Kicking the big guy in the shins is always a popular political diversion – particularly when the big guy in question is an American multinational, writes Dick Roche.
Dick Roche was a senior Irish Fianna Fáil politician and Ireland’s former Minister of State for European Affairs.
There is no doubt that Competition Commissioner Margrethe Vestager staked a claim on the affections of many with her adjudication that Apple should hand over €13 billion plus interest to Ireland. Her circle of admirers expanded with the suggestion that some of the largesse could be siphoned from the coffers of the Irish Revenue Commissioners into government accounts in other EU capitals.
There is no question that corporations big and small should pay the taxes that they are due to pay and pay them where they are due to be paid.
There is equally no doubt that the international taxation system is riddled with flaws, loopholes, and inconsistencies, that these need to be closed and that the international tax system needs to be more transparent
Aggressive tax avoidance is the cause of much understandable public indignation: the international system is badly broken and needs to be fixed.
Before breaking out the champagne, Ms Vestager’s fans might take a long hard look at the facts of this case, consider whether the European Commission’s interpretation of the TFEU is consistent with a legally binding decision taken by the European Council during the Lisbon treaty ratification process and think about where the Commission is seeking to lead Europe.
The Irish government rejects all of the key points in Commissioner Vestager’s analysis.
While acknowledging the executive’s role in enforcing competition rules, the Irish government argues that it is inappropriate for the European Commission to use EU state aid competition rules in “a novel and unprecedented” way to trespass into the area of taxation. Taxation is a sovereign member state competence.
The Commission’s interpretation of what constitutes state aid is robustly challenged. Reflecting findings by the European Court of Justice, Irish authorities point out that for state aid to run counter to EU law, the action taken must confer an advantage on a selective basis, that the advantage must be such that competition has been or may be distorted, and that the arrangements must be likely to affect trade between member states.
The Irish authorities are adamant that Apple’s treatment in Ireland does not cross these thresholds.
The Commissioner’s assertion that Apple has been singled out for special tax treatment is rejected outright. A central point in the Irish response is that the support that Apple has received since the company first established in Ireland in the early 1990s was available to every company investing in Ireland: there was no special deal.
The point is made that, as a matter of principle, the Irish authorities do not do individual deals with taxpayers. A ‘selling point’ of the Irish corporate tax system is that it makes a single offer that is not complicated by sidebar arrangements.
In addition to these rebuttal points, the Irish authorities have provided details on the specific Irish tax rulings relating to two ‘paper’ companies Apple Sales International [ASI] and Apple Operations Europe [AOR).
In the executive’s view, these rulings amounted to “selective tax treatment for Apple” and gave the company “a significant advantage over other businesses that are subject to the same national taxation rules”.
The Irish authorities challenge the European Commission’s interpretation of the interaction between Ireland’s Revenue Commissioners and these paper companies. They also make an important point that the mismatch between Irish tax law and the US tax code on the issue of a company’s tax domicile has already been addressed.
The Irish have put forward two wider concerns about the executive’s actions.
First, they see the Juncker Commission’s actions as undermining the emerging international consensus on reform in the tax sector. Ireland supports the OECD’s Base Erosion and Profit Shifting (BEPS) project and the EU Anti-Tax Avoidance Directive. A US Department of the Treasury White Paper, published in August, makes this same point.
Second, the Irish authorities are concerned about the uncertainty for business and for FDI in Europe that will flow from the Commission’s actions and in particular from their retrospective nature. This point is also made in the US Treasury White Paper.
Another striking feature of the Commissioner’s adjudication that is picked up in the Irish response is the fact that no fine or penalty has been levied against the Irish state. If the executive believes that Ireland has behaved improperly, it has chosen a truly bizarre way to illustrate its disapproval – enrich the Irish state coffers to the tune of €13 billion.
Another aspect of the Commissioner’s finding that has drawn Irish criticism is the fact that a proportion of the tax that it requires Ireland to collect from Apple – probably a very significant proportion – is taxation that is probably due in tax jurisdictions other than Ireland’s.
Requiring the tax authorities in Ireland to collect taxes which, if due at all, are due for payment in a different jurisdiction effectively press-gangs the Irish Revenue Commissioners into becoming a form of extraterritorial tax enforcer.
Not only is this a concept unappealing to Dublin. It runs up against Irish law. Under Irish tax law, non-resident companies can be billed for Irish corporation tax only on the profits attributable to their Irish branches ‘by reference to the facts and circumstances’.
