The European Commission today (30 August) hit Apple with a €13 billion clawback of unpaid taxes in Ireland, but Dublin branded the move a violation of its sovereignty and both the country and the US tech giant immediately said they would appeal the decision.
The decision has put the executive at loggerheads with Ireland, which fears for the effect on investment in its economy and accused it of meddling in its sovereign tax affairs, with Apple, and with the US government, which has accused Brussels of targeting successful American companies.
After a three-year probe, Commission antitrust regulators said that Dublin gave Apple an unfair competitive advantage through the tax treatment of two company structures over ten years.
The Commission accused Ireland in 2014 of dodging international tax rules by letting Apple shelter profits worth tens of billions of dollars from tax collectors in return for maintaining jobs.
“Two tax rulings granted by Ireland artificially reduced Apple’s tax burden for over two decades in breach of EU state aid rules. Apple now has to repay benefits worth up to 13 billion plus interest, “ said Competition Commissioner Margrethe Vestager.
Ireland’s Finance Minister Michael Noonan said an appeal to the European courts was necessary to “defend the integrity of our tax system, to provide tax certainty to business and to challenge the encroachment of EU state aid rules into the sovereign member state competence of taxation”.
Apple Inc US set up two ‘stateless’ subsidiaries, Apple Sales International and Apple Operations Europe, which were incorporated in Ireland. ASI was set up to handle sales of Apple products such as the iPhone in Europe, the Middle East, Africa and India.
But the Irish tax rulings, made in 1991 and renewed in 2007, meant that any profits reported by each company’s head office, neither of which had any employees, were not subject to tax in any jurisdiction in the world.
That meant that Apple, one of the world’s most valuable companies, paid as little as €50 for every million euros in profit the two subsidiaries made, Competition Commissioner Margrethe Vestager said at a Brussels press briefing.
The loophole was closed by Dublin in early 2013, after the existence of the rulings were exposed by a US senate hearing.
The money must be clawed back by the Irish government, which will calculate the final amount owed.
Vestager said the door was open for other countries to claim possibly unpaid taxes on ASI’s profits. Any claimed in other jurisdictions could reduce the tax bill in Ireland, where Apple employs 5,500 people. Apple pays 12.5% corporation tax on the economic activity it declares for that staff.
The decision follows two similar but smaller EU state aid investigations into tax rulings for Fiat in Luxembourg and Starbucks in the Netherlands.
Those probes were launched after the eruptions of the Luxleaks tax scandal that exposed sweetheart tax deals made between multinational and the Luxembourg government.
Commission President Jean-Claude Juncker was prime minister of Luxembourg when the deals were struck.
Apple said the ruling would damage investment and job creation in Europe and vowed it would be successful in its appeal against the finding that it benefited from illegal state aid.
Although it closed the loophole, Dublin also said it would appeal, subject to Irish cabinet approval.
“I disagree profoundly with the Commission’s decision,” said Finance Minister Michael Noonan.
Dublin accused the Commission of overreaching itself by using its competition powers to influence national tax policies, echoing earlier criticism from Washington.
Tax is a national competency, jealously guarded by member states. The US Treasury has warned that using state aid rules would mean the executive was turning itself into a “supra-national tax authority”.
“It is not appropriate that EU state aid competition rules are being used in this new and unprecedented way in the area of taxation, which is a member state competence and a fundamental matter of sovereignty,” an Irish government statement said.
Vestager said EU judges would support the Commission. “State aid is state aid no matter if it informs a piece of land, a grant, a beneficial loan or a tax benefit,” she said.
Both Ireland and the US said the Commission move would upset international consensus on global tax rules, which are centred in the OECD’s Base Erosion and Profit Shifting (BEPS) initiative.
The US Treasury’s Jacob J. Lew said that the Commission’s “sweeping interpretation” of State aid doctrine “threatens to undermine” the progress made by the international community “to curtail the erosion of our respective corporate tax bases”.
But Vestager said that both Brussels and Washington were going in the same direction on the global guidelines.
BEPS, a response to numerous tax avoidance scandals involving multinational companies, is based on the principle that tax is paid where economic activity is centred.
