Mayowa Akinbote, Lecturer, Staffordshire Business School
Apple Inc. (Apple) is a well-known technology company for designing, manufacturing and selling smartphones, tablets, computers and other digitals accessories. Apple has been the world most valuable brand in 2020 with revenue of $267.7 billion (£203.3 billion) and profit of $57.2 billion (£43.4 billion) and the largest public organisation in the United State of America (US) in 2018.
In 2016, the European Commission found Apple guilty of paying the below 1% effective tax rate to the Irish government in 2003 and that Apple was given preferential tax treatment. This tax advantage was declared illegal and the commission rule that of £12.7 billion in taxes and interest should be paid to Irish government coffers. This amount is equivalent to the Irish National Health budget.
Recently, Apple becomes the most valued traded corporation in the world, valued at £1.7 trillion bigger than £1.5 trillion value of all the FTSE 100 the UK top companies. While Amazon and Google followed Apple as the most valued traded corporations in the US. Some commentators suggest that such sudden growth in value could be aided by tax avoidance deals thus such could create competitive advantages over their competitors.
Tax Avoidance
Tax avoidance is legally bending of the tax rules to gain an undue tax advantage that the rules never intended and creating tax loopholes. Transfer pricing is the biggest enabler of tax avoidance. Big companies like Apple design, manufacture, test, hold patent rights and marketing rights of their products in different countries. This gives opportunities to allocate high costs discretionarily to the country that offers low tax advantage like Ireland thus, profit is channel across borders. The annual global tax avoidance is equivalent to the entire Belgium Gross Domestic Product (GDP) with British overseas territories such as British Virgin Island, Bermuda, Cayman Island followed by Netherland, Switzerland, Luxembourg and Ireland in Europe topping the list of tax avoidance enablers.
Similar to the other multinational companies such as Starbucks, Google, Amazon and Facebook, Apple legally channels 90% all its global profits to through Luxembourg and Ireland before profits were channelled to non-Irish residence subsidiaries to avoid paying taxes. This is not unknown, but the Irish government accept the deal in return for the inward investments and jobs creation. Besides Ireland pride herself as one of the countries with the lowest corporation tax rates in Europe at 12.5%.
In the UK airline companies like tax exile, Virgin Atlantic and EasyJet benefited from tax avoidance for decades. Avoiding paying taxes into the countries where they generate profits hence, reducing the funds available for the development of the key facilities that could save host community’s livelihood especially during this period of uncertainty such as coronavirus pandemic. Regrettably, these companies are also ripping where they did not sow. For instance, the air industry seeking £7.5 billion in bailout due to coronavirus lockdown. They also took the advantage of the government taxpayer-backed general support during the uncertainty period.
Competitive Advantage
Michael Porter explains four generic strategies which companies could adopt to gain high profits over their competitors such as cost leadership, cost focus, differentiation leadership and differentiation focus.
The first two strategies focused on cost leadership strategies are price-based competition in a targeted market. Companies such as EasyJet and Amazon adopt cost focus and cost leadership using both economies of scale and scope to achieve the lowest cost of production to their advantage thus generating high profits with their strategy. These companies rather paid shareholder(s) than to invest in their workforce or pay taxes to the host countries. For instance, at the start of the pandemic, EasyJet paid £60 million of dividend to Monaco tax resident founder Stelios Haji-Ioannou.
The other two strategies focused on differentiation strategies which require significant investment in marketing and consistent promotion. Companies such as Virgin Atlantic and Apple adopts differentiation leadership by targeting larger markets and positioning their products quality superiority, global brand loyalty uniqueness to the market. Despite, cost reduction through economies of scale, Virgin Atlantic and Apple continue to charge premium prices on its products and services.
Although, none of the Porters’ generic strategies includes the possibilities of tax avoidance creating competitive advantages. However, some commentators believe that tax avoidance increases the shareholders’ wealth and the companies’ value thus, encouraging investors to increase investments with the hope of increasing their wealth. Furthermore, some observers consider that these extra investments enable such companies to oblige their host countries into offering tax avoidance deals in return for inward investments and jobs creation in their countries.
Mayowa Akinbote FCCA
Lecturer in Accounting and Finance
Staffordshire Business School
Staff Page: https://www.staffs.ac.uk/people/mayowa-akinbote
LinkedIn: http://linkedin.com/in/mayowa-akinbote-33448895
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