02 Sep, 2016

EU State Aid: Commission Goes After the Forbidden Fruit

“The European Commission has concluded that Ireland granted undue tax benefits of up to €13 billion to Apple [the biggest tax bill ever imposed outside the US]. This is illegal under EU state aid rules, because it allowed Apple to pay substantially less tax than other businesses. Ireland must now recover the illegal aid [indirect subsidies].“1

Following an in-depth state aid investigation of the “sweetheart fiscal deal” between Ireland and Apple, the European Commission has concluded that Apple received illegal tax benefits from Ireland through a favorable tax arrangement selectively provided to this company for a number of consecutive years. The Commission stated that, “in fact, this selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014.”2 In other words, Apple’s Irish arrangements allowed them to pay approximately 500 euros in tax on every one million euros they made.

The essence of the case at hand lies in the fact that according to the Commission, two specific companies belonging to Apple’s group (Apple Sales International and Apple Operations Europe) were internally channeling their profits to their ‘headquarters’ that existed only on paper. The said ‘HQ’ had no staff or premises. Said profits were not, consequently, subject to tax in any country where they were originally generated. This was all due to specific provisions of the Irish tax law which are no longer in force. Namely, only an insignificantly small segment of two companies’ profits were making were subject to tax in Ireland, while the remaining vast majority of profits were allocated to the abovementioned “head office” and thereby left untaxed, according to the Commission.

On the opposite side, Apple, Ireland and the US Government have all responded to this outcome with a vocal repudiation. Namely, the company accused the Commission of attempting to “rewrite Apple’s history in Europe, ignore Ireland’s tax laws and upend the international tax system in the process.”3 “The Commission’s case is not about how much Apple pays in taxes, it’s about which government collects the money. It will have a profound and harmful effect on investment and job creation in Europe,”4 Apple claimed. Both the Irish and US governments have originally announced they would also contest the Commission decision.5 However, by the time mentioned, this militancy slowly started decreasing in power. Ireland is today already questioning whether it should take part in the appeal. Opinions on the topic are divided. On the one side, a failure by the Irish government to back up the appeal could undermine the country’s pro-business policy. On the other side, there are views that Irish taxpayers’ interests need to be upheld conjointly, which would be the case only if Ireland permits the tax bill to be paid by Apple. Due to this clash of opinions, the Irish government published a press release with regard to the question of its support to the future appeal. “[I]t was agreed to allow further time to reflect on the issues and to clarify a number of legal and technical issues with the Attorney General’s Office and with officials”6, the government explained. With regard to the United States, the reaction to the Commission’s decision is being given different facets. Apart from the impassioned attitudes describing it as “outrageous”, some experts in the field already have in mind legal tools that might be used to fight the decision. Namely, section 891 of the U.S. tax code, passed in 1934, provides the president with a legitimate possibility to double tax rates for corporations from any of the countries discriminating against U.S. companies. Nevertheless, minding potential long-term effects of such administrative measure, vast majority still shares the stance that American government is unlikely to react in the said manner.

In any case, beholders from the US started to look somewhat deeper into the matter and seemed to find some “perverse incentives” in this manner of “sweetheart deals“ treatment. Namely, the essence of their position is that “a government can offer sweetheart deals in the knowledge that when it gets found out it will be “forced” to accept the reversal of all the concessions it made” , they suggest.

It might also be useful to stress that the former Competition Commissioner, Neelie Kroes, did not seem to welcome this decision. Ms. Kroes described it as unfair and went on explaining that “[s]tate aid cannot be used to rewrite [national tax] rules.“ “However, the current state-aid investigations into tax rulings appear to do exactly that”, she declared.

This decision is only a part of a broader strike by the European Union Commissioner for Competition, Margrethe Vestager, on tax avoidance practices. What is more, the importance of it particularly comes to the fore if bared in mind that this decision belongs to a strong campaign led by the EU against illegal state aid practices, which already, at this moment, captures some of the multinational giants across the continent (Starbucks in the Netherlands, Amazon in Luxembourg and Anheuser-Busch InBev in Belgium). Chances are, DG Competition will keep on fighting against this type of practices by applying the same pattern.

 

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1 European Commission, State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion, press release, Brussels, 30 August 2016
2 European Commission, State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion, press release, Brussels, 30 August 2016
3 Tim Cook, Chief Executive Officer of Apple, A Message to the Apple Community in Europe, August 30, 2016.
4 Tim Cook, Chief Executive Officer of Apple, A Message to the Apple Community in Europe, August 30, 2016.
5 BBC News, Irish cabinet considers appealing against Apple tax ruling, August 31, 2016; see also: Alex Barker and Arthur Beesley, Apple hit with €13bn EU tax penalty over illegal Irish aid, August 30, 2016. (the US Treasury said the “commission’s actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the US and the EU”.) Available at: http://www.ft.com/cms/s/0/b573ac02-6e90-11e6-a0c9-1365ce54b926.html#axzz4IvXkdf4o
6 Available at: http://www.merrionstreet.ie/en/News Room/News/Post_Cabinet_Briefing_Apple_State_aid_Case.html

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