You know a business story is big when comedian Stephen Fry feels the need to comment on it. The self-confessed Apple fan recently waded into the Apple tax row saying he had no patience for big corporations who paid ‘miniscule’ rates of tax. Quoting Benjamin Franklin, Fry said that tax is the price we pay for civilization ‘and if people are not paying tax properly then obviously civilisation falters’.
Tim Martin, chief executive and founder of pub chain Wetherspoons, also insisted that big companies like Apple should pay their fair share of taxes, saying: ‘I wish I could sell people a pint of beer over the Internet. It would reduce our tax bill enormously. We pay a heck of a lot of tax.’
But the row over Apple’s unpaid tax billions is more complicated and controversial than at first appears. What could be perceived as a straightforward reputational fail for the tech giant is also a massive problem for the Republic of Ireland and its government.
Let’s recap. At the end of August, the European Commission ordered Apple to pay back the Irish state up to €13 billion (£11 billion) in taxes in a landmark ruling after calculating that the Californian tech company had paid a levy of between 0.005 per cent and one per cent on its European profits.
The EU alleges that Apple benefited from a sweetheart deal struck with Ireland decades ago, which was not only generous but gave Apple advantages unavailable to its competitors. Brussels has concluded that the tax treatment amounted to unlawful state aid under EU rules.
To put this huge sum into context, if Ireland received what the EU claims it is owed, it would take care of the country’s entire healthcare budget and two thirds of its social welfare budget. The €13 billion bill is the equivalent of 27 per cent of Apple’s annual profits or €2,830 for every one of the 4.6 million people living in Ireland.
Not surprisingly, given Ireland’s recent significant financial problems, many Irish citizens believe their government should be collecting this money. But both the Irish government and Apple have said that they will appeal the decision – a process which could take years.
Apple’s chief executive Tim Cook even greeted the EU’s ruling robustly calling it ‘total political crap’. Cook told the Irish Independent that Apple and Ireland were being picked on, unfairly, by the EU and that neither party had done anything wrong. He also said that the tech giant was continuing with its planned expansion in Cork, in the West of Ireland, adding: ‘We have a 37-year-old marriage with Ireland and it means something to us… I feel like Ireland stuck with Apple when it wasn’t easy to stick with Apple and now we’re sticking with Ireland.’
Eight years ago, when the global financial crisis began, tax became a touchstone issue and non-payment of personal and corporate taxes dominated the front pages, with negative headlines for big British companies like HSBC as well as multinationals like Facebook and Amazon.
From the coverage of ‘non-dom’ financiers like Nat Rothschild to the complicated film-financing schemes used by many show business stars and football players, being seen to be actively trying to pay less tax appears to jeopardise a company’s or a business person’s standing.
There have been attempts to boycott companies like Starbucks and Amazon over their tax strategies and the parliamentary Public Accounts Select Committee suddenly found a raison d’etre in robustly trying to hold some company executives to account. Executives from Starbucks, which had used legal loopholes in the tax law for more than 15 years to pay just £8.6 million of corporation tax on £3 billion of revenues, were so bruised by their appearance before the committee that the company changed its practices.
Indeed, a poll by Ipsos MORI last year revealed that almost 50 per cent of British consumers will think twice about buying something from a company that has avoided paying UK taxes. Louise Gracia, professor in the accounting group at Warwick Business School, says: ‘When giant corporations use their resources to minimise their tax liabilities down to the bone – even if this remains within particular interpretations of the legal framework – it risks contravening other facets of taxation, including its ethical and social dimensions, eroding its equity. This ruling should give other US multinationals, including tech giants, pause for thought.’
Ireland is accused of allowing Apple to sidestep taxes by channelling most of its European sales and profits through artificial corporate entities that are not required to pay tax anywhere. The Republic has been under pressure to ditch its most aggressive tax deals for years, both from the EU and other countries, including the US, and its own citizens.
However, its very low corporation tax rate of 12.5 per cent has helped the country attract record levels of inward investment and turn itself from a largely rural economy into a service economy, with an international clientele. More than one in five jobs in the economy are now supported by foreign direct investment, and major international businesses, including recently global cyber security firm Kaspersky Lab, are opening offices or expanding operations within the country.
Yet many observers of Ireland’s economy think that this row – although likely to take years to resolve – has limited implications for other companies. Fergal O’Rourke, managing partner of PwC in Ireland, said the ruling would cause reputational damage but did not have wider implications. ‘It is clear from the Commission’s ruling that this is not a finding against the Irish tax system or the Irish [corporate] tax rate. It is very specifically about a loophole that has since been closed down,’ he explains. ‘This will not affect other companies operating in Ireland, but we are in the headlines again for all the wrong reasons and that is not good.’
Rory Godson, founder of Powerscourt, the public relations firm, and an adviser to many of Ireland’s biggest companies, says that Apple’s response – to come out fighting – is the right one. ‘Tim Cook has handled it well. You should stick up for yourself, if you think that you’ve done the right thing,’ he says.
