Apple and Deferred Tax – Will the US get any tax from the Irish structure?

The debate about the state aid challenge to Ireland about Apple has been fascinating and I’ve covered some issues in a previous blog. But what has also interested me  is the discussion about when the US tax on the profits which accrue in Ireland will be paid and which government is foregoing tax to facilitate the Irish structure.

Now deferred tax is an arcane subject and became even more so when IFRS came on the scene with the added complication that the US did not implement IFRS. What I want to focus on here is what the provisions which Apple have made for deferred tax tell us about whether and when  the tax avoided by the Irish structure will be paid.

Under US GAAP:

“Deferred tax is recognized on all undistributed earnings, arising after 1992, of domestic subsidiaries and joint ventures. No deferred tax is recognized on undistributed earnings of foreign subsidiaries and corporate joint ventures if the duration of such earnings is considered permanent.”

Under IFRS:

Deferred tax is recognized on the undistributed earnings of any form of investee unless (1) the parent is able to control the timing of the reversal of the temporary difference and (2) it is probable that the temporary difference will not reverse in the foreseeable future.

Apple’s 2014 Financial statements state:

“The Company’s effective tax rates for all years differ from the statutory federal income tax rate of 35% due primarily to certain undistributed foreign earnings, a substantial portion of which was generated by subsidiaries organized in Ireland, for which no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the U.S.”

Now reading these three pieces together one would conclude that no US tax has been provided on the earnings subject to the Irish tax planning because “such earnings are intended to be indefinitely reinvested outside the U.S” which meets the US GAAP test “no U.S. taxes are provided because such earnings are intended to be indefinitely reinvested outside the US.”

Now we come to what has been said by both the company and the US Treasury since the state aid claim (based on reporting by the Financial Times).

“Tim Cook told Ireland’s national broadcaster RTE that Apple had set aside “several billion dollars for the US for payment as soon as we repatriate” some or all of its $215bn in overseas cash.

“Right now, I would forecast that repatriation to occur next year,” he said. Mr Cook has previously said that returning those funds to the US was contingent on a new American president introducing corporate tax reform that would lower the current 35 per cent rate. “

So Apple are going to repatriate some of these earnings, but presumably only to the extent that they have provided for tax to date or are able to shelter them from US tax by blending the dividends with others which have born higher tax. Presumably though, Apple’s policy remains as stated in their financial statements not to repatriate “because such earnings are intended to be indefinitely reinvested outside the U.S”.

A US Treasury paper states:

“There is a possibility that any repayments ordered by the Commission will be considered foreign income taxes that are creditable against U.S. taxes owed by the companies in the United States, if so, the companies’ U.S. tax liability would be reduced dollar for dollar by these recoveries when their offshore earnings are repatriated or treated as repatriated as part of possible U.S. tax reform.”

So why did the US Treasury make this statement? Given Apple’s intention not to repatriate and to indefinitely reinvest outside the U.S, why does the US Treasury make the statement it does? Do they really think dividends will be repatriated?

This all seems a bit of smoke and mirrors. What it obscures is that US tax policy on foreign earnings is actually a form of state aid. The US tax code allows US companies to park income in offshore centres and defers the tax on it – in some cases indefinitely. This allows those companies to enjoy very low tax rates on non US income and encourages them to reduce non US taxes as far as possible, whilst still being subject to relatively high tax rates on US income. This has to have competition consequences for the activities of US companies in non US markets as it potentially allows them to undercut competitors whilst maintaining the same after tax profit. It also encourages US groups to use that offshore cash outside the US.

The US Treasury paper needed to deflect criticism of the US system of taxing foreign income by claiming that these profits will be taxable in the US. Apple’s financial statements contradict this position. The US Treasury is suggesting that the EU state aid claim will reduce US tax receipts and thus casts this dispute as one between two fiscs as to who has the taxing right. This is misleading, the aim of the Irish structure is to reduce taxes in European markets, while ensuring that the income is either not taxed or taxed at a very low rate in Ireland/Bermuda. That low rate is dependent on the US tax treatment of the structure and the ability to defer US tax indefinitely.

If the US Treasury wants to collect tax on the foreign earnings of US multinationals, it needs to reform the tax treatment in the US, this reform would reduce the incentive for US multinationals to use structures like those in Ireland. It would probably also lead to them paying more tax in Europe – particularly where the European country’s tax rate is lower than the US,

In my next blog, I will look more widely at the deferred tax treatment of this issue.


© Chris Lenon and  2014-2016. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Chris Lenon and with appropriate and specific direction to the original content.

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