometimes when these things are discussed there is a mismatch between the opinions because they are coming at it from a different legal perspective. Someone asked one of our officials lately why there are not court cases about tax in Ireland. As the Deputy knows, under common law, once one gets the first court case, it creates precedent. They do not have that in European jurisdictions frequently where one goes to court again. The concept of precedent seems to be beyond the remit of some of the people who are dealing with these things.
I do not think it diminishes our chances but in the prediction business, it makes it more difficult for people here or in the UK, who see things through a common law lens, to predict with accuracy what the result will be.
The Commission's estimate is of €13 billion plus interest to Ireland. The authorities here have been looking at that since September. The Minister gave us some context in his opening remarks but can he clarify the emerging indications on that? Is there a solid basis for the estimate of €13 billion based on the Commission's decision? The Minister disagrees with the basis of the decision, as I do, but is its calculation standing up?
The Commission did not include the €13 billion in its decision. The €13 billion was the estimate it gave when it were describing what had happened. It included a method of calculation on the primary case. In the work that has been conducted to date by the Revenue Commissioners and in sharing the information with the Department, I understand there is no strong reason to disagree that it will not land at €13 billion or thereabouts. It is a ballpark figure. I will read the Deputy the note.
The recovery sums represent what, in the European Commission's view, is the amount of additional tax that would have been paid over the past ten years had Ireland applied the European's Commission's referred methodology. The recovery sum also applies interest to those amounts.
The Commission decision sets out its supporting rationale and the basis for making this calculation. However, there is no such figure in the final decision and instead Ireland is required to calculate the sums on the basis of the methodology set out in the decision. The work has been ongoing since September 2016 in co-operation with the Commission and Apple but so far my officials have not indicated to me that it will seriously over-run the €13 billion or come seriously short of it. There are other years to be assessed.
I will read a note on the interest as well because I do not want toad libit.
The application of interest in the recovery calculation is set out in the EU regulation published on the Commission's website. The interest rate varies according to the date and the individual member state, although generally speaking the rate is linked with EURIBOR rates. The interest is calculated on a compound basis and the interest rates will only cease to apply on satisfaction of the recovery order, that is, on payment. As soon as the payment is made by Apple the interest calculator stops running.
Has the decision raised any difficulties for Ireland in terms of other multinationals who might now question the issue of tax certainty? I refer to companies which have been given an advance Revenue opinion but which now see it retrospectively overruled by the European Commission under state aid rules. Does it undermine certainty around our corporation tax offering that a case of this magnitude is decided in this way?
Until the case is decided there will obviously be uncertainty about whose liability it was to collect the tax. It has not affected the flow of foreign direct investment into the country. The Commissioner, Ms Vestager, said they had gathered data on 19 other companies and none of the other 18 was proceeded against. The state aid activity of the Commission is ongoing and other files are being looked at. There is no other case against Ireland at the moment but I cannot say that a case will not be initiated in the future.
It emerged yesterday that NAMA had paid €158 million following the closing of the loophole around section 110 companies and that this preliminary tax liability related to its profits from September to December of last year. Given that it is a State agency, this is essentially a circular transaction but it has wider significance in that it calls into question the amount of tax that has been forgone overall in the past number of years by the use of these companies. Can the Minister comment on that? Does he know how long NAMA has been using the section 110 tax structure? Given that this is a very large liability for a period of some four months, does it raise question marks about the estimates of Revenue and the Department of Finance which were that the closing of the loophole would only bring in a total of €50 million for 2017?
I cannot add to what is in the public domain on NAMA's practice but I am assuming we will get parliamentary questions on it and we will give a more detailed response to them. I do not think we will be able to increase the estimate of tax forgone because I assume that NAMA did not try to change structure or behaviour when the law changed in the Dáil. It just accepted the new legal position but other companies are changing structure and practice to reduce liability. The Revenue will have some information on this as the year goes by.
The sales of property portfolios, through which this mechanism facilitated tax avoidance, started around early 2014 so it would probably be in autumn 2015 when the Revenue had detailed information in the form of tax returns from these companies. It was brought to our attention in early 2016 and we moved as soon as we had figured out a way of closing the loophole. Unusually, we published it in September rather than waiting for the Finance Bill. If I can get more information that I can stand over, I will give it to the Deputy.
At the joint committee meeting she attended recently, the Commissioner stated:
I can say how it looks from my side. We did not investigate how Apple organised its operations. We did not investigate the cost-sharing agreements. We did not investigate the fact that Apple records its profits in Cork, Ireland.
We were looking at whether the allocation of profits was recorded in the branch and whether, therefore, it had to be taxed in Ireland, or recorded in the stateless headquarters and, therefore, not to be taxed in Ireland. We found that the recordings by Apple, which we did not question, could not be supported by economic activity. That is why they ought to be recorded in the branch of the company that is taxable in Ireland.
I am trying to reconcile, in my own mind, the statement made by the Department of Finance on the Irish branches of Apple Sales International and Apple Operations Europe. Can the Minister give us an opinion on the Commissioner's statement, particularly on the stateless headquarters and the activity levels she says were not supported by economic activity?
The statement is an inaccurate characterisation of the facts of this case and the application of Irish tax law. These companies are not Irish tax resident. Our tax legislation, which reflects international norms, only allows us to tax non-resident companies on the profits they make in Ireland. The central aspect of this case is that the economic activity that created the value in Apple's business operation was not conducted in Ireland. Everybody knows that the iPhone and other well-known Apple products were developed in the US, not in Ireland. The bulk of the profits, therefore, were not Ireland's to tax.
The central point of Ireland's response is that the 12.5% tax rate was applied to the Irish branch and that was all that could be subject to Irish tax under the legislation. That is what Revenue did. Ireland is not seeking to defend the outcome achieved by the company but I can be clear that Ireland received all the tax that was due under Irish law. Importantly, the amount of tax correctly reflects the economic reality of the activity taking place in Cork. The underpinning issue from Ireland's point of view is that the OECD has laid down the rule of what should be taxed. The profits that accrue from economic activity in a particular location are liable to tax in that location. The members probably have Apple phones themselves and if their eyesight is good enough they can read the little italic mark in the back which states that it is designed in California and manufactured in China. This shows where the economic activity is. Non-resident companies under Irish law are not liable to tax on profits accrued elsewhere.
The Commissioner is not giving a tax opinion but a state aid opinion. That will be the subject of the case. Apple paid its tax on all its profits in Ireland and last year it was one of the biggest corporate taxpayers in the country.
The Commissioner went on to say, "We do not investigate or value the intellectual property." If I interpret it correctly, in dealing with activity levels in Ireland, they are actually putting a value on the intellectual property, or they are at least stating it to be economic activity. Am I wrong in this contention?
I do not know. I am not competent to answer that. In the public presentation of the case, the Commission and its spokespersons have always said that, effectively, one cannot stand over a case where the biggest company in the world is paying 0.01% or an amount of that nature - a figure which the Commission has put into the public domain. Of course, that is true and I would not stand over it either. The point is that Apple had a liability of 35% for the profits that accrued in the United States but under the law in that jurisdiction, the tax liability only crystalises if the company repatriates the property. Okay, the company did not pay tax. My view is as follows. We have been doing it for three years now and those who have taken part in the debates on finance legislation know that we are progressively changing the law, and we have done so reasonably successfully without scaring anybody. The point is that tax avoidance occurs when there is a mismatch. It takes two to tango and unless it is done internationally, the issue is not resolved. This is to put all the burden on Ireland for tax liabilities accruing in other jurisdictions. I do not see why I or the Revenue Commissioners should be responsible for collecting tax on Apple's profits in the United States, Austria or Spain. It does not make sense that a small country such as Ireland should have that burden put on it. That is part of the case we are going to fight.
That is part of it. We would say that the Revenue Commissioners fulfilled all their obligations under Irish law and collected all the tax due to Ireland under that law. It is not our business to collect tax that was appropriately due in other jurisdictions. I am not defending the case that multinationals should not make a bigger contribution internationally. The matter has to be sorted and the Organisation for Economic Co-operation and Development, OECD, has done much work in that regard.
I welcome the Minister. We received his statement very late. He mentioned that Ireland was asked by the Commission to collect the tax on Apple's worldwide profits. I challenge that statement. Is it the Commission's suggestion that we tax Apple's profits on products sold in the United States of America?
The answer is "No". So the statement made to this committee - a throwaway statement that the Commission is asking us to collect tax on Apple's worldwide profits - is false. The accurate statement is that the Commission is asking us to tax the profits that are recorded by Apple of sales that happen outside of the Americas. Would that not be a more accurate statement?
Fine. Let us try to see if we can understand why sales of products by Apple in Canada, the US and South America are recorded in the United States of America as opposed to Ireland and why every other sale outside those jurisdictions are recorded in Ireland. The Minister has made the following comment a number of times. If we look at the back of an iPhone, we can see how we on this committee are being taken for fools. We can see where that iPhone is manufactured and produced. Mr. Tim Cook, in sworn evidence before the US Senate, stated that 95% of the creativity that goes into the iPhone comes from California. Nobody disputes that or where it is manufactured. Where does the economic rights for the intellectual property for all sales recorded outside of the Americas lay? In which company does that lay?
This is a statement of fact. This is not a dispute. Apple had structured itself from the 1980s with an Irish-registered company owning the intellectual property for all products sold outside the Americas. Is that not a statement of fact? Did representatives of Apple not say that in the US Senate hearing?
I am not here to speak for Apple. I communicated with the clerk to the committee that, because of the legal cases, I am constrained in what I can say. The Deputy is trying to push me into a position where an answer of mine could be used in evidence at the appeal. I am not going to go into that position.
It might sound very plausible to people out there when the Minister comes to the committee and asks why should we tax sales of Apple products in Spain, the US or wherever. We know the US taxes the sales of products in the US, Canada and the rest of America. That has been identified. In all of the other jurisdictions, why did Apple structure itself in this way? I will rehash what Mr. Tim Cook and Apple have said.
It is that an Irish-registered company pays for half of all the intellectual property or creativity going into Apple products under an arrangement dating back to the 1980s. The economic rights for the intellectual properties reside in an Irish company. Is it not the economic rights of the intellectual property that allows for the products to be taxed in the same jurisdiction, regardless of where the products are sold?
