Wednesday, 31 August 2016

Apple tax

Isn't "apple tax" the duty they charge on cider?

OK, there is much in the news on Apple and the tax they are due to pay in Ireland, or not. They are appealing. The letter from Apple was interesting.

So not really debating that issue itself much, but more of a general issue I see on companies finding legal means (or are they made illegal retrospectively?) to reduce the tax they pay. As a business, one of the things that bugs me a lot is when people talk of companies paying no tax when in fact they are referring to paying no (or little) corporation tax (in a specific country in which they trade).

The reason that annoys me is that I know, as a business owner, that we pay lots of tax in lots of ways, and corporation tax is just one of those, not even the biggest. My company does a lot of R&D and as a result we manage to reduce our corporation tax quite a bit. Whilst we had spotted this, it really only happened when Alex managed to engage some consultants that are good at this (MPA group). I hope we don't get the same grief from people saying we are not paying our fair share of tax as a result.

At the end of the day companies do pay a lot of other taxes apart from corporation tax, and one of those is VAT. This is where a heated debate arose with my friends on who pays the VAT!

My view on this is pretty clear, and a result mainly of my failed economics module that I did at uni. There are a lot of taxes that relate to what a business does. You cannot argue that Apple, in what they do, have not caused a lot of VAT to be paid. The VAT actually gets paid mostly where the companies trade and sell their goods. The fact companies can effectively divert their corporation tax to other countries, that may charge less, is one of the big gripes people have - tax not paid where the company is making its money, but VAT is where the company makes its money.

Now, the issue I had with my argument is that "VAT is paid by the customer and not the company", as it is added to the price and the company is simply collecting it and handing it over. I do not entirely agree!

Who "pays" a tax?

The issue I have is down to who "pays" a tax. This is not as easy as it sounds!

One simple way to work out who pays a tax is to work out who is better off if the tax did not exist. That shows who exactly has been burdened by the tax, and so who really "pays" that tax in the end.

Now, with VAT, you could say that if VAT did not exist, your iPhones would sell at the ex-VAT price. Apple would be no better off, but the end customers would be. So the end customers are the ones that pay the VAT.

But equally you could say that the market can bear a price for an iPhone, and if no VAT existed then Apple could charge the same final price. The end users would be no better off, but Apple would be. So clearly the tax is a burden on Apple - they pay the VAT.

The problem is that this is hypothetical, unless VAT was abolished and we waited a while, we would never know the final outcome. In practice, it is reasonable to expect that a market price would be found that was somewhere in between, so the VAT ultimately has been paid by final customer and by Apple in some part. The exact ratio is not something we can really know.

What you can say for sure is that Apple are responsible for all of that VAT getting paid. It is, after all, a "Value Added" tax, a tax on the "value add" that Apple have created, and is money going to a government because of Apple and what they do.

Is VAT special?

The other point is that VAT is seen as special because of the way it is accounted, as a separate thing "collected" from the end user and handed to the government. This makes people dismiss it as a tax not paid by the company by by the consumer - not as clear cut as I explain above.

But my argument here is that VAT is not special. All of the above points, where one could expect the price to drop by the tax no longer in play, or one could expect the price to be the same and Apple pocket the amount they would have paid in tax. All of that applies to any tax, whether corporation tax, council tax, stamp duty, fuel tax, employers national insurance, or so on.

However it is accounted for - at an economics level - a tax is diverting money from the profit that could be made and sending it to a government. Without that competition may mean a lower price, or same price and more profit for the company, or more likely somewhere in-between. So both pay in some part for that tax, whatever that tax is.

VAT is not special!

Apple have created a lot of tax at various levels in different countries, not just the corporation tax they may have paid in one country, but all of the employment and property taxes in the country they employ people and the VAT in the countries they sell things. This should not be dismissed.

Tax burdens us all, consumers and businesses. Businesses actually have a legal obligation to act in the best interests of their members, and so try and pay as little as they (legally) can. End users usually have the same incentive.

It will be interesting to see how the Apple case pans out in the long run though.


  1. My view has long been that corporation tax should be 0%.

    When money flows into a business through sales then it's taxed via VAT, and when it flows out then it's taxed through income and dividend taxes.

    Taxing it in the middle as well seems weird, and contrary to the aim of a business as being a generator of wealth/productivity/value/etc.

    1. Excellent comment - I think I agree with that.

    2. I disagree - the purpose of corporation tax is to penalise a company for accumulating wealth in the form of cash.

      You can legally avoid corporation tax by spending the money - on wages, on equipment, on property, on share buybacks, anything that gets cash out of the business and into other assets - giving the people who receive the cash from you an opportunity to spend it, and causing overall taxable revenues to go up. Note that because the recipients are also spending it, the economy can grow by more than Apple's total spend, as Apple buys a warehouse, whose previous owner can now invest in a small FTTP deployment, making it possible for another provider to build a cheaper LTE network, making it more affordable to run an iPhone, increasing Apple sales etc.

      Without it, as Apple has demonstrated, a business can decide to not reinvest its income, and build up huge cash reserves. These cash reserves are generally considered to be a bad thing; they act as a brake on total economic activity, because money that could be active (on Apple's behalf) is currently inactive.

    3. Interesting. Though, to be fair, in order to build up that cash they have caused a lot of tax to be paid already, e.g. VAT. corp tax is more tax on income that has been taxed quite heavily already. The key difference is which country gets the tax. Sales taxes like VAT happen where the goods are sold, corp tax can be moved around more easily.

    4. Simon: However, holding the cash isn't such a bad thing as it would give the business immediate access to do something useful and gives it a buffer in the event of something happening.

      Long term, the business has a better chance of continuing to provide tax income to the treasury if it exists, and if all of the value got made into assets, realising that might not be possible in a sufficiently timely manner as to protect a business.

