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October 2, 2016

Are we going the Irish way?


October 2, 2016

‘Celtic Tiger’ is the term used to refer to the Irish economy for its remarkable growth over the last three decades. One significant presence in the Irish economy, despite its ups and downs, has been the technology giant, Apple.

All was going well until recently, when the European Commission (Ireland is a member of European Union) recently concluded that Apple has been guilty of manipulating laws in order to avoid paying taxes. The commission demanded that the Irish government initiate a process whereby thirteen billion euros are to be extracted from Apple as taxes that it did not pay between 2003 and 2013.

This ruling has caused considerable anxiety within Ireland, and both Apple and the Irish government are set to challenge the European Commission’s ruling. For the Irish, the ruling is akin to a disaster since Apple is an important part of the Irish economy. The Irish finance minister, Michael Noonan, remarked that “it would be like destroying the future of [the] Irish people for a short-term advantage”.

But even more confounding is the interesting, and strange, fact that legally speaking, Apple neither exists in Ireland nor in the US! It took a bit of ingeniousness on the part of Apple Inc to devise a way to render taxation laws inapplicable. And that is what is causing all the commotion.

The story of Apple’s presence in Ireland began in 1980. At that time, Ireland was considered an economic backwater due to the dependence of its economy on agriculture. Ireland’s most talented, just like the case of present-day Pakistan, couldn’t find much scope for their abilities in Ireland and would usually look for greener pastures like Britain or mainland Europe. But then Apple Inc came to Ireland. Over time, it has been an instrumental part in the remarkable transformation of the Irish economy to the Celtic tiger that has an advanced financial and technological infrastructure. Apple not only helped create a base for fusing technology into the agrarian economy, but also brought investment and created jobs.

Today, Apple is there in Ireland as it has been since the early 80s, but the nature of its presence is dual. There is Apple Inc, the one with the physical presence and then there is Apple Operations International (AOI), a firm that holds two hundred billion dollars in assets but does not have any physical presence or any employees. The one with the physical presence can be found in the Holyhill Industrial Estate, with manufacturing, assembling, marketing, logistics and a service centre facility that serve all of Europe in its many languages. These facilities employ a large number of labour. AOI, in contrast, cannot be found anywhere.

This conundrum first started to gain traction after a 2013 hearing in the US Senate that focused upon the question of why Apple is not paying any taxes in the US. What Phillip Bullock, Apple’s the person heading Apple’s tax affairs, came up with completely flummoxed the Senate representatives (as it will you). He stated that: “AOI is incorporated in Ireland; thus, under US law it is not tax resident in the US. AOI is also not tax resident in Ireland because it does not meet the fact-specific residency requirements of Irish law.”

As far as confounding statements go, this surely has to be one of the top ones. Try to challenge your logic on this one: a US-based firm is operating in Ireland, making billions of dollars in profits. Yet it is under no obligation to pay taxes to either the US or the Irish government because, well, it does not exist in any of these countries (legally speaking).

To understand what’s going on, one has to understand the different priorities and different circumstances that beset a nation and its economies. In this tail, the two nations (USA and Ireland) experienced different circumstances and are facing different policy problems. The age of globalisation and global integration meant that many US firms, including Apple, were able to outsource their business activities outside of the country to destinations like Ireland where labour was comparatively cheap and laws (including those related to taxation) were quite lax. In the process, a few hundred people may have lost their jobs in the US, but for the world’s largest economy, this was not a big problem. Its economic growth covered this aspect, especially during the magical years under Bill Clinton when the US economy performed incredibly well. Thus, there was a tendency to ignore these kinds of issues.

But as the golden years of economic growth tapered off under George W Bush, and recession struck in 2008, it made its policymakers look for problematic areas. One of these, of course, was how US-based firms were avoiding taxes worth billions of dollars by exploiting tax loopholes. And thus came the scrutiny of firms who stash their wealth in foreign destinations. In times of fiscal crunch, lost tax revenues are a serious policy matter that can no longer be ignored.

Ireland’s case is altogether different. For its policymakers, taking action against Apple would be akin to ruin and suicide. Over time, the Irish government has actually helped legislate such legal loopholes that could help firms like Apple. Why? For a country of less than five million people, Apple has been of tremendous value. It was Apple’s success that helped lure other firms like Dell, Intel and Microsoft to Ireland. They invested in infrastructure and created jobs for the unemployed. This helped turn the tide as talented Irishman stopped leaving the country and in fact, over time, talent from other parts of the world started migrating to Ireland.

It was Apple’s presence that laid the platform for a technological base upon which other industries like finance and pharmaceuticals found their footing in Ireland. Moreover, the technological input helped transform Ireland’s agriculture too. Not only is Ireland a major exporter of technology, pharmaceutical products and services, it has also become a major exporter of food products.

In essence, what Apple did to Ireland’s economic growth amounts to a wonderful success story. But, in between, the company also extracted favours that helped it save billions of dollars in taxation. In this quest, it found a helpful ally in the form of Irish lawmakers, who did everything possible to facilitate the firm and its ventures (legal and extra-legal).

The Irish economy might be the Celtic tiger, but Irish authorities have also become one of the world’s leading experts in devising new taxation loopholes. The latest in the series is the so called ‘double Irish with a Dutch sandwich’, a complex scheme for avoiding taxation created especially for Google to bring its business to Ireland.

In hindsight, Ireland took this route because its policymakers did not see any plausible alternatives. Its economic compulsions were of a different nature than those of the US or Europe. The end result, however, is that the Irish economy is now so dependent upon creative tax avoidance schemes that it fears catastrophe if Apple and other technology firms are to leave Ireland in case they are forced to pay their billions of dollars in taxes. In effect, Ireland has become like one of those offshore tax havens (aka the Panama leaks) that specialise in dodging tax laws. The advantage: it brings in much-needed investment.

This all reminded me of another interesting case: Pakistan. Pakistan’s present economic predicament is more like the Ireland of the early 80s. Nobody is bringing in their investment to Pakistan, except for the Chinese. Pakistan needs it badly, but it comes with a catch: tax exemptions. And Pakistan is no position to resist.

Take Gwadar as an example. Gwadar has been declared tax free for atleast twenty years. And if reports are to be trusted, the investors are coming in with the assurance that no Pakistani laws (like the PPRA rules) would be applicable upon them. Which makes me wonder: are we going the Irish way, and will we see something like a ‘double Pakistani with an Afghani kabab’ scheme in the future?

The writer is a freelance contributor.

Email: [email protected]

Twitter: @ShahidMohmand79

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