From my perspective, the Deputy's statement is not the issue. The Deputy is cross-examining on the basis of the thesis that the Commission was right in its findings. He is bringing forward evidence of how Apple was structured to prove it was right. He is saying that under state-aid and tax rules, the liability is with Ireland. I am saying I cannot enter that debate with the Deputy because it is the very cornerstone of the appeal. We are saying the Commission is not-----
I am challenging inaccuracies that the Minister has put before the committee. We have established one in the Minister's assessment that the Commission is asking us to tax all worldwide profits. We understand now that it is not the case and the statement has been debunked. I am challenging the Minister's comment to the committee that it is not appropriate that we would be asked to collect tax for sales that happen in other jurisdictions. I am not talking about the Commission. It is up to the Commission to decide about state aid. I want the Minister to recognise that the economic rights for the intellectual properties for all Apple products sold outside the Americas rest in an Irish company. That company, in which Apple has structured those economic rights, is not tax-resident in this State. Let us establish some facts. Is that not the facts of the matter?
The intellectual property at the time was not in Ireland and, therefore, it was not attributable to the Irish branch. That is the central point of the case. I came here with the full understanding from the Chairman that we would not prejudice the case. The Deputy is asking me to take a position on the case in agreeing with him when, effectively, he is arguing the Commission's side of the case.
We are trying, in the first instance, to establish the position regarding economic rights. We are talking about economic rights and not intellectual property. I would appreciate if the Minister answered the questions. My contention is that economic rights for all sales of Apple products outside of the Americas rested with an Irish-registered company. That would not alter the Commission's argument one iota. The Commission's argument is that because of where the economic rights lay, it was impossible for them to be assigned to that company because it had no staff and physical presence.
There was no way to deal with risk or any other management issues and therefore it had to be the branch. Does the Minister dispute the sworn evidence by Tim Cook and others before the US hearing that as far back as the 1980s, the economic rights of Apple products rested in an Irish-registered company as a result of a profit-sharing agreement with Apple that was entered into again in 2008 and signed by Tim Cook as CEO of Apple, along with his vice president and one other financial director?
If a company producing widgets was established in Dundalk and sold those widgets in Australia, Spain and the United States, where would the profits be taxable? The intellectual property for the development of the widgets rests in the company in Ireland. Where would the profits be calculated? Is it not standard that they are calculated in Ireland?
It is controlled in Ireland. Is it not the case that the profits of an Irish company, controlled, operated and tax resident in Ireland, which sells products in other jurisdictions, are taxable at the point where they are recorded?
We are talking about me rubbishing the Minister's comments about how Ireland could not be expected to collect taxes for products sold in Spain, Africa or wherever else. Every Irish-registered and controlled company that sells products overseas is taxable on its profits recorded in Ireland. Is that not a fact?
On a point of information, the example Deputy Doherty gives of widgets relates to an Irish-incorporated, Irish-resident company. The Apple issue relates to two non-resident companies. There is a fundamental distinction. We can argue about where they should be resident but that is the point.
I did make the point but the point that the Commission makes very thoroughly is that it is impossible for all of these profits to go through a company that does not exist, that has no physical presence, no employees, no way to deal with risk, control or distribution and indeed it was the Irish division of that company which carried out all of those functions on behalf of the non-registered company. The point I am making to the Minister is that it is standard practice that if the intellectual property for products sold worldwide rests in Ireland, that is where it is taxable.
In the Commission's judgment there are minutes recounted stating there was no evidence to underpin the offer by the Apple tax adviser to calculate its taxable profits at $30 million to $40 million. Would it be standard practice that the Revenue Commissioners enter into agreements where no methodology has been written down, no profit and loss, no transfer pricing documentation and, as the Apple tax adviser says, no evidence to back up the numbers suggested?
That may be so but it could also be that no records were retained. It is not a matter for me. The Chairman of the Revenue Commissioners will be here very shortly and the Deputy can ask him the question. This goes back 25 or 26 years in the Revenue Commissioners. How can I answer the question?
I just want to follow up on the previous round of questions. The Minister should know the answers to these questions because he has decided to appeal a Commission ruling which states that we are owed €13 billion plus interest, money this State could do with. I want to know, and I suspect many in the wider public want to know, why the Minister decided to pay millions of euro to lawyers to ensure we do not get €13 billion when an EU Commissioner came here this week and explained in very simple and convincing terms why that €13 billion is owed to this State. It is entirely reasonable to ask on what basis the Minister has made that decision because she made a very simple argument to the effect it is not credible to allocate profits to a company that has no real existence, no economic activity, no employees and no office. That is the basis of her case. We are owed an explanation for why the Minister thinks there is some problem with that because it is self-evident that these companies did not have an economic existence, yet Revenue thought it acceptable to allocate and record profits in a company that has no real existence and the Minister is willing to go to court to defend that decision and say no to €13 billion. Can he please explain that to us?
First, it was the Government that took the decision to appeal and it did it on my advice. Second, the decision was put to the Dáil and a very big majority in Dáil Éireann supported the decision to appeal. I do not have the numbers now but that is the position.
The reality of the arithmetic is that Fianna Fáil, Fine Gael and Labour have a very big majority in the Dáil and that is what they decided because it was in the best interests of the country.
Commissioner Vestager is a very impressive lady but she is on the other side of this argument and we are appealing against the decision made by her and her officials which affects Ireland, not on unknown grounds. In November or December we published the main legal grounds on which we were appealing and they are available publicly. I did not put them into my speech today because the committee already has them. They are the grounds for the appeal. We think we are on very solid grounds and we have the best of legal advice. It is a given that multinational companies organise their affairs to minimise their tax and maximise their profits but that is not the point here. The point is that the liability was not on Ireland to collect additional tax from Apple because it had collected everything due to Ireland from economic activity to create a profit in Ireland. That is the issue. How it was structured after that and whether it paid sufficient tax in other jurisdictions - it paid very little tax overall - is the problem of the mismatches in tax law between different jurisdictions. Clever tax lawyers can play one jurisdiction off against another. To say the responsibility for fixing all that rests on the shoulders of a small country is facile and we do not agree.
The explanation for why Fianna Fáil, Fine Gael and Labour might have decided to support the appeal is of course that they were all in government over the years that this took place and if the ruling goes against the Government and Apple, they are all implicated in this.
That is why they have decided to vote against it. The Minister has not given an argument that is in any way convincing or could be understood by lay members of the public, who have a big stake in this given that the sum in question is €13 billion, as to why he believes the Commissioner was incorrect in her basic assertion. Ironically, the representatives of the various parties on this committee tried to impugn her motives and suggest she was being political when, in fact, she was very convincing in saying she was just looking at the matter on the basis of the state aid rules. Instead, individuals were suggesting this was really about an assault on Ireland's corporate tax rate and implying the Commission and other states in the European Union were jealous. This is blurring the issue and being political. Even in the Minister's response just now to me, he said we are doing what we are doing because it is in the best interest of Ireland. Surely when dealing with a matter as serious as this, the decision should be based on what the Minister believes to be the truth about it. It should not be a case of acting in a partisan way, regardless of the truth, to do what the Minister believes is in the best interest of the State. Amazingly, he believes refusing €13 billion is in the best interest of the State.
How can the Minister seriously suggest it is reasonable for Apple's profits to be allocated to a company that has no existence? That was the essence of the matter. The Minister still has not answered the question.
On the question of the other states in Europe being owed moneys, it could not be a question of the American sales because they are dealt with elsewhere, as Deputy Doherty said. What the Commissioner said is that any other state is free to make a claim on the €13 billion but it would have to provide the evidence. The fact is that no other state in Europe has made a claim on it. No figures were provided. The Commissioner said that, as a consequence, the only place to which the profits could reasonably be allocated was a company with a real economic existence, that is, the company that was tax resident here in Ireland. It was stated the profits should have been booked and taxed here and that it was not reasonable to allocate them to a company that had no existence and was tax resident nowhere.
The reality is that this is a classic BEPS scenario arising from the mismatch between tax laws in two different jurisdictions. Although the profits concerned were generated in the United States, that country did not tax them as the companies were not incorporated there. In line with the tax treatment of non-resident branches internationally, the Irish law focuses exclusively on the profits arising from the activities of the branch in Ireland, and this regards any profits arising elsewhere. This is how Irish tax law operates and has operated always. Nobody challenged it.
Ireland is not seeking to defend the outcome achieved by the company but it received all the tax due under Irish law. Importantly, the amount of tax correctly reflects the economic reality of the activity taking place in Cork. I am not making a case to defend Apple's corporate structures in respect of non-resident companies in Cork. That is not my business. I am saying that because of the way in which they were non-resident, there was not a tax liability in Ireland for the profits put through them. That is the argument.
The Commission, in my view, is misusing state aid powers to lay the blame for a mismatch in international tax rules at Ireland's door. Its approach conflicts with the core international tax principle of ensuring taxing rights are aligned with economic activity. That is another strong plank in the case we will be pursuing. The profits charged to Irish tax fully reflect the operations carried out in Ireland. That is a fact. The tax on profits generated in Ireland was fully paid. The driving force behind the profitability of the two companies is Apple's highly valuable intellectual property, which is wholly created and developed in the United and thus is not taxable on the basis of the activities in Ireland.
Could the Minister provide clarification on a question asked by Senator Conway-Walsh? We were talking about the cost to date of €1.8 million. If it is to take some years to deal with this case, that figure will obviously increase year on year. Are there any circumstances in which the State could get back that money, depending on the outcome?
Could I also have clarification on the methodology the Commission is asking us to apply in the calculation regarding the €13 billion? Is that, in itself, not interference in the role of the Revenue Commissioners in that it is dictating what they should do?
The Department of Finance, but mostly based on technical work by the Revenue Commissioners. The Commission has set out a methodology for how the calculation should be made over a ten-year period. It is quite complex.
If the Minister's position is that the Commission is wrong and that the €13 billion in taxes is not due, does it not follow that the Commission, by asking or dictating that a particular methodology be used to calculate the relevant figure, is asking the State here to stand up its case and imposing a position on us that is not acceptable?