Much of Apple’s economic activity is based on the Intellectual Property of its products, which is held at the US headquarters.
When Apple pays the Irish government, the company can write off the bill in the US, chipping away at taxes it owes there.
Apple has about $181 billion tied up outside the US – more than any other American firm, according to a study published by Washington-based non-profit Citizens for Tax Justice last October. Apple would pay more than $59 billion in US taxes if the company reported those earnings at home.
Last week, the US Treasury called the EU executive’s analysis “deeply troubling” and said it would result in a “transfer of revenue to the EU from the US government and its taxpayers”.
— Martin Schulz (@MartinSchulz) August 30, 2016
Ireland suffered a banking crisis in 2008 that lead to it needing an €85 billion international bailout from the International Monetary Fund, European Commission and European Central Bank in 2010.
It exited the bailout in 2013, the first crisis-stricken Eurozone country to do so, after four austerity budgets.
Tove Ryding, Coordinator of Tax Justice at the European Network on Debt and Development (Eurodad), said it was absurd that Ireland was refusing to collect billions of much-needed euros from Apple.
She added, “The European Commission has exposed one rotten apple, but we fear there are many more out there.
“What we really need is a rule requiring all multinational companies to publish basic information about where they do business and what taxes they pay in each country where they operate.“
Burkhard Balz is a German MEP and a member of the European People’s Party, the same party as Irish leader Enda Kenny. He said the money should go to the EU and not the Irish budget.
"I feel a strong discomfort about that. This is a weird way of encouraging countries to infringe competition rules. The money clawed back should flow into the EU budget instead," he said.
"To protect the Internal Market and to make sure that nobody plays foul we need consistent, rigorous and bold enforcement of competition rules. That's what Vestager does," said Balz.
Irish MEP Matt Carthy said the decision was a victory for Irish taxpayers. He said, “The Irish government has been lining up in recent days to assure Apple and other multinationals that they will immediately challenge any ruling against the Apple tax deal in the European Court of Justice.”
“In effect, the two main political parties and coalition partners are saying that the Irish government will actively try to avoid recouping tax revenue owed to the Irish people. It’s farcical. These parties need to get real about the Irish government’s cosy relationship with Apple and its role in facilitating industrial-scale tax avoidance.
“There is simply no justification to challenge a ruling against this deal - and the Irish government should immediately rule out an appeal,” Carthy said.
Aurore Chardonnet, Oxfam EU policy advisor on inequality and tax, said, “This decision shows that some tax practices by EU member states can be terribly damaging. Poverty in Europe has been rising and some EU countries have even had bailout programmes in recent years, so it makes no sense for European governments spurn the chance to raise billions in corporate tax income for the benefit of their citizens.”
Independent Dublin MEP Nessa Childers said, “I am utterly puzzled at the Irish Government’s plans to challenge this ruling in the European court. Are we so lacking in self-confidence in our abilities to attract FDI that we need to provide fractions of 1% through corporate tax deals to have companies move here?
“Instead of challenging the European Commission’s ruling today, the Irish Government should recognise the sheer injustice involved in these special deals, including the immense damage they cause to people’s trust in government and public administration, and the losses to public service provision from the uncollected revenue.”
S&D MEP and spokesperson on economic, monetary and tax issues Pervenche Berès said, “The European Commission's decision sends a clear signal that those tax practices which create a race to the bottom between member states are no longer acceptable.
"After similar Commission decisions against Starbucks in the Netherlands and Fiat in Luxembourg last year, Europe looks less like a tax jungle. Big companies doing business in Europe will have to respect competition law, show solidarity and pay their fair share of tax. "
“As a legislator, we will make sure that European governments keep working to close the loopholes in the European tax system. We need to use this momentum to set up a comprehensive legal framework in Europe, based on a full, mandatory common corporate consolidated tax base (CCCTB) in the EU, to ensure that profits are taxed where they are generated, and to prevent artificial transfer pricing arrangements."
The European Commission accused Ireland in 2014 of dodging international tax rules by letting Apple shelter profits worth tens of billions of dollars from tax collectors in return for maintaining jobs.
- State aid: Ireland gave illegal tax benefits to Apple