The European Union's decision to require Apple to pay €13 billion ($20b) in back taxes to the Irish government is a revealing insight into the tax strategies of large multi-nationals. Apple's total penalty could be as high as €20b when accrued interest is taken into account.

This is a huge figure in relation to the Irish government's annual corporate tax revenue of just under €7b.

In light of this, why would the Irish government want to turn down the opportunity of a massive €20b windfall and does this EU decision have any implications for New Zealand?

To answer these questions we have to look at corporate tax rates in Ireland and the United States as well as New Zealand's tax structure, particularly our imputation credits.

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In 1980 Ireland introduced a 10 per cent corporate tax rate on all manufacturing activity, which was extended to the financial services sector in 1987. These tax changes received EU approval at the time.

However, the EU is opposed to state support for specific sectors and, as a consequence, in the 1990s the Irish government announced the gradual abolition of the 10 per cent tax rate for the manufacturing and financial services sectors. This was replaced by a 12.5 per cent corporate tax rate that applies to all companies operating in Ireland.

The US corporate tax rate is 35 per cent but this only applies to the offshore subsidiaries when the money is remitted back to the US. This means that US companies do not have to pay US tax on overseas earnings if the money remains offshore. This is one of the reasons why Apple holds over US$230b ($314b) of cash and short-term securities, most of it overseas.

The crux of the issue is that the Irish government gave Apple tax rulings in 1991 and 2007 that allowed the US technology company to establish two structures in Ireland:

•A structure which would be taxed on Irish generated profits only, at the 12.5 per cent corporate tax rate

•A "head office" type structure that could earn profits outside Ireland but would not be subject to Irish tax. In other words, this head office became a stateless entity that was not subject to any corporate tax regime.

There is little doubt that Apple was given the special head office deal to encourage the company to establish, and expand, its manufacturing operation in Ireland.

Under this structure, Apple was able to channel a substantial proportion of its global sales, including sales to New Zealand, through this Irish head office structure. The so-called Irish head office had "no employees, no premises and no real activities" according to the EU.

The Irish head office purchased iPhones and iPads from unrelated manufacturers in China and shipped these goods directly from China to Europe, Australia and New Zealand.

According to figures released in the US, the Irish head office recorded pre-tax earnings of €16b in 2011 but only €50 million was allocated to Ireland and subject to corporate tax. As a result, Apple had an effective Irish corporate tax rate of only 0.05 per cent in 2011.

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The Irish head office profits continued to increase between 2011 and 2014, while taxable profits earned in Ireland remained static. Thus, Apple's effective Irish corporate tax rate declined to just 0.005 per cent in 2014.

The EU's Apple decision is based on competition law rather than tax law. The decision doesn't call into question Ireland's 12.5 per cent corporate tax rate.

Under European competition law, member states are prohibited from using state resources or funds to give an advantage to any company or sector. The EU concluded that the Irish head office arrangement gave Apple an unfair competitive advantage and has ordered the Irish government to recoup €13b of unpaid taxes, plus interest.

Irish commentators, including government ministers, were shocked by the decision as they were expecting a figure in the hundreds of millions, rather than €13b.

The EU ruling, which looks like a windfall for the Irish government, was greeted with dismay in the country. Parliament was recalled from its summer recess and members voted unanimously to appeal the decision. Street demonstrations in support of the government retaining the €13b had little support.

There are a number of reasons why the Irish government quickly decided to appeal the EU's decision including:

•The decision confirms the view that Ireland is a tax haven at a time when these structures are under scrutiny

•The enforcement of the EU's decision could encourage Apple, and other multinationals, to close their operations in Ireland and move to countries that offer better tax deals

•There is a strong argument that other countries, including New Zealand, could be entitled to a substantial share of the €13b, plus interest

•The Irish government is concerned that this decision could lead to the harmonisation of corporate tax rates in the EU and the country could lose its 12.5 per cent rate

A number of prominent businesspeople were appalled by the EU's decision.

Padraic White, the former head of IDA Ireland, which is mandated to attract foreign investment to the country, called the Apple ruling "fool's gold".

White wrote: "The implications of all this are very disturbing for Ireland's foreign investment programme. The EU is seeking to rake back over 25 years of tax rulings in the case of Ireland and Apple. It puts a question mark over all tax rulings for decades past and introduces new uncertainty. Ireland, which is more dependent on foreign direct investment than any other member state, has the most to lose."

Almost 200,000 Irish workers, or 10 per cent of the workforce, are employed by overseas companies. Apple has 5000 employees in Cork but has no employees in its so-called Irish head office, which had pre-tax profits of nearly €16b in 2011.

The accompanying table shows the profitability of Apple's NZ operations, which are run from Sydney, and the parent company in California. It appears that a large proportion of Apple's sales in this country -- from a tax point of view -- go through the Irish head office to Australia and then across the Tasman.

Profit margins and tax provisions are very low in New Zealand because Apple wants to account for most of its international profits through its tax-exempt Irish head office.

One of the clear conclusions from this is that Apple would have had far higher earnings, and paid far more tax in New Zealand if it wasn't for the Irish head office structure. Therefore, countries that were supplied through the Irish head office have a stronger claim to the €13b, plus interest, than the Irish government because only the cash, not the physical goods, passed through Ireland.

In view of this there is a strong argument that NZ, Australia and other governments should make a claim on the €13b if the EU decision is upheld by the courts.

New Zealand has a 28 per cent corporate tax rate and imputation credits on dividends. These credits have been an excellent innovation because they encourage New Zealand corporates to pay tax on their domestic, as well as their offshore, operations.

This is a far better structure than the US, where profits are only taxed when remitted home.

The Irish government has accepted that its head office tax-exempt structures are flawed and these are being phased out over the next few years. The EU/Apple case is about the legality of these structures prior to 2014.

Brian Gaynor is an executive director of Milford Asset Management, which holds Apple shares on behalf of clients.