It is asking the State to recover what it regards as improperly paid state aid to the tune of approximately €13 billion by using a methodology designed and set out by itself but it is a matter of law in state aid cases that one recovers the amount before the appeal takes place.
Yes. It is complicated. It it said that because the matter is under appeal, the sum should be put in an escrow account and then go to the winner of the court case. It has to be recovered up-front. One cannot wait to see the result of the court case before one recovers it; that is the law.
I do not like to attribute motives to the Commission but there is a general move in the Commission as a whole to extend its power and remit. I see this as part of that. I am not saying the Commission does not believe what it is doing or is not acting from good motives or genuinely. It is a different perspective.
Point 7 of the document we published in the late autumn to set out the grounds on which we were taking the appeal states:
The Commission has exceeded its powers and interfered with national tax sovereignty
The Commission has no competence, under State aid rules, unilaterally to substitute its own view of the geographic scope and extent of the Member State’s tax jurisdiction for those of the Member State itself. The purpose of the State aid rules is to tackle State interventions which confer a selective advantage. The State aid rules by their nature cannot remedy mismatches between tax systems on a global level.
I put a question to Commissioner Vestager this week that, on the basis of Tim Cook's statement in August, it was quite clear that the company sought an opinion from Revenue, which it took and applied, as it saw it, correctly and legally. On the basis that Apple sought and applied that opinion and given the retrospective nature of the decision of the Commission, subsequent to losing the argument in the European Court of Justice, ECJ, is it possible Apple could take a case against the State on the basis of the information received, when adjudicated on by the ECJ, being incorrect?
The Commissioner said during the week that the bulk of the €13 billion would be due to the Republic of Ireland. Has there been an assessment of how much of that €13 billion would be due to Ireland based on conversation with the commission?
Windfall amounts such as this cannot be used for ongoing and recurring expenditure. After that it would be a matter of argument between a different Commission and the Irish authorities as to whether a portion could be attributed to capital projects. That is unclear. The fiscal rules we have signed up to under the Stability and Growth Pact would deem this to be once-off revenue and cannot be used to finance permanent increases in expenditure. In any event, the possibility of spending the money does not arise. It will not be available to the Exchequer, unless and until the legal proceedings are fully completed. It is expected that it will be several years before this is resolved. It certainly could not be used for any recurring expenditure of a current expenditure nature. We will have to wait and see whether it will be possible to get agreement to use some of it for capital investment.
I move on to section 110 and the matter raised earlier in regard to the vulture funds. Has there been any analysis of how much tax the vulture funds avoided, using section 110, for the period that the loophole was available?
No, I have not seen any analysis of that. Everyone's tax affairs is confidential, whether personal or corporate tax affairs, and the Revenue is obliged to keep the tax affairs and the tax details of all companies confidential. I would not have access to confidential data. When the Revenue gives me information it does it globally, referring to the sectors rather than individual companies. The reason we know about NAMA is that it published this in the quarterly report. Have we any idea of what was lost? The Revenue has put in a figure of €50 million. That was the advice it gave me to include in the estimates for 2017. It expects to collect another €50 million. On the face of it, one would expect more than that to be collected but it says the change in the law will lead to a change in practice, so that companies will structure themselves differently. If things were allowed to continue, the amount of tax that would be collected would be bigger but we have to wait and see. It is very hard to forecast these things.
I am suggesting, on the basis of €158 million from NAMA from the last quarter, that the €50 million is well overshadowed by that. I suggest that perhaps a sectorial analysis should be conducted to try to recoup those funds that were aggressively avoided by the vulture funds.
I do not think we can recoup. Section 110 of the 1997 Act was designed to make Dublin, in particular, but Ireland in general, attractive as a location for financial services. That was the intent of the section. The section was then misapplied on the advice of tax lawyers to property portfolios but as I said to Deputy McGrath it was not clear that was being done until approximately the autumn of 2015, and then there was a discussion about how widespread it was. The nature of tax avoidance measures that are brought up through the big tax advice companies and by tax advisers is that they are very secretive, and until the Revenue gets tax returns in and sees the data it is very hard to form an opinion. The loophole is blocked now and we think it will work. However, there will be an ongoing analysis of the effectiveness of the legislation we brought in last autumn.
It is for the State to recover under the legal direction from the Commission. In other words, we have a legal obligation to recover if it is deemed to be state aid, and we have to recover before the legal appeal and give it back if the appeal is won.
If the Commission is successful in the appeal, and the Commission seems to be saying that most of the €13 billion will go to Ireland but the Irish authorities refute that and say we are collecting for other countries, who then decides how much is owed to the other jurisdictions in that event and how is it going to be collected?
I would have thought initially that all the recovery would be due to Ireland. That was my initial response. However, the Commission introduced the idea that other countries in Europe might have a claim on the €13 billion but the Commissioner now is less emphatic about the amount. It would be for the authorities in the other countries to make the claim. There is an uncertainty about the amount. There is an uncertainty as to the methodology which would lead us to a figure of €13 billion and whether the figure will be €13 billion or not. If there are other countries claiming that part of it is due to them we will have to see where that lands. That is a long way down the road.
The Irish authorities say that Apple was adhering to the letter of the law. If the Commission is successful in the appeal, how difficult would it be for the Irish tax authorities to collect the €13 billion from Apple? They believe they have complied with the law and the tax rulings. Would it be enforceable? Would the Irish authorities be able to enforce the collection of the €13 billion, even if the Commission is successful in the appeal?
The discussions are ongoing with Apple, and it are co-operating. If it did not co-operate we could take enforcement proceedings in the Irish courts and have the force of law to collect, but we are not going there. We think that as the details are resolved, Apple will transfer money to the escrow account.
When the Commissioner was here, she stated that the Commission sent out circulars to 19 other Irish companies with the same questions that it would have sent to Apple. The Commission stated that in the other 19 companies it has not found anything that compares to the Apple case. Have the Revenue Commissioners anything to say on that?
No. The Revenue's position was that there was nothing in any of the files, including Apple, that would give rise to the initiation of an inquiry. I do not have access. As I stated previously, these files contain data that are confidential between the companies and Revenue, but what the Commissioner said was there was nothing in this documentation that was examined by the Commission which caused it to initiate an inquiry into any company other than Apple.
I acknowledge that 11.30 a.m. was a deadline but if the Minister has time for a couple more questions, I myself have a couple.
Reference was made in the meeting with the Commissioner about Irish authorities' perceived view that they were not receiving procedural fairness in their dealings with the Commission. Maybe the Minister could elaborate on that and on the process - how much feedback the Minister got, the timeliness of the feedback and other issues involving the interaction between the Commission and the Department and the Minister in advance of the ruling. Was it a surprise on 30 August when it came out and how much prior notice of the announcement were the Department and Revenue given?
It was indicated to us some time in early summer that the ruling would come out in the early autumn, in September-October but more likely to be in September. I am speaking from memory but I think I put this on the record previously. When we got the call some time in late August that it would probably come out in the first days of September we were just surprised at the timing, but not particularly surprised. I expected it would come out anyway in late September at that stage and then it was announced in August. I had met the Commissioner - I forget on what date - and discussed it, and she had indicated that she would let us know in advance when the ruling would come out. Therefore, I was not surprised at the timing but I was surprised at the amount of money. Quite frankly, it was the widest possible interpretation that one could take.
No. We had not done any calculation on that basis. Speaking personally, I was surprised that there was a finding that the profits outside Ireland and in all those countries where profits were made were attributed to Ireland and that there was a responsibility for their collection attributed to Ireland.
If one looks at the precedents, Starbucks was €30 million or €40 million and Fiat involved a small amount of money. There are a couple more. They all had findings against them but small amounts of recovery money.
There was a suggestion earlier that Governments over the years had issued these rulings. The Revenue issued these rulings. The Revenue Commissioners are independent of Government. Regardless of the political hue at the time, these were issued. I want the Minister to confirm such was the case and it was not Fianna Fáil, Fine Gael or Labour which was making these rulings.
The Revenue would say it acted all the time in accordance with tax law. The fact that we do not tax the profits of non-resident companies for their profits outside of Ireland is a matter of law. Always in our dealings with the Commission, the law on tax that applied was domestic law because tax is within the competence of the sovereign, not within Europe.
I would not have that detail. It would be a matter for Revenue. A lot of this is not shared because it is confidential.
The key point, from my point of view, is the fact that Apple had a particular structure for their company - it was not illegal - is not the concern of the Irish Revenue authorities. The concern of the Irish Revenue authorities was to collect all the tax that was due in Ireland. One might not like the arrangement that was made by a multinational but if it was in accordance with law, and if the G7, the G20 and the OECD had not succeeded in eliminating the mismatches which allowed large global multinational companies to avoid tax, my belief is the onus should not be put on Ireland.
Is it fair to say that the Commission said if it cannot be taxed in America it must be taxed in Ireland but the Minister's view is just because it is not taxed in America does not mean it should be taxed in Ireland?
Finally, what has been the impact of this decision on Revenue's ability to provide tax rulings and certainty for business? Has there been any impact on potential business or business existing in the State, particularly from foreign multinationals? I asked the Commissioner about other cases and, as the Minister alluded to earlier, the Commissioner stated there were no other open files of investigations. The Minister stated that does not mean there cannot be in the future but they looked at 19 others and they have not opened any investigations. I presume that is a positive for the investment climate for both existing and potential new businesses. Has there been any effect?
Our guest is Mr. Niall Cody, chairman of the Revenue Commissioners, joined by Mr. Eamonn O'Dea and Ms Kate Levey. I welcome them to the meeting.
I advise the witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.
Mr. Niall Cody:
I thank the committee for giving me the opportunity to make my opening statement. As members of the committee are aware, and well used to, I am constrained, for reasons of taxpayer confidentiality, in discussing the tax affairs of any taxpayer. Section 851A of the Taxes Consolidation Act 1997 specifically provides for such confidentiality. Further constraints arise in this case due to the fact that it is the subject of ongoing legal proceedings in the European courts and I am very conscious of legal limitations on what I can discuss in public as a result of those legal proceedings.
