Apple ruling indicates EU, US must solve tax jungle

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Apple store - New York City

Apple store, New York City.

The EU and US government have to find an equitable, effective and mutually acceptable solution for taxing the corporate profits of multinational companies, writes Philippe de Schoutheete.

Philippe de Schoutheete is former Belgian Permanent Representative to the EU.

Commission bashing has, for some time, been a widespread pastime. But every now and then it is nice to have a change.

Margrethe Vestager gave us such an occasion at the end of the summer. She stated on 30 August that two tax rulings granted by Ireland to Apple had artificially reduced the tax burden of the company over two decades, and that this was in breach of EU state aid rules.

All profits made by Apple in the whole of the Union had been recorded in Ireland under a company called Apple Sales International. Through the rulings, the effective tax rate of that company on corporate profits had been 0,05% in 2011 and 0,005 in 2014. The European Commission, therefore, decided that Apple owed Ireland owed 13 billion as tax arrears for the period 2003-2013.

Many people thought this must be a joke, except those few who knew what a “double Irish” was. This part of Irish tax regulation allowed a company to be incorporated, and have its seat, in Ireland, thus accessing the single market, but to have a separate seat outside the EU where its corporate profits would be taxed. Carribean islands were generally favourite for this second seat, but, according to the Commission, Apple, as a high-tech company, chose, not a sunny tax paradise, but the cloud: the second company seat had no physical existence outside of the Internet, it was virtual and stateless.

There is no doubt about the legality of the arrangement under Irish law. But the executive questions its legality under European law. The legal basis (art. 107-108 TFEU) says that any aid granted by a member state in any form whatsoever which distorts competition by favoring certain undertakings shall be incompatible with the internal market. In that case, the Commission shall decide that the state concerned shall abolish or alter such aid.

Rules to that effect have been part of European law for sixty years. Without them the internal market could not have been established or maintained. That tax rulings can be a form of state aid is obvious, and, if they distort competition, the executive is duty bound to decide that they be altered or abolished. The European Commission is not operating as a supranational tax authority, as the US government and the Business Roundtable is saying, but as the supranational guardian of treaty rules. That is an important part of its job.

Both Apple and the Republic of Ireland are appealing against the Commission decision and ultimately it will be for the Court of Justice to decide whether the executive has gone beyond its remit.

Given the legal expertise which will be mobilized on this issue, procedure will certainly extend over a number of years. But leaving aside procedure, there are two questions of substance which are of public interest:

  • Is it true, as the Juncker Commission says, that the effect of the Irish tax rulings was, over a long period, to reduce corporate tax on Apple Sales International’s European profits to negligible amounts?
  • Is the underlying problem simply a matter of taxation and state aid or does it raise questions of equity, good citizenship, corporate social responsibility, ethics, legitimacy?

On the first question, Apple, which normally has an outstanding sense of public communication, has been less than clear. It did say that the 0.005% tax rate was false. Tim Cook, the chief executive, added that the European Commission decision was “total political crap”. He mentioned a worldwide income tax of 26%. Another executive stated that the decision would have a devastating effect for the European economy, which sounds more like a threat than an explanation. The Business Roundtable writes that the decision undermines legal certainty and is a great self-inflicted wound for the EU.

In that context, most outside observers in Europe conclude, for once, that what the Commission says must be not far from the truth.  It received congratulations from a French minister.

But if the Commission is right, many questions arise. Equity between companies of different size and nationality. Good citizenship, towards various countries in which the company operates. Corporate social responsibility towards those communities. Ethics about taxation and tax havens, also in the cloud. Perhaps above all: legitimacy as distinct from legality. In the Financial Times, Philip Stephens quotes Theodore Roosevelt as saying that capitalism requires legitimacy. It should be on the side of the welfare of the nation’s citizens. Indeed it should!

It is stupid that the whole matter is becoming a virulent quarrel between the US administration and the Commission.

Sweetheart deals of this sort are on the way out. Dublin has abandoned the “double Irish”.  The G20 and OECD try to eliminate tax optimisation. The European Commission makes impressive use of competition law.

Public opinion, alerted by leaks (Luxleaks included), finds unacceptable what they discover. Ultimately the Commission and the US government will have to work, with others, to find an equitable, effective and mutually acceptable solution for taxing the corporate profits of multinational companies. The sooner the better!

Subscribe to our newsletters

Subscribe

Want to know what's going on in the EU Capitals daily? Subscribe now to our new 9am newsletter.