The profits of non-resident companies that are not generated by their Irish branches (such as profits from technology, design, and marketing that are generated outside Ireland) cannot be charged with Irish tax under Irish law. Retrospectively amending the tax law to do the European Commission’s bidding raises a slew of legal and political complications.
The Irish Revenue Commissioners, who usually refrain from comment on specific cases, are emphatic that there was no departure from the applicable Irish tax law, that there was no preference shown in applying that law, and that the full tax due was collected.
The US Treasury, as mentioned, has also entered the debate with a White Paper, released on 24 August, six days before Commissioner Vestager’s press conference. This levels some substantial accusations of bias and abuse against the European Commission.
It registers concerns about the Commission ‘second-guessing member state income tax determinations’ and about retrospective tax recoveries, argues that the executive’s approach is out of line with international norms and, as mentioned already, sees it as undermining the efforts to reform the international tax system.
The White Paper, in effect. accuses the Juncker Commission of a smash-and-grab policy, claiming tax revenue which is not due to EU member states but which belongs “to the US government and its taxpayers”.
It makes two other telling points – that the Commission’s actions “could lead to a chilling effect on US-EU cross-border investment and that “new enforcement regimes with retrospective effect” will impact on companies’ ability to assess risks and plan for the future”.
Commissioner Vestager and her officials are unmoved by all of this. They see the changes made by the Treaty on the Functioning of the European Union as their trump card.
In Ireland, it took two referendums to win voter support for ratification of the Lisbon Treaty. Without the ‘Yes’ vote in Lisbon II referendum, the TEU and the TFEU would not have come into effect.
Opponents of the Treaty in Ireland argued that Lisbon would expand the powers of the Commission in a variety of areas – including taxation.
In the run up to the 2008 referendum, the European Commission, with its impeccable sense of timing put the cat amongst the pigeons by announcing that it was looking at ways to harmonise tax systems for business across the then 27 member states.
This was manna from heaven for Irish opponents of the Lisbon treaty. The question of tax sovereignty came on the Referendum agenda with a vengeance.
In April 2008, Commission President Barroso came to Dublin to address the National Forum on Europe and to encourage Irish voters to support ratification.
In press interviews and in the Forum, Barroso insisted that the Lisbon Treaty would not fundamentally change the existing position on taxation.
On 12 June 2008, Irish voters, by a substantial margin, voted against Lisbon. Detailed analysis carried out on behalf of the Irish government after the referendum identified the main issues that lead to the ‘No’ vote. One of these was tax sovereignty.
On 19 June 2009, the European Council agreed on a decision which, in the Council’s words “gives legal guarantee that certain matters of concern to the Irish people will be unaffected by the entry into force of the Lisbon Treaty”.
On taxation, the Council agreed “nothing in the Treaty of Lisbon makes any change of any kind, for any Member State, to the extent or operation of the competence of the European Union in relation to taxation”.
It is very hard within the normal meaning of words to reconcile the Commission’s actions in the Apple case with the legal guarantee given to the Irish people prior to the Lisbon II Referendum.
Commissioner Vestager has denied that her ruling against Ireland and Apple is political. Neither her presentation in the executive’s press conference, when the ruling was announced nor her presentation in the European Parliament produced any convincing evidence that the finding is anything but deeply political.
The Court of Justice appeal by Apple and by Ireland, which may be joined by other member states, will be a watershed one.
While Commissioner Vestager’s decision may be popular, her ascent in the popularity stakes may be very costly in the longer term.
Even if the Juncker Commission carries the day in the ECJ, the direction of travel that the executive has taken raises some serious political issues.
The introduction of what the US Treasury has characterized a “new enforcement regimes with retrospective effect” makes Europe a less attractive place for investors or for FDI.
The decision may well be counterproductive if it impacts on the OECD BEPS project.
The political ramifications could be even greater. The decision is a further encroachment by the European Commission on member state tax sovereignty a red line for citizens in many countries.
After the excitement of ‘sticking it’ to a powerful multinational fades, the realisation that the Juncker Commission has abrogated significant additional power, based on a questionable and self-serving treaty interpretation that ignores a ‘legally binding’ undertaking given to Irish voters in 2009, is not likely to sit well with European citizens who are falling ‘out of love with Europe’. It will be red meat for Eurosceptics.
Against this background, Commissioner Vestager’s decision may in the long term well be seen less as a windfall and more as a poisoned apple.