The committee's letter of invitation indicated that the committee wishes to engage specifically on the Commission’s decision in this case and wishes to explore the factors underpinning it in the context of state aid rules. Having received legal advice on the matter, it is my understanding that there are significant limitations on discussion of pending legal proceedings in any public forum. Specifically, I am advised that I should not discuss the substance of the legal case, the state aid analysis in the Commission decision or the legal grounds relied upon by the State in support of its annulment application. Having said that, I want to be as helpful to the committee as possible and I understand that the EU state aid investigation raises broader international tax issues, including in relation to tax administration.
When the Apple decision was announced last August, and prior to the Government's decision to appeal the decision, I issued a statement responding to the decision and it is important that I recap on the content of the statement:
Revenue co-operated fully with the Commission’s investigation.
We provided all relevant information and explanations to the Commission to demonstrate that Revenue collected the full amount of tax due from Apple in accordance with Irish tax law. Apple has confirmed on the public record that the relevant companies were not tax-resident in Ireland and under Irish tax law, non-resident companies are chargeable to Irish corporation tax only on the profits attributable to their Irish branches. The profits of non-resident companies that are not generated by their Irish branches – such as profits from technology, design and marketing that are generated outside Ireland – cannot be charged with Irish tax under Irish tax law.
The issue of international tax planning, involving mismatches between different countries’ tax rules, is well known and is the subject of the OECD BEPS project. Those mismatches go to the heart of what the case is about.
And while I cannot otherwise comment on the specific facts of this case, I can confirm that -
- there was no departure from the applicable Irish tax law by Revenue;
- there was no preference shown in applying that law; and
- the full tax due was paid in accordance with the law.
As the members know, the Government decided to appeal the European Commission’s decision and an annulment submission has since been lodged with the General Court of the European Union. While I am not free to discuss the detail of Ireland’s appeal of the decision, the main lines of argument in Ireland’s annulment application have been published by the Department of Finance and I would like to read the key elements of those arguments:
The Commission decision of 30 August 2016 (the Decision) wrongly asserts that two opinions given in 1991 and 2007 by the Irish Revenue Commissioners “renounced” tax revenue that Ireland would have otherwise been entitled to collect from the Irish branches of Apple Sales International (ASI) and Apple Operations Europe (AOE). The opinions involved no departure from Irish law. The ordinary tax rules applicable to branches in Ireland of non-resident companies are in Section 25 of the Taxes Consolidation Act 1997. The opinions simply applied section 25, which in accordance with the territoriality principle, taxes only the profits attributable to the branch, not the non-Irish profits of the company.
The Decision also mischaracterises the activities and responsibilities of the Irish branches of ASI and AOE. These branches carried out routine functions, but all important decisions within ASI and AOE were made in the USA, and the profits deriving from these decisions were not properly attributable to the Irish branches of ASI and AOE.
The Commission’s attribution of Apple’s intellectual property licences to the Irish branches of AOE and ASI is not consistent with Irish law and, moreover, is inconsistent with the principles it claims to apply, as is its stated refusal to take into account the activities of Apple Inc.
As members know, Ireland submitted its annulment application to the General Court of the European Union in November 2016. In terms of the next steps in the legal process, my understanding is that the European Commission has until mid-March to make a submission to the General Court in response to Ireland’s annulment application.
Ireland will then have a further opportunity to respond to the Commission’s submission and following Ireland’s response, the Commission will make a final submission. Other interested parties also have the opportunity to apply to the court to make submissions. The case will then be considered and adjudicated by the General Court, with a further right of appeal to the Court of Justice of the European Union available to both parties. The process is therefore likely to take a number of years.
On the broader issues raised by the Commission's decision, the European Commission’s state aid investigations into the taxation of multinational companies reflect a broader international policy focus on the ability of companies operating cross-border to exploit gaps between the tax laws of different jurisdictions to reduce the amount of tax that they pay.
Part of the international tax policy focus in recent years has been on tax rulings or tax opinions, as they are called in Ireland, and their use by multinational companies to gain certainty in respect of their cross-border tax structures. In particular, the Commission launched its investigations into ruling practices in all EU member states in 2013; EU member states agreed amendments to the directive on administrative cooperation in 2015 to provide for rulings with a cross-border impact to be exchanged between all member states from 1 January 2017 onward. OECD BEPS Action 5 contained a similar initiative which came into effect on 1 April last year; OECD BEPS Action 5 also introduced best-practice guidelines for the issuing of rulings, and the EU recently finalised its best practice guidelines on 6 December last.
I would like to set out the position regarding the Revenue practice on issuing opinions. In providing opinions, Revenue's role is to set out our view of the correct interpretation and application of the law so that taxpayers can understand and comply with their obligations. Unlike the situation in some other countries, Revenue does not issue legally binding tax rulings. Revenue opinions cannot and do not depart from the tax law that applies in any case.
Revenue has published detailed guidelines on the provision of opinions or confirmations in respect of tax matters. Guidelines on opinions-confirmations relating to cases dealt with by Revenue’s large cases division, LCD, were previously contained in a tax briefing published in 2002. These guidelines were subsequently updated in 2014 and again more recently in 2016. There are separate guidelines which cover requests for opinions submitted for non-LCD cases through the Revenue technical services.
These guidelines set out in detail the procedures to be followed by taxpayers in requesting an opinion from Revenue. Opinions are only issued where the matter is complex or where there is genuine uncertainty regarding the applicable tax rules. Liability to tax should not be left uncertain, so Revenue will provide an opinion on how the law should be applied to complex situations. Almost all tax administrations around the world do this and any taxpayer can request an opinion from Revenue. Opinions from Revenue are specific to the particular case and the law provides for confidentiality of taxpayer information. For that reason, Revenue opinions are not individually published.
As I have already mentioned, the use of tax opinions by multinational companies is an issue that has been discussed at international level, both OECD and the European Union, in recent years. The outcome is that last year both the OECD and the EU designed exchange of information mechanisms so that all rulings that have a cross-border dimension will be automatically exchanged with other countries from now on. Revenue is participating fully in these initiatives and has recently implemented both the OECD initiative and the EU directive, and has published a detailed manual setting out the new procedures. The sharing of such information between tax administrations should help reduce the opportunities for multinational companies to exploit gaps between different countries’ rules in the future.
In light of these international developments, we have been reviewing our practice for the issuing of opinions and we have recently updated our practices in a number of respects. At the time of the Government decision to appeal the Apple decision, we committed to reducing the maximum period for which opinions can apply from seven years to five years in line with the OECD best practice guidelines and, going forward, we will publish the number of opinions provided each year in our annual report.
More generally, in regard to international tax developments, I know that members of the committee are familiar with the OECD’s base erosion and profit-shifting initiative which has specifically targeted aggressive tax planning by multinational companies, recognising that it is a global problem that requires countries to work together to address it.
Ireland has responded quickly to a number of the BEPS recommendations which were made in October 2015, notably as an early mover in introducing country by country reporting. The EU anti-tax avoidance directive, which was agreed in 2016, was a significant milestone in terms of implementation of a number of other BEPS recommendations and Ireland will be implementing the directive in legislation in accordance with the agreed timelines set out in the directive.
Ireland is also fully engaged in the work to create what is referred to as the multilateral instrument or MLI. This will be used to implement the tax treaty-related changes resulting from BEPS to tax treaties globally. Countries, including Ireland, are now finalising their analyses of the various provisions in their existing treaties to prepare for the MLI.Revenue is playing an active part in this work given our role in the negotiation of double taxation agreements. The MLI is a key part of the OECD’s effort towards the quick and consistent implementation of anti-BEPS measures into existing tax treaties.
Revenue has invested significant resources in international tax in recent years. We play a full role in both OECD and EU taxation discussions and a number of the policy developments relate specifically to exchange of tax information between tax administrations. Tax administrations are working more closely than ever before and we are learning from each other in order to combat both tax evasion and tax avoidance more effectively.
In regard to the state aid investigation, I reiterate that Revenue can only operate within the law. Revenue opinions do no more than provide clarity on the application of the law and there was no departure from the applicable Irish tax law by Revenue in this case. In accordance with the law, Revenue attributes profits to branches of non-resident companies by reference to the individual facts and circumstances of the branch. We consider the economic reality and activity of the branch to determine the profits generated by the branch. What is it that the branch does? Revenue can only tax on the basis of the economic reality of what is being done in Ireland.
As I mentioned at the outset, I am very conscious of the legal limitations on what I can discuss due to the ongoing court proceedings but I will make every effort to respond to questions members of the committee may have, within that constraint.
I welcome Mr. Cody and his colleagues from the Revenue. I appreciate the constraints he is working within but I want to focus initially on what is the nub of the case, as I read it and having read the Commission's overall decision. It goes back to the tax rulings, as it calls them, or the advance opinions, whereby the basis of deciding how much of the profits of Apple Sales International, ASI, and Apple Operations Europe, AOE, reside in the Irish branch and how much reside in head office. It set out in its decision the basis that was used so in the case of ASI, for example, the 1991 tax opinion was that the net profit allocated to ASI's Irish branch would be calculated as 12.5% of all branch operating costs, excluding material for resale. Similarly, in the case of AOE, the net profit attributable to the Irish branch would be calculated as 65% of that branch's operating expenses up to an annual amount and 20% of its operating expenses etc.
Can Mr. Cody clarify for us, and I do not expect him to go into the detail, if the Revenue used a defined methodology in calculating the attribution of profits between the Irish branch and the head office of those two companies, which were incorporated in Ireland but were not tax resident in Ireland? That is the key issue. Was there a defined methodology which Revenue used and which, by the way, would have been used consistently in respect of tax opinions with other multinational companies? Will Mr. Cody try to address that point within the constraints he mentioned?
If I may add one further point, the Commissioner was very clear in her assessment earlier in the week that there was not a defined methodology and that there seemed to be no basis for it. I am asking Mr. Cody to respond to that.
Mr. Niall Cody:
What I was going to get to is that I cannot go into a discussion around the basis of the opinion in any particular case but what I would like to do is talk in general terms about what we do. Clearly, the decision sets out examples of 11 different entities where there was branch attribution.
