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September 1, 2016

EC tax ruling on Apple set to create tensions between EU, the UK and the USA

By Heather Jimaa

A war of words has been set off between the USA and European officials following the EU’s decision to fine Apple for unpaid taxes over the last 10 years. 

The European commission has ordered Apple to pay €13bn ($14.5bn) in back taxes to Ireland after concluding that the deals between the two involved parties can be construed as illegal state aid. 

Ken Almand, head of transfer pricing at RSM, an international audit, tax and advisory network said this incident could spark retaliatory measures by the USA treasury against European companies operating in the country: “The USA Treasury is unhappy and has fired warning shots across the Atlantic.”

He added: “The USA sees this step as targeting USA corporations and jeopardising international attempts to cooperate in the battle against tax avoidance.”

Baker Botts’ Brussels partner George Berrisch, who represents clients in state aid matters before the European Commission and the EU Courts said: “The ruling raises several highly controversial issues that will be for the EU courts to decide. This litigation will take several years to resolve.”

Berrisch also said that the decision will likely contribute to the impression that Brussels is disproportionately targeting USA companies.

However, he disagrees with the accusations of it being labelled ‘tax aid’. “This is not true as the Commission repeatedly ordered Member States to recover large amounts of alleged illegal aid from European companies, including national champions.”

Tim Wach, global managing director at Taxand said this decision will have great implications and consequences, stretching as far as the USA election campaign “as candidates can be expected to seek to establish their positions on where and how company profits and cash should be taxed especially the intellectual property held by tech companies.” 

Wach believes the decision may even effect future business in the EU as it “will create greater instability and no doubt increase the cost of doing business in the EU as all tax rulings, advanced pricing agreements or settlements of litigation will no doubt carry a yet greater risk.” 

Tom Wesel, partner at international tax consultancy firm Milestone said the EU Commission is using EU law to bully smaller EU countries including Ireland into not competing with bigger countries such as the UK on taxes, adding that the Commission would never have dared to try this with the UK in the past.

Apple and Ireland have decided to appeal the verdict. However according to Wesel the success of any appeal will depend on the accuracy of Ireland’s claims that there was no selectivity involved in enabling companies to pay almost no tax on their profits.

Although the UK Treasury recently toughened its stance on the issue of tax avoidance as it outlined new penalties in a consultation paper titled: 'Strengthening Tax Avoidance Sanctions and Deterrents: A discussion document' Wesel is dubious this latest decision by the EU Commission will be welcomed by Irelands close neighbour, as it wishes to become a low tax haven.

Wesel believes that the UK may be sceptical about the decision as it intends to compete with its neighbour as an “offshore low-tax state to attract multinationals trading with Europe.”

Depending to what extent Britain implements Brexit, it could in future suffer the same fate as Ireland. “If the UK settles for a soft Brexit to protect the City, it could end up being hit by the same EU rules now being used against the Irish, with the Commission newly trigger-happy to use them against a semi-detached Britain,” Wesel said.

It’s not all doom and gloom for Ireland though, as it may still get to keep its giant multinational USA conglomerates paying minimal tax.

A new form of tax break – the Knowledge Development Box – has already been given the green light by the Irish government, leaving knowledge-based multinationals such as Apple paying just 6.25% tax in Ireland on much of their profit earned throughout the EU and they will still be complying both with EU state aid rules and the latest OECD anti-avoidance rules. 

“Perhaps the Irish government will therefore end up with a one-off windfall of €13 billion and still get to keep its US multinationals," Wesel said.

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