On June 2014, the European Commission said it had opened three in-depth investigations into tax decisions affecting Apple, Starbucks and Fiat Finance and Trade in Ireland, the Netherlands and Luxembourg respectively.
An U.S. Senate investigation has revealed that Apple, that, “under the agreement Apple has with Ireland”, Apple paid a maximum tax rate of 2 percent or less. Apple’s annual reports show that over the past three years, Apple paid taxes worth 2 percent of its $74 billion in overseas income. Reuters 21 May 2013.
It raises the question whether besides evaluating tax risks (level of tolerance) also reputational risks of the company – as part of proper tax risk management – should be considered mandatory when such schemes are recommended.
Tax consultancy firms branded such effective tax planning service offerings not so long ago as ‘Tax Effective Supply Chain Management’. That kind of wording is hardly used anymore for obvious reasons.
- Is the public opinion important for tax planning and the company’s business objectives?
- Has that changed due to economic climate and EU / US investigations?
- What drives public opinion?
- What is the impact on the reputation of the tax professional if planning is implemented and becomes unforeseen public knowledge?
- How important is the reputation of the tax professional to establish company’s tax objectives such as tax controversy when ‘enhanced relationships’ with tax authorities might be a global trend?
The changing world from an indirect tax adviser perspective
A tax professional should contribute and give guidance to achieve that taxpayers do not pay more tax than necessary. Every opportunity has to be considered. At least that was the job description and actually how you could differentiate yourself among competition to make that happen for example via realizing beneficial tax rulings.
“Look, for example, at the UK. There have been some abusive avoidance schemes in the UK over the years. Most advisers have left these behind them, but as a result, the tax authority has increasingly been addressing boards about controls and processes, asking: “Is this the kind of thing that you want your business to be seen to be doing?” They’re trying to change behavior at a board level by changing board attitudes.” Chris Needham, GE’s Global VAT and GST Director from EY Tmagazine Issue 8
In the indirect tax field, especially value added tax, this kind of aggressive tax structures were for a long time often approved by case law. That has changed when the European Court of Justice ruled a couple of years ago that the tax advantage had to be revoked or denied.
The indirect tax profession had to change as well and reposition itself to ‘manage the numbers of indirect tax’ – focus more on risk management – and because of new trends relationships with tax authorities became more important to realize the taxpayer’s tax objectives.
See also OECD’s promotion of ‘enhanced relationship’ (OECD Report: Study Into The Role of Tax Intermediaries).The new trend is or will be to have an open dialogue between revenue bodies, taxpayers and tax intermediaries based on mutual trust.
Is what Apple did wrong?
How Apple Sidesteps Billions in Global Taxes by Charles Duhigg and David Kocieniewski
“Apple’s headquarters are in Cupertino, Calif. By putting an office in Reno, just 200 miles away, to collect and invest the company’s profits, Apple sidesteps state income taxes on some of those gains. California’s corporate tax rate is 8.84 percent. Nevada’s? Zero. Setting up an office in Reno is just one of many legal methods Apple uses to reduce its worldwide tax bill by billions of dollars each year.
As it has in Nevada, Apple has created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letterbox or an anonymous office — that help cut the taxes it pays around the world.
Almost every major corporation tries to minimize its taxes, of course. For Apple, the savings are especially alluring because the company’s profits are so high. Wall Street analysts predict Apple could earn up to $45.6 billion in its current fiscal year — which would be a record for any American business. Without such tactics, Apple’s federal tax bill in the United States most likely would have been $2.4 billion higher last year, according to a recent study by a former Treasury Department economist, Martin A. Sullivan.”
From an indirect tax perspective as resident of Europe if you buy services from Apple via the iTunes store no local VAT is due unless you are a resident of Luxembourg. The supply is subject to Luxembourg VAT. In Hungary the standard VAT rate is 27%. The standard VAT rate in Luxembourg is still 15%.
That means a maximum VAT saving of 12% per transaction to purchase the services from Luxembourg in stead of a local (e.g. Hungarian) entity.
About change and competencies
Based on the above, effective tax advice by a tax professional should nowadays not only address the ways of how not paying more tax than necessary and evaluate associated tax risks of implementing such tax planning schemes (rate level of tolerance on a risk scale), but should also take in consideration the impact of such planning on the reputation of the company if it becomes public knowledge and that means anticipate actions of the authorities to truly qualify as a trusted business tax advisor.
What is the impact if the tax planning becomes public knowledge?
What are the consequences if a newspaper or politician picks it up to make statements about lack of ‘tax morale’ and the company is used as case study?
Think about the taxpayer’s customers, suppliers, employees, external auditors, financial institutions, the taxpayer’s credit rating.
“On his 2008 Presidential campaign trail, Barack Obama made his hostility toward “offshore” jurisdictions very clear: “There’s a building in the Cayman Islands that houses supposedly 12,000 U.S.-based corporations. That’s either the biggest building in the world or the biggest tax scam in the world, and we know which one it is.”
What determines our reputation?
Is that also the real market danger for Apple:
- The mindset of the public opinion?
- What is the impact on Apple’s reputation with respect to this kind of stories?
Apple customers and suppliers face increase of taxes and you hear that Apple does not pay taxes (highly profitable). Would that customer have an opinion about tax morale in general and benchmark that with Apple’s tax strategy?
- What is the public opinion about the company’s code of conduct?
- Has that opinion changed and what was the cause effect?
- Does that impact Apple’s future tax strategy?
About change of tax strategy, If you focus only on evaluating tax risk (level of tolerance) probably not. However, is such a tax risk analysis nowadays sufficient?
In Apple’s defense lots of multinationals are doing the same and change of the tax system – as those structures are often legally allowed – is the only way to close such gaps. I refer to Obama’s quote:
“There’s a building in the Cayman Islands that houses supposedly 12,000 U.S.-based corporations.”
Apple’s public image is made of teflon
The N.Y. Times’ tax-avoidance story didn’t stick to Apple By Philip Elmer-DeWitt
“When the New York Times claimed incorrectly last year that General Electric (GE) paid zero federal taxes in 2010 on worldwide profits of $14.2 billion, the company’s reputation took a steep and prolonged hit, as measured by YouGov’s BrandIndex Reputation score.
Not so Apple (AAPL).
When the same paper ran a front-page story last week detailing — again incorrectly, according to Forbes — the lengths to which Apple has gone to avoid paying taxes, the company’s consumer reputation barely budged. In fact, based on responses to the question “Would you be proud or embarrassed to work for this brand?” Apple’s reputation score actually went up modestly a few days after the Times story broke, according to a YouGov report issued Tuesday.
The market research firm concluded that Apple’s public reputation is “virtually Teflon” – at least in terms of tax avoidance.”
Source: EY Managing indirect tax data in the digital age
- Governments are increasingly relying on indirect taxes to meet their budgetary needs
VAT rates have increased worldwide in recent years, and new indirect taxes are being introduced in many countries for sectors such as banking and energy
- The “fair tax” debate has put companies’ tax affairs firmly in the media spotlight – drawing intense scrutiny not only from tax administrations, but also from regulators, investors and even the public
- Tax and customs administrations are focusing more than ever on full compliance and using risk analytical tools to target their resources to tackle tax leakage and tax avoidance. They are collecting more taxpayer data and doing more with it”
However, is there a time limit on being bulletproof?
What are your guidelines on acceptable tax planning, including impact on the business, the potential change to the company’s tax risk profile and key reputational issues.
By Richard Cornelisse