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Commission ruling on Apple will help prevent free for all

Analysis & company report

By John Simpson

Published 13/09/2016

The Apple Corporation’s CEO Tim Cook
The Apple Corporation’s CEO Tim Cook

The Danish Commissioner has done the EU a service by attempting to clarify the fiscal discretion of national governments and doing so with some basic principles. Other regions, like Northern Ireland, (even as we leave the EU) should support the decision on taxation due from Apple to the Irish government.

The Irish government and the management of the Apple Corporation have their own motives to challenge the European Commission ruling. That shared interest does not invalidate the EC ruling.

The commissioner could be challenged: first, as setting a precedent for the orderly management of the behaviour of multi-national businesses and, second, as creating a wider interpretation of the competition rules of the EU.

Have the rights of a national government been unfairly or unreasonably challenged? The commissioner has acted on grounds of fairness in competition policy, generically, through the avoidance of unfair state aid. The Irish corporation tax rate is not being challenged, the attribution of profits is.

The EC explicitly stated that it is not challenging the separate authority of each member state to determine fiscal policy for all businesses operating within that member state.

This difference means that Ireland can set a corporation tax rate at 12.5%, but that tax rate should be applied to all profits attributable to Ireland.

The shifting of Irish profits due to Apple on to a different Apple subsidiary -not registered in any country - seems like a back-door way to avoid company taxation.

The legal merits of the disagreement will be decided by the European Court. However, without claiming technical legal authority, the issues involved do raise important questions on what should determine good relations between modern states.

The liability falling on Apple depends on how much profit is liable to taxation and in which jurisdiction the profit was earned. Apple appears to have attributed a large part of its international profits to Ireland and then sought to pass the majority of those profits to a headquarter company which had no residential base.

The principle, more easily stated generally than measured with precision, is that business profits should be assessed and subject to taxation in the country where the added value generates extra profits.

This principle has been applied flexibly. International businesses can legitimately allocate parts of their costs and royalty payments with considerable discretion.

A business trading in several countries has, in the past, been able to shift profits between the different countries by discretionary allocation of costs or manipulation of transfer prices.

A consequence of the EC ruling on Apple profits is that Apple may still, with advantage, review how it attributes current profits.

To date, Apple has relied on the existing procedures through Ireland to avoid the degrees of financial manipulation that might now be necessary.

The EC has made a ruling based on EU precedents for judging whether state aid was distorting competition unfairly. The EC decision is that the taxation rules as applied by Ireland have been unfair to other companies and also between competing countries.

The way in which multi-nationals are taxed is more than an Irish issue. The OECD, supported by most of the more developed countries, has set out policy guidelines so that companies and governments avoid 'base erosion and profit shifting' by multi-national businesses.

If the relationship between Apple and the Irish Government was tested using the criteria developed by the OECD, the policy conclusion might be the same as that made by the EU.

Northern Ireland (and other UK regions) has a strong vested interest in this EC ruling whether the UK is part of the EU or not. In the competition for foreign direct investment, the Irish practice, if unrestrained, could become dangerously expensive. On this occasion, the EC has moved to help bring order and follow principles to avoid an unacceptable free for all.

 

Company Report: United Dairy Farmers

The figures (in £'000)

United Dairy Farmers (UDF) is essentially a co-operative organisation buying, processing and selling milk. UDF is the parent company and owner of nine trading subsidiaries including Dale Farm Dairies, Rowan Glen located in Scotland and Dale Farm Lakeland in Cumbria.

The annual report to the end of March 2016 confirms that, although milk volumes were higher, because of lower revenue per litre, the value of trading revenue was down a further 12% compared to the previous year and, in turn, revenue in 2015 was 5% lower than in 2014.

In 2016 the average price paid, in pence per litre, to farmers was 19.97p compared to 26.41p in 2015. This fall of 24% in the average price happened at the same time as the average output of milk per member of the co-op increased from 583,000 litres to 599,000 litres, a further increase of 2.7%.

Despite the weaknesses in the market place, the volume of sales by the Dale Farm group grew during the last year and the operating profit showed a return to more acceptable levels. The main growth was in sales of cheese and butter consumer products. International events registered adverse consequences for UDF. Sales to China were reduced and a continuing ban on imports of EU food products by Russia further dented export opportunities.

In the early part of the present trading year, 2016-17, EU policy on market management has seen high levels of skimmed milk powder being sold into intervention. This has partly stabilised the international market.

Turnover443,155421,490370,180Down 12%

Operating profit (loss)7,3903,3429,008Up 170%

Pre-tax profit (loss)6,112(714)6,824Back to profit

Capital expenditure8,8944,3283,137Down 28%

Employment (ave. no)9391,0131,087Up 7%

Shareholders' funds47,28045,39050,223Up 11%

2014 2015 2016 % change annually

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