If the committee bears with me, what I will talk about is what we try to do in terms of branches. The Commission took a strong line on the fact that it could not see a consistent basis. We see that as the opposite to a weakness. We look at the facts and circumstances of the cases. The 11 companies and Apple covered various sectors such as pharma, tehcnology and other entities. What happens is that the company comes to us, sets out a basis and we engage with it or its advisers to ascertain the facts and circumstances of the case. Calculating branch profits based on a percentage mark-up on the branch costs is a well established basis in international tax which various countries use.
Mr. Niall Cody:
What we are trying to do in any individual case is to look at the facts and circumstances on the ground. One would look at the assets on the ground, what the company does, and compare routine functions in a particular case to more complex functions. That engagement takes place between the advisers and ourselves.
Mr. Niall Cody:
I think it is well to go back a little also. We operate a self-assessment system. If the company does not come to us, it has to calculate the profits that are attributable to the branch and declare those in its returns. It can do that. Some companies do not come and look for an opinion. Some of the multinational companies have not got an opinion and they calculate their profits. That is what they are obliged to do. What they can do with the opinion is come to us. They can be proactive. They come to us and present a set of circumstances to us and ask if we are happy that it is a reasonable basis for the facts and circumstances of the branch and what takes place in the branch in Ireland. We then engage with the company. We usually ask for more information or we will say we are not happy with one or other part of it and it will go back and revise its position.
Is Mr. Cody saying that the methodology used in this particular case for the attribution of profits between the branch and the head office is not unusual, and that the basis was common to other tax opinions in which Revenue engaged?
Mr. Niall Cody:
I do not think there are extensive files going back to the 1991 opinion, but the basis on which the attribution is made is in the records. There are records but not extensive files. It is clear in the entire process that there is not a big transfer pricing methodology because there was not a transfer pricing methodology in use and that would not have been a common standard feature in 1991.
Is there any evidence of political influence going back to the 1991 or 2007 tax opinions? Did Revenue have any contact with the Department of Finance or elected representatives in advance of or during the process of making the advance opinions in the case of Apple?
Okay. In the case of the two companies concerned, it has been said, and there are references in the Commission’s decision about the test of management and control in terms of where the companies conducted their activity. For example in the cases of ASI and AOE, where did their board meetings take place?
Mr. Niall Cody:
I hesitate to get into the details of the case for a number of reasons. It is useful to talk a little about the process we are in at present. As I set out, Ireland has put a detailed legal case in response to the decision of the European Commission. That is lodged with the court. It is not a public document. It has not been made public yet. The court effectively is in possession of that. It will publish summary legal pleadings in the official journal. What I read into the record earlier that the Department of Finance published is a summary of what will be published. That is all that will be published. We are in a situation here where a case is being made by the Commission in which there is a considerable amount of public detail available on the record, but obviously redacted. There is an answering legal documentation, which is not on the record and on which my legal advice is that I cannot put it on the record, apart from in the court. We have a process in train that will ultimately be determined by the court. I have no difficulty coming before the committee to try to answer as much as I can but I have strong legal advice and I do not wish to do damage to the legal proceedings that are in train. Going into the basis of Ireland's answer and rebuttal to the particular points made by the Commission brings us straight into that area. What I would like to do is, as much as possible, talk about what we do when we are trying to tax the branches of multinationals in Ireland.
I have two further quick questions. Is the position Revenue has taken in defending the tax opinions given to Apple in 1991 and 2007, a unanimous one in terms of the board? Could Mr. Cody clarify that?
Mr. Niall Cody:
It is the unanimous position of Revenue. Obviously, we discussed the case. The investigation started in mid-2013. It has gone on and there have been truckloads of documentation toing and froing. There has been a significant level of correspondence between Revenue and the Commission. One thing we did is that we decided at the very start to co-operate fully because as a regulatory body ourselves that is what we expect others to do with us. We gave considerable information and we took part in meetings and discussions. At our own board and management advisory committee level we briefed people on where we are.
On Tuesday I was taken by what the Commissioner said when she talked about her responsibility under the treaty. Equally, we have a responsibility under the tax Acts and the authority given to us by the Oireachtas to implement the legislation. That is what we did. We implemented Irish tax law. That is what the people who were involved in the individual opinions and who deal with opinions of multinationals seek to do at all times. There is no question among people in Revenue that we implemented Irish law. That is not to say that everybody, including me, is happy with multinational tax avoidance. We have invested significant resources, which I told the committee previously about, in the context of changes we made two years ago setting up our international branch and the work we do in terms of playing a part in relation to tackling multinational tax avoidance that is significantly above our punching power.
If the courts find against the State, can Mr. Cody clarify whether Revenue has a legal basis for collecting the money? Revenue's position is that under Irish law, it is not due this money and Mr. Cody is responsible for applying the statutory taxation provisions. Does the EU state aid law supersede that in the event that the European courts uphold the Commission's finding that Ireland is owed this money? What is the legal basis for accepting it?
Mr. Niall Cody:
There is a decision so under state aid rules, and I know the committee had a discussion with the Minister, we are obliged to recover the money having regard to the methodology laid down and we must do the calculations and computations on that. If, ultimately, the European Court of Justice finds that there has been illegal state aid, Ireland will be obliged to recover the money, that is, the equivalent amount of the state aid - the tax. At that stage, it would have been forgone if the European Court of Justice finds that it is forgone, so we will be legally obliged to collect it. In respect of the methodology of collecting it in five years' time, tax assessment and collection of the money, the money will presumably be lodged in an escrow account and will then be available to be set against the tax liability. I know the Belgian authorities in the context of their case looked at putting in specific tax assessment rules regarding an unsuccessful state aid case, or a successful one depending on what one is looking at. That will come to fruition in whatever length of time it takes, be it four or five years or a shorter period of time.
I also welcome the Revenue Commissioners. I am trying to distil this. In respect of the theme around the methodologies, the Commission has stated that the decision of 30 August asserts that the two opinions given in 1991 and 2007 by Revenue renounced tax revenue that Ireland would otherwise have been entitled to collect from the Irish branches of Apple Sales International, ASI, and Apple Operations Europe, AOE. Mr. Cody speaks of a mis-characterisation. I think those were the words he used in the documents we have. Will he explain what he means? What is meant by "renounced" in this instance?
Mr. Niall Cody:
I am tempted to say they are the Commission's words. They are not our words. We do not agree with or accept them. Ultimately, the Commission is saying that all the profits attributable to the two Irish-registered non-resident companies were properly taxable in Ireland. It is like two parallel lines. The Commission says that the profits of the companies are fully attributable and fully taxable in Ireland. We are saying, and Irish law says, that the profits of the branch are taxable in Ireland at 12.5%. The debate could go on forever and, ultimately, it will be a matter for the courts to determine. Revenue can only apply the Irish tax code. We cannot apply the Irish tax code as people might want it to be. Our role and responsibility involves applying the Irish tax code. The Commission is clearly of the view that the profits are fully attributable and that is where the figure of €13 billion comes from. Ultimately, it is a figure by 12.5% - there or thereabouts. If, from the Commission's perspective, that figure is the amount of tax paid plus €13 billion and is what should have been paid, it then uses the word.
Correct me if my mathematics are wrong, if the tax liability is €13 billion and for the sake of argument, the tax rate is 10%, the economic activity is €130 billion, if I am correct. What the Commission is saying is that in this instance, there was €130 billion worth of economic activity conducted on the island of Ireland through two entities. Is that correct based on that model?
Mr. Niall Cody:
I know the committee had the discussion with the Minister around the non-American profits. That is basically the case at its simplest. The Commission is saying it is fully taxable in Ireland. Irish tax law says the branch profits are taxable in Ireland - not what takes place outside Ireland. I am not anticipating the questions I will be asked but I know I will be asked about the headquarters. What is really important in the context of Irish tax law and what we must do is look at what takes place in the branch - not what takes place or what is outside the branch.
I return to the Commissioner's comments when she appeared before the committee the other day. She said:
We were looking at whether the allocation of profits was recorded in the branch and whether, therefore, it had to be taxed in Ireland, or recorded in the stateless headquarters and, therefore, not to be taxed in Ireland. We found that the recordings by Apple, which we did not question, could not be supported by economic activity. That is why they ought to be recorded in the branch of the company that is taxable in Ireland.
She went on to state:
We do not investigate or value the intellectual property. We have not done that here. We have seen that Apple has organised itself with what it refers to as a cost-sharing agreement. This means that most of the research and development takes place at the Apple Inc. facility in Cupertino.
I am trying to get my head around this. In Mr. Cody's lines of argument, he states that the Commission's attribution of Apple's intellectual property licences to the Irish branches of AOE and ASI is not consistent with Irish law and, moreover, is inconsistent with the principles it claims to apply, as is its stated refusal to take into account the activities of Apple Inc. There is no reconciliation between those two statements. I am trying to distil the contradiction in layperson's terms. In respect of the intellectual property piece, the Minister asked us to refer to the phones and so on being made in China and the intellectual property in Cupertino. Can somebody distill that for me in bare simple terms? Where does the intellectual property piece fit into all this if the Commissioner is saying that the Commission did not investigate or value the intellectual property? Mr. Cody is saying that the intellectual property is not generated in Ireland. If I am interpreting the Commissioner correctly, she is saying that the Commission is not investigating the intellectual property so, therefore, it is not investigating an Irish operation in that sense. How do we reconcile that? How do we get a better understanding of that dynamic?
Mr. Niall Cody:
I think it has been acknowledged probably by everybody, including the Commission, that the creation and management of the intellectual property and the intellectual property rights developed in the US. I think that is a given. That is where the work was done - where the research and development is done. We had to look at what was in the Irish branch in Cork. The intellectual property is not created in Cork or in the branch in Cork. It is outside the branch and outside Ireland. The fundamental issue here is the interaction about residence rules.
In a way, this was not discussed hugely with the Commissioner and she did not make any real play about it. The heart of this is the mismatch between tax residency rules, in this case with Irish registered companies. This goes to the heart of the BEPS action plan. If this could be sorted by state aid, the whole issue around BEPS, the whole issue around CCCTB, would be very different. However, what we have is a mismatch. The issue around what is in the head office would not have been a matter for our officials in 1991 or 2007. From the point of view of the Commission, in a way, the 130 pages are the 130 pages for the prosecution. The legal case, which I cannot share with the committee, rebuts those points. Ultimately, it will be a matter for the court. As the Commissioner said the other day, ultimately this will be a matter of law.
