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RACE TO THE BOTTOM

Brexit won’t help the UK lure tech giants away from Ireland with sweetheart tax deals

A customer enters the new Apple store, which is the world's largest, on its opening day at Covent Garden in London
Reuters/Suzanne Plunkett
“Sorry, do you take euros?”
By Joon Ian Wong
Published Last updated This article is more than 2 years old.

With the widespread perception that Apple enjoys a tiny tax bill in the United Kingdom, even as it earns hundreds of millions from consumers here, the tech giant usually sees some public scrutiny when it files its accounts.

But when Apple filed for its UK businesses on June 23, the shock of the Brexit result ensured that there was plenty of other news to keep everyone occupied. While Apple’s filings didn’t go completely unnoticed, the public couldn’t muster its annual outpouring of outrage around the company’s perceived manipulation of its tax bill.

Apple reported that it paid £12.9 million ($17 million) in UK corporation tax for 2015, on the back of pre-tax profit of £106 million for its two main UK entities, Apple Retail UK Ltd and Apple (UK) Ltd. That was derived from revenues of over £1 billion from those two companies.

It’s the seemingly paltry amounts of tax paid compared to the vast sums in sales that raises eyebrows. Apple, of course, is having its tax affairs investigated by the European commission. That’s because its European holding company is located in Dublin, which has a much lower corporation tax rate of 12.5%, compared to the UK’s 20%, and that’s where the bulk of its profits flow.

If the UK leaves the EU, that means Apple’s UK companies would no longer fall under European commission jurisdiction–or investigation. One theory goes that the UK could then become an attractive location for Apple’s European holding company, allowing the company to shift profits out of the EU and into newly independent Britain. The UK’s tax authorities, after all, have already shown that they’re willing to cut deals with tech giants, like Google, who have been remiss on their payments. That might seem preferable to staying in the EU, and continuing to run the risk of probes from individual member states, as Google was subjected to in Paris recently.

The idea of the UK supplanting Ireland as base for global tech companies is not entirely alien. Rohan Silva, a former adviser to David Cameron on tech policy matters, has called for post-Brexit UK to slash its corporation tax rate in half, to 10%, the world’s lowest, precisely to attract relocating companies.

But the reality is that a post-Brexit UK would make little sense as a European holding company. Once the UK leaves the bloc, dividends, interest payments, and royalties remitted from a subsidiary in an EU member state can no longer benefit from a withholding tax exemption provided by the EU. That exemption is currently offered under an EU directive that allows these payments to be made between a parent company and a subsidiary, or vice versa, located in EU member states.

When the exemption is removed, it translates into an estimated additional 5-15% of withholding tax on interest, royalty, or dividend payments, depending on the country, if a company were to repatriate its profits to the UK, says Markus Meiner, a director at the advocacy and research group, the Tax Justice Network. Even reduced UK tax rates would be outweighed by taxes levied on subsidiaries in EU member states. ”It would make the UK the worst place as a holding location, no matter what sweetheart deals are offered by the UK,” Meinzer says.

There are other factors that diminish the UK’s attractiveness as a new European base for big tech firms. There’s currency volatility: Apple would be exposed to pound sterling fluctuations if it were based in the UK. And there’s little certainty around the trade rules for UK businesses to gain access to the European market, because it all hinges on the trade deal post-Brexit Britain strikes with the EU.

With all this taking place against the backdrop of the Panama Papers revelations, which forced David Cameron to clear his name by publishing his tax returns and Iceland’s prime minister to resign, the idea of using Brexit to turn the UK into a Panama-esque haven for global companies, appears to be a non-starter. “The time has never been worse to run a tax haven strategy,” says Meinzer.

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