    5. RevK: Of course, but if they spend it, they'll incur more taxation at the time they spend it, too; the goal of CT is to ensure that they're taxed at comparable levels whether they reinvest their income in some form, or they keep it as cash in hand.

      TBEG: That's why CT should not be 100% - it should be set such that cash is the least tax-efficient way to hold your profits, because there are business advantages to holding them as cash rather than reinvesting in some form.

      Secondly, that's the reason for having lots of CT tax credits like the R&D tax credits - if you're doing things that are high risk, but socially beneficial, you are rewarded by having the option to retain more profit as cash tax-free, to counterbalance the risk you're taking when (e.g.) you spend on R&D.

  2. i guess any tax has 2 main features:
    1) Is it regressive, proportional or progressive
    2) Is it easy or hard to evade
    Not sure how corporation tax fares here, but vat is generally regressive and hard to evade so governments like it.

  3. Does this help in the context of who pays VAT?

    "VAT on any supply of goods or services is a liability of the person making the supply and (subject to provisions about accounting and payment) becomes due at the time of supply.

    VAT on any acquisition of goods from another member State is a liability of the person who acquires the goods and (subject to provisions about accounting and payment) becomes due at the time of acquisition."

    It's a genuine question, as I suppose it is possible that the person who is "liable" for the VAT could be different to the person who "pays" the VAT...

    1. Not sure it really helps that much, the point that the company is liable for paying it was not the issue - it was the notion that it is collected by the company from the customer and then paid making it notionally a tax the customer "paid". I think the problem in the debate is down to what "pay" means.

  4. I would agree with you, except that Apple were actually moving all the profit as "Stateless Income" and paying no tax at all on it.

    I wouldn't have an issue if they had just put their head office in a low tax country, but simply having it exist nowhere is where it becomes wrong, imho.

    1. This is part of the problem - you say "paying no tax at all"! They are paying VAT, employment tax, property tax, fuel tax, and many others. They are paying a lot of tax even if they pay zero "corporation tax". The whole point of my post was to explain the notion of "paying no tax at all" is wrong.

    2. Yes, true, but what I'm trying to say is I feel they should pay corporation tax on that money. If they want to sink it into RnD or whatever to avoid paying tax on it, I don't have an issue, but what they are actually doing is... gaming the system to say the least.

  5. "Businesses actually have a legal obligation to act in the best interests of their members, and so try and pay as little as they (legally) can."

    Often repeated, but doesn't match UK law.

    Please refer to the Companies Act 2006 and associated guidance.

    Section 172 of the 2006 Companies Act (below) specifically says company Directors must consider the interests of employees, suppliers, community, environment etc, and not just in a short term context either.

    Obviously nobody ever bothers with this, and the consequences of ignoring it are nil, but this is The Law as it has been in the UK for a few years, so would contributors please not repeat the mistaken claim that (UK) law says the shareholders always come first.

    From e.g.

    172 Duty to promote the success of the company

    (1)A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—

    (a)the likely consequences of any decision in the long term,

    (b)the interests of the company's employees,

    (c)the need to foster the company's business relationships with suppliers, customers and others,

    (d)the impact of the company's operations on the community and the environment,

    (e)the desirability of the company maintaining a reputation for high standards of business conduct, and

    (f)the need to act fairly as between members of the company.

    (2)Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

    (3)The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company.

    1. All of which, in the end, are to promote the interests of the members. So ultimately, paying as little tax as legally required is doing so, is doing so, unless somehow people create bad PR around it by misleadingly stating that you pay "no tax".

  6. I think this is kinda distorting the issue a bit, the problem is not that Apple isn't paying that corporation tax they owed but rather that the Irish Government has granted them an illegal competitive advantage in violation of state aid rules. If Ireland had given all companies headquartered in Ireland the same corporation tax rate that would be different, but they have made this deal specifically with Apple that is what really got them bitten.

    1. Oddly apple say not a special deal!

    2. "has granted them an illegal competitive advantage in violation of state aid rules" according to the Commission, which is neither a court nor an independent prosecuting or tax authority. Calling it "illegal" implies some due process, but there has been none.

    3. Apple says it's not a special deal because basically they tried (here's a good sign that someone knows they're up to no good...) to have Ireland write it up without specifying Apple by name. So e.g. you don't say "Apple Inc." you say "All corporations with a turnover exceeding $5Bn in the high value information technology business whose CEO has the initials T.C. *wink* *wink*"

      Apple picked the terms of the deal, Ireland agreed all this knowing it was illegal.

      Contrary to what Andrew Martin claims, you don't have to wait for some hypothetical "due process" of his liking before calling something illegal.

  7. "The VAT actually gets paid mostly where the companies trade and sell their goods."

    Apple arranged, perfectly legally under Irish law, that almost all the Apple products bought in Europe would really be "sold" from Ireland, where VAT is lower.

    Then Apple arranged, under agreement with the Irish tax officials, a deal nobody else has had or is ever likely to have, that their "Head Office" would be considered to have received almost all the profit of this already artificial tax arrangement. In exchange for this, the Irish office would conveniently be allocated a small profit that could be taxed to produce a little income for Ireland.

    So, 1. No, when you buy an Apple computer in the UK you're paying VAT to Ireland. This is why Ireland wants very much to keep Apple on side.

    2. Where was "Head Office" paying taxes? It didn't physically exist. Since it had no location it didn't pay any taxes at all. The Commissioners, not unreasonably, felt that in fact those profits occur in Ireland, where the company actually was, and where they'd be subject to Corporation Tax. Ireland had instead decided that this idea of imaginary "Head Offices" making an enormous profit and never paying tax was totally fine. Only in the case of Apple though. Huh.