Did the two opinions of 1991 and 2007 speak to the issue of intellectual property? If I understood Mr. Cody's interaction with Deputy Michael McGrath correctly, the Revenue Commissioners would have kicked the tyres on the two opinions given. Did Revenue look at the issue of intellectual property in that?
Mr. Niall Cody:
What we would have been doing in 1991 and 2007 was looking at what was done in Cork and the routine roles and functions of a significant operation. At various times, between 3,000 and 6,000 people were working in Cork. As we all say, this is not a brass plate operation. What we had to look at was what Apple did in Cork and what did that proportion of the total of Apple Inc. contribute. That is all. We had a tax case in 1998 where we were looking at the issue of multinational operation which had a branch in Ireland and had assets outside the jurisdiction. The assets were not tangible in any way. There is a High Court decision at which said what we could look. That is the branch and what was in the branch, not having regard to what was in the head office. We are being looked at for not looking at what we were not entitled or obliged to look at. Most of the commentary on the case and the direction of the OECD relates to the idea that if there is tax foregone here, the reality is that it is US tax.
Mr. Niall Cody:
The arm's-length principle is the methodology around transfer pricing. What it is trying to do is get a market rate for transactions between intergroup transfers. It is trying to say that if one is buying on the market independently, that is the benchmark to mark against. That is the arm's-length principle. Again, the Commissioner said on Tuesday that is the secondary part of the Commission's case. That is the alternative argument. In some of the commentary and the talk about not applying arm's-length principles, the arm's-length principle and transfer pricing rules have evolved over the last number of years. There were guidelines in 2010 implemented in our law. Clearly, they were not in place in either of the years. A number of commentators have highlighted that. In fairness to the Commission, however, that is not the core of its case. The Commissioner very much said that. It is the secondary part of the Commission's case.
Go raibh maith agat agus fáilte ag an coiste. We appreciate the fact that there is a legal case and that some of this will be technical. We will all have to wait the course. The die is cast. Unfortunately, this State is going to spend many millions of taxpayers' money that the Revenue Commissioners collect to fight a case so that we do not take in €13 billion - possibly up to €18 billion - that could help those same taxpayers. Another case on which we spent taxpayers' money was that relating to Santander, which had nothing at all to do with this. Ireland decided to join that case because it was obviously thought that it was going to assist in the Apple judgment. The case was lost and it was money down the drain for the Irish taxpayer. Did Revenue give any advice to the Department or any Government official or body in respect of whether Ireland should join the Santander case?
As legislators, we are probably asked to look at all other issues. I refer, for example, to the HSE decision on Orkambi yesterday. We need to look at all the resources and where they are best applied. A failed challenge is not the best use of resources. I want to move on. I want it to be clear that I do not make any assertion to the effect that there has been political interference. Mr. Cody suggested to Deputy Michael McGrath that there was no political interference in respect of the case. How did he come to that determination? What trawl did the Revenue carry out? Did it question people?
Mr. Niall Cody:
I know the inspector who dealt with the case at the time. We have discussed the matter with him. We also have to look at what we know about what has gone on with all Ministers for Finance for as long as I can remember. The law is agreed and passed in the Houses of the Oireachtas and we implement it. One of the strengths of the country since the foundation of the State has been that Governments have respected the independence. I read back over a lot of the material when I got the job. I get parliamentary questions, PQs, referred over regularly where Deputies ask the Minister to instruct Revenue to do A, B, C, D, E, F or G. Depending on who is in government, the Opposition will always ask that question.
I agree with that. I have tremendous respect for the work Revenue has done. It sometimes has to collect taxes with which it does not agree but, by and large, it has done a tremendous job over the years. I have serious issues, however, over the Apple case. On the question of the independence of Revenue, we are dealing with a tax ruling from 1991 after negotiations that began in 1990. Did the Moriarty tribunal not find, in 1997, that the Taoiseach, Charlie Haughey, intervened with the chairperson of the Revenue Commissioners shortly after becoming Taoiseach? The tribunal, which has been accepted by all parties in this House, found that Mr. Haughey conferred an undue advantage on Ben Dunne as a result of the intervention, which was in respect of Mr. Dunne's tax bill. The tax bill was reduced by around £23 million, or €29 million. Is it true to say that the independence of the Revenue Commissioners has not always been respected? There have been interventions at the highest level and the example I have given coincides, in time terms, with the first Apple ruling.
I am asking Mr. Cody to answer my question. Does he accept the fact that there has been interference with individuals in the Revenue Commissioners at the highest levels of public office, as found by the Moriarty tribunal?
It was the position of the Revenue Commissioners that there was no political interference, up to the point when the Moriarty tribunal made the finding to the contrary. When did the Revenue Commissioners first become aware that the stateless company of which we are speaking existed? We know that there was a number of stateless Apple companies here, referred to as its "head office". When did the Revenue first become aware that companies incorporated in Ireland were not tax resident here or in any other jurisdiction in the world?
Mr. Niall Cody:
Whether a company is stateless or tax resident in the Cayman Islands, the Bahamas, Bermuda or anywhere else with zero-rated or no corporation tax, it is exactly the same. People sat up when the Senate committee hearing was told of stateless companies, but the issue for us is what is happening in the branch.
I did not ask Mr. Cody about the branch. I asked a specific question and I have only a little time. I know there are jurisdictions with low corporation tax but I am asking, specifically, when the Revenue Commissioners first became aware that the Apple companies operated on a stateless basis, meaning they were not tax resident in this jurisdiction or any other jurisdiction across the globe?
When did the Revenue Commissioners first become aware that it was stateless? They are obviously aware of it today, as they were last week and last year. When was the earliest point at which the Revenue Commissioners knew the Apple companies were stateless?
I will clarify what I mean by this. The Department of Finance gave an answer to a parliamentary question in which it said it first became aware of it only after the Apple hearings in 2013. I want to determine, before this committee today, whether that is the case with the Revenue Commissioners. The Finance Act 1999 amended section 882 of the Finance Act 1997, and stated that any companies incorporated in the State had to provide certain particulars to Revenue within 30 days. Those particulars included the name of the company, the address, the place of residence, the date of commencement of the business and, in the case of a company not resident in the State, the name of the territory in which it is tax resident. If ASI or AOE were incorporated in Ireland post that date, they would have had to tell Revenue that they were stateless but there was no requirement on them to do that because they were incorporated prior to that date. I want to know when the Revenue knew. It surely knew that these companies were stateless. When the Revenue Commissioners identify a loophole, it is their job to come to us as legislators, through the Department of Finance, and tell us. They need to tell us there is a loophole whereby a multinational company, operating and incorporated in Ireland, records profits for that company but does not pay tax anywhere in the world on those profits.
Please answer the question. When we became aware of it, as a result of the US Senate hearings, I challenged the Government to close down the loophole but it said it could not close it down, though it did so in a subsequent Finance Act. We had the ability, during all this period, to close this loophole down and if we had done so we would not have the Commission breathing down our necks over the State aid rules. We would have got the tax that was due to us in the first place. I will put my question again. When did the Revenue first know that ASI and AOE were operating on a stateless basis?
Mr. Niall Cody:
The law changed but these companies were incorporated before the change happened. At the time that law changed it was very clear to us there was a problem around non-resident companies which were registered in no place or in a tax haven and that was part of the background. I do not want to mislead the Deputy but the question of being stateless was not to the forefront of the issue. I can write to the committee setting out some information. We have not focused on statelessness as the problem.
The Senate clearly revealed that two or three companies were incorporated in Ireland which were stateless. We changed the law as soon as we knew about it, and rightly so. My suspicion is that the Revenue Commissioners knew about it a long time before that but did nothing about it. They did not tell us but turned a blind eye. We do not have access to the information as to where are the economic rights of Apple's intellectual property.
We do not have access to their accounts. Revenue had all of that. In my view, Revenue may have known this as early as 1990 and yet as Mr. Cody rightly said, a paper was done by the Department of Finance in conjunction with Revenue, in 1997, to close down this tax loophole, which actually happened in 1999. It again turned a blind eye to what Apple was doing in Cork. Can Mr. Cody confirm to the committee that he was aware that Apple was operating stateless companies incorporated in this jurisdiction prior to the US Senate hearings?
Can I press Mr. Cody on this? There is no taxpayer confidentiality in this. We now know as a matter of fact, since its incorporation in 1980, that they were stateless. That is a matter of fact. Nobody disputes that. The only question we are asking is when the Revenue Commissioners became aware of that.
Mr. Niall Cody:
On the potential loophole, regardless if whether a company is Irish-registered non-resident, IRNR, stateless or is in a country without a corporation tax, there is the exact same effect. The IRNR issue was on the agenda, it appeared in a tax strategy group, as the Deputy mentioned before, in 1998. The IRNR issue has been well-known and been part of the environment in which we operate. The fact that they were stateless has no impact.
I am trying to be fair. The Deputy has been asking questions for more than 15 minutes and has the answers. He is not happy with them. We will take Mr. Cody up on his offer of replying in writing. I call Senator Conway-Walsh.
I am not sure of the value of me continuing to ask questions when the crux of the matter cannot be dealt with here with the restrictions that are around it.
However, I think we need to address a few things. The transcripts which this debacle centres around speak for themselves. On 30 November 1990, Apple's tax adviser met with Revenue Commissioners and stated that the company would be prepared to accept a profit of between £30 million and £40 million for taxation in Ireland as opposed to actual profits in their accounts. The Revenue Commissioners asked the adviser to state if there was any basis for the figure of between £30 million and £40 million and he confessed that there was no scientific basis for that figure. Lo and behold, on 3 January 1991, a deal was struck between the Revenue Commissioners and the Apple tax advisers that the profits chargeable to Irish tax would be between £30 million and £40 million. This special deal involving an agreed charging structure is in contravention with tax legislation which remained in place until 2007. I think that is the crux of the problem here as well in that we have a whole lot of indigenous businesses around this country, including small businesses in rural areas and other areas, which have been hounded by Revenue to the letter of the law. This facility is not available to indigenous businesses and is anti-competitive. There is an issue with how multinationals such as Apple are treated and how they dictate what tax they are going to pay as opposed to how small and indigenous businesses are treated by Revenue where the full hammer of the law is brought down on them. Did the Revenue Commissioners sit down with Apple? Did Apple say what it was going to pay? Did Revenue agree that that was going to be paid?