Nor does Godson think it will deter any other companies, whether in tech or other sectors, from investing in Ireland in the future. ‘It won’t make any difference at all, because low tax is not the only reason that companies have been setting up in Ireland over the last 25 years,’ he says.
Rupert Younger, director of the Oxford University Centre for Corporate Reputation, is also sceptical that the revelation will blow up in Apple’s face. ‘Category killers like Apple can ride out this type of issue without any implication for consumers,’ he says.
Younger does not see any boycott occurring, and is also doubtful that consumers really give a damn. ‘Voters note it, but they don’t really care. Regulators, on the other hand, are very interested in [tax issues] because it is about their effectiveness and competence. This is a test of the EU’s competence and of how they will be able to hold member states and companies to account,’ he explains.
Younger believes that of the three parties involved in this particular fracas, it may be the European Union that, ironically, comes off worse, from a reputational point of view. ‘This could dint the EU’s capability reputation – their campaign to force Apple to pay and their attempt to co-opt all the member states to do their bit may not work and may backfire on them,’ he says.
Professor Stuart Roper, from Bradford University’s School of Management, also believes that the consumer rarely likes to inconvenience themselves and says Apple looks likely to evade a consumer boycott. ‘I expect Apple will get more backlash from removing the headphone jack on the iPhone 7 than they will for their tax avoidance.’
But he warns that cumulative bad news stories can add up to push a company into a downward spiral and the last thing that a company wants is to become an example of or a metaphor for bad practice, as Sports Direct has found.
However, Roper agrees with other commentators that Apple’s reputation looks untarnished despite the EU’s ruling, while it is the Irish government that has suffered a blow to its reputation.
‘You’d think they’d be delighted with the ruling but quite the opposite – they don’t want to upset Apple. It’s difficult to take that attitude and then claim that you are not some sort of tax haven for big organisations wishing to avoid their obligations.’
The EU’s ruling will undoubtedly stoke the animosity between the EU and the US. Washington complains that the trading block is unfairly singling out its big tech companies – Facebook, Amazon and Google, while in turn the US has been slapping crushing fines on major European companies, such as HSBC, Deutsche Bank, BNP Paribas and Standard Chartered, for often small rule infringements.
Observers believe Tim Cook’s comments were made with the full backing of Washington. In such an inter-governmental spat, it is hard to predict who might be next in the firing line.
John Waples, UK head of FTI Consulting, says there has been an element of schadenfreude amongst FTSE-listed firms, who have enjoyed watching Apple being presented with a very large bill for unpaid taxes. ‘There is some sense of Finally they have had their comeuppance. At last, the EU has grasped the nettle because they had been getting away with it,’ he says. Waples has not seen, nor expects to see, a rush for advice from listed companies. ‘The truth is that most listed companies are quite well-behaved in this regard.’
Andrew Wilson, managing partner at strategic communications company Charlotte Street Partners, is not as convinced that this problem will fade rapidly. ‘From a corporate comms perspective the debate has to be about the conflict between paying less tax in the short-term and long-term sustainability. Apple consumers want to know that they [Apple] are doing the right thing and producing a great product.
‘If I was at Apple, I would say, whilst we may not get a consumer boycott, we should be behaving now as if we might.They may think that their product strength is so strong but they still need to put insurance in the tank. You only have to see what has happened to Nokia to understand that a great product is not always enough.’ (In 2007, the year the iPhone launched, Nokia was the world’s fifth most valuable brand, having sold more than one billion mobile phone handsets. Four years later, it was forced into a partnership with Microsoft, after suffering job losses and profit falls. By 2014, the Nokia brand had been ditched.)
While Wilson acknowledges that Tim Cook is one of the world’s most successful business people, he suggests that Apple’s response to the EU could have been more measured. ‘I would say they need a more orderly and detailed communication about their Irish tax affairs. It doesn’t feel sustainable. This is such a large amount of money at stake,’ he explains.
So far Apple have opted straight for the legal route – in other words, an appeal – but, Wilson believes, ‘they could get ahead [of the lawyers] and solve it themselves’ by making some sort of settlement, or recognising publicly the company’s duty to pay its fair share.
He adds: ‘We are living in an age of austerity and greater inequality of income. Companies need to be mindful that they have to pay their fair share of taxes or they may find they lose their licence to operate entirely. Living within the letter of the law, rather than in the spirit of it may not be enough.’
Meanwhile this story about Ireland and the EU underlines, for Wilson, one of the difficult legacies of Brexit: when the UK leaves the EU it will become considerably harder for Britain to co-operate and collaborate to make sure that all countries are working to make sure that companies pay a fair amount of tax.
One veteran non-executive director of UK companies suggests that more corporates will find themselves receiving hefty bills for unpaid taxes because the G20 has failed to make any progress on international co-operation on tax, and because companies continue to take a short-term view, thinking narrowly about their fiduciary duty to shareholders to lower their tax bills.
‘What may happen is that countries will do more unilaterally to get at what they deem their fair share,’ she says. The irony is that when Brexit happens it could be the UK who takes up the low-tax baton from Ireland, as the country attempts to stop companies leaving for a home in the trading bloc.