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Comment: The poisoned apple

The European Commission has concluded that Ireland granted €13bn ($14.5bn) of illegal state aid to Apple. But the real question on everyone’s lips is: who will benefit from this large bite of the apple? Francesca Lagerberg, global leader tax services at Grant Thornton, writes

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Today is a good day the sovereignty of the EU’s nations when it comes to tax
Slicing the apple or killing the goose?

Ireland has been appointed as EU tax collector, with other member states and the US all set to vie for their slice of the pie. What remains clear is that this decision has firmly placed Ireland at the centre of an EU tax policy debate over sovereignty and, to some, gives further support to the Brexit result. 

This case never aimed to decide where the taxes in question ought to be paid; instead the primary focus was on whether the Irish authorities enabled Apple to obtain an advantage over its competitors by virtue of two tax rulings. We understand that the rulings clarify Apple’s interpretation of specific provisions of Irish domestic tax legislation in place at that time, known as ‘double Irish’. Using this legislation, profits for two Irish incorporated companies of the Apple group (Apple Sales International and Apple Operations Europe) were attributed to a stateless ‘head office’.  The Commission argue that this allocation did not reflect the economic reality of the transactions. 

Were the rules broken?
Under US tax legislation, the profits in the ‘head office’ would remain untaxed until repatriated to the US. The Commission alleges this enabled Apple to pay a rate of tax of between 0.005% and 1% for the years concerned. The Commission therefore concluded that Apple obtained a competitive advantage referred to as state aid from Ireland. Apple, on the other hand, argues that its effective global tax rate was 26% in this period. With so many conflicting reports hitting the press and with the absence of the formal judgement, it’s very difficult for the general public to make an informed decision on what is or isn’t correct and if any laws were broken. 

While this case has captured the media’s attention which, is attributable in part to Apple being the largest technology company in the world and, of course, the sheer volume of the proposed settlement. Interestingly, it’s not the first tax advantage case that the Commission has ruled on, but the level of settlements involved have fanned the flames of media attention. In October 2015 the Commission concluded that the Netherlands and Luxembourg granted selective tax advantages for Starbucks and Fiat respectively. Earlier this year, it ruled that Belgium granted selective tax advantages to at least 35 multinationals and two further ongoing investigations remain against Amazon and McDonalds in Luxembourg

What is state aid?

State aid rules were introduced to the EU treaties in the 1950s to circumvent member states subsidising domestic champions to the detriment of foreign competitors. Many see this application of the rules to domestic tax as an underhand way of attacking Ireland’s low corporate tax rate. Many businesses are concerned with the Commission’s current application of state aid to retroactively assess higher levels of taxes.

Appealing the argument
The Irish government has quickly indicated its intention to appeal this decision, a necessary step on its part to try and quell the growing uncertainty faced by Irish-based multinationals in the wake of this decision. With Apple also stating its intention to appeal, Washington will be looking on with baited breath.

The Irish government and tax authorities argue that Irish tax law was applied evenly and clearly, in that any corporate could have availed itself of this arrangement. The appeal is likely to be decided by the party that can successfully prove that the ‘double Irish’ structure and clarification rulings either inferred or didn’t infer Apple with a tax advantage over its competitors.

Paying a fair share
This case once again raises a very topical question; do our largest organisations pay their fair share of taxes globally? The alleged figures highlighted by the Commission paint a surprising picture, on the face of it, of the amount of taxes expended by one of the largest companies in the world. This sort of scenario was behind action taken by the Organisation for Economic Co-operation and Development (OECD) which sought to change the game with a new approach on global tax issues. The Base Erosion and Profit Shifting (BEPS) Action Plan had exactly this type of issue in its sights. Increasingly the general public demands a more ethical tax policy be adapted by large corporates, which goes beyond the letter of the law. Meanwhile businesses have a responsibility to shareholders to maximise profits and there is a tension around where the lines are drawn on acceptable tax planning. Reputational risk is now, or at least should be, a key board item. Equally many of the issues hitting the headlines now relate back many years to a different tax environment where decisions were taken that would perhaps not have been taken today.

The OECD spearheaded the BEPS Action Plan which has been designed with input from the G20 countries, the purpose of which is broadly to level the tax playing field by creating a framework for corporate taxation and ensuring tax is paid where value is created. With more than 80 countries agreeing to adopt at the very least the minimum elements of BEPS, great inroads have been made to help ensure issues of scale don’t arise in the future. 

As business struggle to deal with the introduction of BEPS across the jurisdictions where it operates, due to differences in timing and the variations on the extent of implementation, it’s likely to be a few years before the desired clarity is achieved. In the interim it’s likely that medium-sized enterprises will bear the brunt of these measures and not the large organisations at the centre of the Commission cases.

Ending the double Irish
Ireland has been an advocate for BEPS and one of the first adopters of country-by-country reporting. It also continues to reiterate its commitment to maintaining a transparent tax system. A strong signal of its support and commitment was the abolition of the ‘double Irish’ structure at the centre of the Apple case. The story is far from over; the appeal is likely to be ongoing for a number of years and judgements are anticipated in a number of other Commission cases that may influence the ultimate decision. Meanwhile, the US will sit on the sidelines waiting to step in at any moment to stake its claim to the billions up for grabs as the long appeals process begins.

It may have initially been just a bite of the apple, but the whole tree of multinational businesses will continue to be looked at in detail in search of any rotten fruit.

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