Mr. Niall Cody:
I know the Senator's introductory remark was to wonder if there was any point in asking me these questions because, again, I am constrained in what I can say. There is a whole raft of stuff that could be read out in the case that is being put by the Commission, that the Senator did not read out the fully. I cannot go into the detail of the opinion and how it was arrived at apart from going back to what I said before. What we were dealing with was calculating and attributing the branch profits and coming up with the tax on that. The Senator said, and I take it as a colloquial statement, that Revenue hounds indigenous companies. We do not hound anybody.
Mr. Niall Cody:
I think the use of the term "hounding" is inappropriate. The law is provided by this House and we implement it. We act in accordance with the law and there are provisions set out in legislation on what we can and cannot do. I do not think that term is appropriate. If there are individual cases, there are procedures and processes to get satisfaction.
Mr. Niall Cody:
If there are specific examples of where somebody in Revenue is doing something that they should not do, I would like to hear about it. My office is open and I get representations from various people, including Members of both Houses, about individual cases. We will look at any of them. I think that is really important.
Opinions are available to any taxpayer having regard to the circumstances but the rules are different. If we are taxing an Irish resident taxpayer, their profits are calculated based on their accounts. As a result, they are taxable on their accounts. If we are dealing with the profits of a non-resident company, we are taxing on the branch. There is a different basis. We only tax them in accordance with the legislation as set out.
Mr. Niall Cody:
The company is a non-resident company with a branch in Ireland. The company is the company. The branch operates in Ireland. The Commission talk about not seeing anything in the head office. That is ignoring the infrastructure around Apple Inc. This goes, as I said to Deputy Sherlock earlier, to the heart of the case. We cannot sort this case here. There are two basic interpretations of how the rules apply.
Mr. Niall Cody:
If they are managed and controlled outside of Ireland, Irish tax rules apply. This goes to the heart of things around "double Irish" and the Minister has made changes in legislation over the last number of years as part of the base erosion and profit shifting, BEPS, process. The residence rules and the mismatch between US rules and Irish rules is the cause of this problem.
There is tax planning by multinationals that exploits the mismatches. It does not make Ireland responsible and we can only implement the Irish tax rules.
I understand that but what is perplexing for people is that Revenue obviously advises Government, such as in the case of the section 110 tax arrangement. When Revenue discovered this arrangement - I cannot really understand how, given all of the people in Revenue, all of these things were not discovered earlier- and that it was being used and abused to relieve Irish citizens of up to €350 million in taxes that should otherwise have been paid, is there no provision for Revenue to let the Government know this is happening and to advise that it needs to be immediately closed down? The section 110 arrangement was discovered in 2015 but was not closed until many months later. We need to quantify the figure that was lost as a result of that delay. In the case of the double Irish tax strategy, it was closed for new companies but we see again that the liabilities for that will continue on into 2020 and beyond. There does not seem to be any urgency in closing down these loopholes, which are available to a section of our society while other people are being treated differently.
Mr. Niall Cody:
Revenue is responsible for bringing to the attention of the Department of Finance loopholes that give rise to the erosion of the Irish tax base. That is what we are looking at. The example of the section 110 process is where Revenue would have seen the use of the section 110 arrangement in relation to Irish property assets. When section 110 was introduced, it was always seen as supporting the international funds industry. With regard to the issue around the timeliness, corporation tax works on a time lag. We will not see it as it is happening.
I completely understand the retrospective aspect of this, but would Mr. Cody expect that as soon as Revenue goes to Government to explain that the section 110 is being used and abused, and ask for the tax arrangement to be shut down, it should not have taken a number of months, and in some cases years, to shut it down?
Mr. Niall Cody:
It is our responsibility to bring the issues to the attention of the policy makers. If one looks at where Revenue is coming from and how we look at things, we see tax abuse and tax avoidance and we bring it to the policy makers' attention. Other people see those things as fully acceptable tax planning. If Revenue could determine the policy, then the Finance Bill would probably be far busier with provisions to close off structures that we do not like. There is, however, a whole policy dimension to be applied to all of this. Revenue does not have the monopoly on the view of what is acceptable tax planning or aggressive tax avoidance. There is a spectrum and one could invite plenty of practitioners into the committee and they would say that it is the purpose of the way the system is structured.
Mr. Niall Cody:
That is completely not the case. I said that Revenue brings the issues to the attention of the policy makers when we come across loopholes. This is absolutely a core part of what we do. Every year issues are put on the agenda. Some get into a Finance Bill, some do not and some get into a Finance Bill after a period of time. A core part of the job, and it is a part of the work I have dealt with for a long time, is when we see things, we bring it to the attention of the Department. When we see an issue, we must establish what it is and go in and check on it. We recently published our statement of strategy. A core part of the work we do, and the resources we use in our revenue and legislation services, deals with flagging up of loopholes and coming up with solutions.
It is difficult to contain one's frustration in all of this. In my case, I put forward a motion to this committee in 2013 asking that Apple representatives be brought in to answer some of these questions. The Fine Gael, Fianna Fáil and Labour parties all banded together to ensure that it did not happen. They even turned off the cameras while we were discussing it. This is the frustration that some of us must put up with in trying to get to the bottom of this. I understand that the Revenue representatives have some constraints but I hope they will tell us as much as they can. Is it Revenue's responsibility to identify loopholes, possible tax evasion and possible tax avoidance and to bring it to the attention of the Government?
Mr. Niall Cody:
As I said to the Senator, it is the job of Revenue to bring to the attention of Government loopholes that give rise to the erosion of the Irish tax base, when we come across the loopholes. The Deputy used the words "evasion" and "avoidance". If we come across tax evasion, it is not a loophole. We can raise assessments or do anything up to referral for prosecution. The loopholes are around the tax planning and tax avoidance area. When we come across loopholes that give rise-----
Does Revenue not have any obligation if Ireland is being used in some way? Any company that is incorporated in Ireland is using Ireland in some sense. For example, the witness mentioned earlier how Ireland is ultimately under the jurisdiction of the European Court as a member of the European Union. Does Revenue not feel any responsibility or obligation whatsoever if Ireland is being used in some way to facilitate tax avoidance or evasion, or in exploiting loopholes? Does Revenue not feel any obligation to flag that whatsoever?
Mr. Niall Cody:
I spoke earlier around Revenue's role with regard to international tax and our role in the exchange of information. We have put significant resources in to working with our colleagues in other tax administrations through the OECD and the Joint International Taskforce on Shared Intelligence and Collaboration, JITSIC, forum, which facilitates the exchange of information on practices of multinationals. We have played our part; these things cannot be sorted unilaterally.
I am not asking Mr. Cody what Revenue does. I am asking him a very direct question: does he feel an obligation to do anything if he believes a company is in any way using Ireland to exploit loopholes to evade or avoid tax or does he simply say that if it does not affect us, we are not bothered? It is a very simple question, in fairness.
Mr. Niall Cody:
We exchange information with other countries subject to the rules on which we can exchange information. There are legal constraints in what we can exchange, as there are with other jurisdictions. If there is some suggestion that the use of mismatches between different tax rules is a secret to the tax administrations of the other countries, that is an illusion.
No. The suggestion, which is very clear and which I think Mr. Cody understands fully, is that all of us find it simply incredible - not credible - that Revenue did not notice quite some time ago, long before 2013, that a company that was incorporated here was stateless, that the profits from a company that did have a real economic presence here were being siphoned into the stateless company and that those taxes were therefore not being paid anywhere.
Mr. Niall Cody:
-----and the IRNR issue had been known about since the 1990s. Various provisions have been introduced in the meantime. Therefore, just to take the example of the US, the idea that nobody in the US Administration knew the arrangements in any of these cases until the Senate hearing is just not true.
That is my point. Mr. Cody is saying the US Administration knew beforehand. If any reasonable person saw that an incorporated company was either resident in the Cayman Islands or stateless - certainly if Revenue did - he or she would think there was something going on there. We are a little surprised that Revenue did not flag this - or did Revenue flag it way back when, when it became apparent that-----
I ask Mr. Cody to remind me, as a matter of interest, when the criteria of ownership and control, the distinction between a tax resident and an incorporated body, were introduced in legislation.
I will move onto another aspect of this because one can come at it from many different ways. If Niall Cody develops a phone and holds the intellectual property for that phone and if he sells the intellectual property to me, the profits I generate from selling the phone accrue to me, do they not?
Did Apple Inc. have the intellectual property rights for the sales of Apple products in Europe, Africa and Asia? Mr. Cody referred to them and kept saying, as the Minister has said, that we know Apple Inc. was managed in and controlled from the United States and that that is where the intellectual property was developed. However, it is irrelevant whether it was developed there. The issue is who had the intellectual property rights for the sales in Europe, Africa and Asia.
We will move onto that, but I think we have clearly established that Apple Inc. did not, so it is a complete red herring for anybody to talk about it developing the intellectual property or in any way the tax being owed to it because it had sold the intellectual property to another company, which was incorporated in Ireland but not tax-resident in Ireland. Mr. Cody himself referred to ASI carrying out "routine functions". These are almost the same words as Commissioner Vestager's. The question is how Revenue established ASI was carrying out any functions when it had no staff, no office-----
Therefore, the branch, which has thousands of employees, an office, a headquarters and so on, is a branch of this company that holds the intellectual property rights but which has no staff and no office, and Mr. Cody says it carries out routine functions. What routine functions does it carry out if it has no staff and no office?
Mr. Niall Cody:
The branch carries out the routine functions in Cork. That is what I said. As I said before - and this is the fundamental difference between our job and the Commission's case - we look at what was carried out in the branch in Ireland. These were the routine functions that were carried out, and that is part of the company. We did not look at what was carried out outside of Ireland, so what we must look at is what was done in Cork, what is-----
What I fail to believe or find credible is that Revenue could accept from Apple that this company, which is incorporated here but not tax-resident here, has any economic reality that would allow the branch to allocate the profits to it.
I do not accept it as credible. Even on that basis - and I think this is more or less what the CCTB attempts to do - even when Revenue was trying to assess what the Cork branch did, I think a reasonable understanding of this is that there is a place where the intellectual property is developed, then there is a hub for selling that intellectual property and then there are the countries into which those sales are made. Would Mr. Cody accept that Cork, the Irish branch, was the hub for doing that selling? Nobody else could have done it because there was no staff and so on. Therefore, when Mr. Cody refers to what they did, is that not what they do?
Mr. Niall Cody:
In a way, the issue is where the company is managed and controlled. The company determines where it is managed and controlled. The directors and where they meet are indicators of that. It is generally very clear to us from what is on the ground in cases of these kinds of entities coming to Ireland, that is, multinational companies bringing foreign direct investment, where they are managed and controlled. The meetings are no more than an indicator.
Mr. Niall Cody:
The first time we set it out in a guidance note was in 2002 and we did a bit of restructuring of our tax opinions for large cases division. In 2014, we updated our guidance. It is very similar to the original 2002 guidance. Legislation has changed in the interim and transfer pricing guidelines-----
Mr. Niall Cody:
No, but there is no doubt it is in the background. It is part of the environment in which we are operating. One of the things the Commission makes a play of is that the tax adviser mentioned employees and there is an inference that we were influenced by the idea that this is about jobs. We want to make very clear that we are only interested in the issues that are relevant to the calculation of the tax. The opinion updated that. We changed it in 2016. The 2016 changes relate to the Apple case in that we reduced the period to five years from seven and undertook to publish the numbers in our annual report. The other thing that happened in the meantime is the move to country-by-country reporting and the exchange of information. If we give an opinion to a multinational entity which has an impact on the tax arrangements in another country, we will exchange the information with the other country. It touches on an element of what Deputy Boyd Barrett was saying. There will now be greater knowledge of the full pieces of the jigsaw. Every revenue authority should have a view of the issues relevant to the entire group because there is no doubt multinational corporations have oversight of all their own operations and, in many cases, they structure them in such a way to minimise the tax. There is no overarching tax authority looking at this. The individual administrations will have relevant pieces which from country A's point of view is very valid and protects its tax base but country B might say it has an impact on theirs and they want to revisit it. That is part of the backdrop.
Mr. Niall Cody:
When it is anticipated that there is a possibility of a state-aid issue in new legislation, initiatives or incentives, one will regularly see the Minister announce a new provision subject to consultation with the Commission on state aid. That probably happens a bit every year as a result of some measure in the Finance Bill and then it is referred to the state-aid directorate.
Mr. Cody said "Revenue can only tax on the basis of the economic reality of what is being done in Ireland." Does that apply only to multinationals or to all companies? Would it apply to an Irish company that had some activity here and also on the London and New York stock exchanges? Is Mr. Cody saying Revenue would have no responsibility at all for the activities taking pace in any of those areas?
Mr. Niall Cody:
I am not saying that. Irish tax-resident companies are taxable on their worldwide profits. They may well be entitled to some credit for foreign tax. That is the difference. Irish non-resident entities are only taxable on their activity here because, if one takes the normal territoriality rules, they would be taxable on their profits in their own country. As a result of different rules in different countries, there are sometimes cracks and this is what happens. It is what happens in this case.
When changes are made by way of legislation passed by the Oireachtas, does Revenue notify the companies that there have been changes or does it have to wait for them to ask for a ruling? Does Revenue give them rulings? Does it say the law has changed and the previous ruling Revenue gave has changed?
Mr. Niall Cody:
I talked to the Senator about the guidelines. An opinion applies up to the time it is either withdrawn, the facts and circumstances change or the legislation that applies to it changes. If the legislation changes, the rulings do not have any further value. It is purely up to the company to come back to us and say that in the context of the changes in whatever section it is in the Finance Act, it is now looking at how this applies. We do not go and say "Lads, the law has changed now and that is gone," because the law is changed, it is gone and it is a self-assessment tax system. The company and any taxpayer are still obliged to return their tax having regard to the self-assessment system. If the legislation changes, the previous ruling could not apply.
Mr. Niall Cody:
The rulings that were given deal with a once-off transaction and only apply to a transaction. The rulings we are talking about in this case are how the profits are calculated for the branch. That continues until the facts and circumstances change. Part of the process we are engaged in is this idea that rulings now only have a life of five years.
We started pulling the shutters down on any ruling made before 2012 this year and issued new guidelines last weekend. If someone is relying on a ruling that is more than five years old, he or she needs to revert to us because it cannot be relied upon any longer.
When the European Commissioner attended, she stated that, as a result of the Apple case, the Commission examined 19 other Irish companies and found nothing wrong. The Apple case was different. Would Revenue not have seen that difference as well?
Mr. Niall Cody:
That goes to the heart of the case. It suggests that we view the Apple case as different than the others. The Commission's case is that there is state aid. Revenue and Ireland's case is that there is not. The fact that the Commission says there is does not mean that it is right. That will be a matter for the court to determine in whatever time it takes.
I wish to make a couple of points. To follow on from Senator Burke's question on selectivity, the Commissioner referred to how Apple did not pay the corporation tax rate of 12.5% and that the Commission was basing its case on this and the idea that the tax ruling was selective. The Commission's argument is that Apple got a special deal. According to the Commissioner, the somewhat unfortunate references made by Apple in the US Senate were the catalyst for much of this investigation. We will never know whether it would have been conducted otherwise. Apple referred to having a special deal. Maybe it was not as special as Apple thought it was and Revenue contends - I do not want to put words in Mr. Cody's mouth - that the deal was available to anyone who looked for it and Apple's treatment was the same that anyone else would have had had the same circumstances pertained. What are Mr. Cody's thoughts on the issues of selectivity and Mr. Tim Cook's commentary in the US Senate?
Mr. Niall Cody:
There was not a deal. Revenue does not do deals. Instead, we examine the facts and circumstances and agree in the branch cases the profits that are attributable to the branch. The Committee of Public Accounts asked me about Mr. Cook's statements at the Senate committee and the idea that Apple effectively got a rate of 2%. I told that committee that it was a wrong explanation of what had happened. From where Apple was sitting, however, I could see how it would look at the amount of tax it paid over its worldwide profits. It is a sum-----
Mr. Niall Cody:
Yes, that 55% to 60% belonged to ASI, AOE and Ireland. When Mr. Cook represented it as a particular percentage, the Irish tax rate over the non-Americas profits gave the sum. The 12.5% tax rate was applied to the profits attributable to the Irish branch. There was no deal or special arrangement. All of the cases that we are dealing with - 19 were mentioned, but there are effectively 11 and Apple in the decision - involved the calculation of the profits attributable to the relevant Irish branch and the application to those of the statutory corporate tax rate of 12.5%.
Mr. Niall Cody:
We discussed this previously. We must consider the facts and circumstances of the branch in Ireland. The companies ranged from pharma to technology, which are different in their scope. We needed to examine what was happening on the ground. Those companies propose a methodology. Some relate to cost plus a margin. Their standard methodology-----
There is the suggestion or idea that products, for example, are brought into Ireland at a low price by an intra-company entity located elsewhere in the world, are processed in some way in Ireland and are then shipped out at a larger price, with all of the profits attributable to Ireland. The products might be shipped to another country in the world and, if not sold at a loss, sold at a small profit so that the profit accrues here. That is not a part of this argument.
Mr. Niall Cody:
In a way, transfer pricing gets the label of being bad. Transfer pricing is the methodology used to determine the price where there is no price. If it is done properly, it works as it is supposed to. In recent years, we have regularly dealt with requests from other administrations that feel that they are losing out on transfer prices. There is an ongoing engagement. We have produced statistics in our annual report on the review of those requests. That process is ongoing.
Mr. Niall Cody:
No. There is a transfer pricing audit function, which is based in our large cases section, that we are developing. We have been recruiting. I recently signed off on an order appointing five new assistant principals. That is a resource that we have developed and built since introducing the transfer pricing rules in the Finance Act 2011.
The competent authority, which is in Mr. O'Dea's division, deals with resolving international transfer pricing disputes with other administrations. I will refer to the 2015 budget. As part of the international tax package that the Minister put together, we were given sanction to beef up our competent authority significantly. At that point, we had one principal officer leading the negotiations with support on a part-time basis from our economists or the large cases division. The competent authority team now has a staff of eight - a principal officer, five assistant principals and two administrative officers - supported by the resources-----
Mr. Niall Cody:
No, the competent authority, which deals with that aspect. I have spoken at various committees about our resources and how we have invested significantly. These are scarce resources. Traditionally, the transfer pricing audit function was not a significant feature of Irish tax, as we were seen as a low-tax country. In some cases - the past few hours are probably proof of this - people are not satisfied paying 12.5%.
We are now looking at where there is a flow out from us.
Two years ago we set up the international tax division which is part of the wider business tax division. There are now 30 people working in the international tax division. We made a conscious decision when the base erosion and profit shifting, BEPS, process started that we would be involved in all of the actions because it is really important to Ireland and our industrial policy in the context of being a small, open economy in a very turbulent world.
Mr. Niall Cody:
It is a lesson to anybody appearing before any parliamentary committee. I know that Mr. Cook subsequently said "Sorry" and that what happened was not exactly as he had said. Apple has clarified the situation, and obviously it is appealing the case. If Apple felt that there was another story behind this, involving deals and political influence, I am sure that it would be reluctant to appeal the case.
On the question of the methodology, the European Commission said that it could not find the basis on which the profits were calculated. The suggestion was made that the formula suited Apple and the Irish system acquiesced in and tolerated that. What is Mr. Cody's response to that?
Mr. Niall Cody:
Again, the Commission has published the case for the prosecution and has put its case very well. The press conference that the Commission held on 30 August had a particular presentation as well, and ultimately that is its case. There is a raft of documentation which seeks to rebut that which is not yet on the public record. I cannot put it on the public record now or discuss the detail of that documentation. It might be helpful to point out to the committee that we are engaged in a legal process involving submissions and counter-submissions. We are not even in the first half of the match yet and ultimately it will be played out in a different forum.
We hope Mr. Cody will be able to appear before us again at some point in the future to outline some of the information that is not yet in the public domain when it is finally made public. We might all still be here and able to ask him more questions then.