In 2016, the executive branch of the European Union, the European Commission, found the Irish state facilitated Apple’s international tax avoidance strategies. The commission declared Ireland must collect 13 billion euros (about $15 billion) in unpaid taxes. On Wednesday morning, the General Court of the E.U. overruled the commission’s decision and found in favor of Apple and the Irish state. Here’s the background to what happened.
Ireland is a tax haven for U.S. multinationals
There are four key facts that help explain what has just happened. The first is before President Trump’s tax overhaul, the U.S. tax code gave U.S. multinationals strong incentives to park their profits and intangible assets overseas, rather than bringing them home. The second is Ireland (as well as a couple other E.U. member states) have tax arrangements that make it especially easy for U.S. multinationals to avoid paying high taxes. The third is this is highly unpopular with other E.U. member states, which increasingly see Ireland as stealing their tax revenue, and with the European Commission, which sees itself as the guardian of economic competition within the E.U. The fourth is there isn’t any direct way for the commission or other E.U. member states to stop this. Tax policy is a national competence, which means the E.U. can’t straightforwardly intervene to stop states such as Ireland from making it easy for companies like Apple to dodge taxes in jurisdictions like Germany.
It is worth noting Apple has a long history in Ireland, where it employs thousands and is one of the largest corporate taxpayers to the Irish state. However, Apple has multiple subsidiaries within Ireland that are designed to shift capital and income from around the world to Ireland, to minimize the amount of tax they pay in other countries. It is these global tax games that are in the spotlight.
The European Commission hoped it had found a way to make this harder. It claimed two tax rulings by Ireland, which allowed Apple to transfer the profits from their European sales into Ireland for tax avoidance purposes, were a form of illegal state aid, which the commission is empowered to regulate. Based on a detailed investigation, the commission found Apple was able to effectively reduce its tax bill on the sales and activities of some of its European and global operations to 0.005%.
The commission’s ruling led to uproar
The commission’s ruling was controversial, because it applied the E.U.’s strict laws on competition to tax avoidance. The decision implied using national tax laws that give favorable treatment to U.S. multinationals might break the rules of the E.U.’s single market. What the ruling meant in practice was Ireland had to apply its standard 12.5 percent corporate tax rate to Apple’s untaxed profits and collect 13 billion euros in unpaid taxes.
The Irish government found itself in the rather awkward position of having to publicly reject the E.U.’s demand it collect 13 billion euros in unpaid corporate taxes, after years of tax rises and austerity. Despite this, the Irish government, and especially the powerful Department of Finance, considered the ruling an attack by the federalizing European Commission on Irish sovereignty. The government argued the money does not belong to Ireland and it was simply waiting to be repatriated to the United States, so it was U.S. tax laws that applied to this money. The Irish government also argued Ireland and Apple were legally complying with globally accepted accounting rules on transfer pricing and it was not the E.U.’s role to unilaterally rewrite the rules of the game.
The E.U. court has overturned the commission’s ruling
Now, the E.U. court has rejected the conclusions of the commission and found in favor of Apple and the Irish state. The court found the commission was wrong in concluding the Apple subsidiaries involved were given a ‘selective advantage’ (that is, a specific benefit aimed just at them). Therefore, Ireland’s tax decisions did not constitute illegal state aid. The effective 0.005 percent tax on Apple’s subsidiary was perfectly legal. Ireland was not giving Apple any special treatment. It was just applying Irish laws.
Furthermore, the court rejected the conclusions of the European Commission that Ireland’s 12.5 percent corporate tax rate should apply to the relevant activities, which were based on profits generated elsewhere. Therefore, the court found the commission was wrong to conclude the 12.5 percent rate applies, agreeing with Apple’s argument that the money was simply resting in these Irish accounts. Apple argued it intended to send the cash back to the United States — when U.S. corporate tax law made it more attractive for it to do so.
The battles will continue
This doesn’t mean the story is over. The European Commission will challenge the ruling in the E.U.’s higher court — the Court of Justice of the European Union (CJEU). That could take two years. The commission is also likely to increase efforts to challenge smaller member-states that act as global corporate tax centers. But its strategy of using E.U. competition law to tackle corporate tax avoidance is much riskier than it would have been if the court had ruled the other way.
Everyone agrees Ireland facilitated the global tax games of the Apple group, allowing Apple to radically reduce its global tax bills. Irish and U.S. corporate tax laws have changed since the initial investigation. Trump’s tax overhaul means big tech and life science firms have incentives to shift more taxable cash back to the United States and move more intellectual property rights away from places like the Bermudas to places like Ireland.
The Apple tax affair clearly shows global multinationals are complex legal entities that can use complex arrangements of subsidiaries, holding groups and special purpose vehicles to minimize their tax bills. Small sovereign European states such as Ireland play a very important role in helping them do that, but they are likely to face continuing pressure from E.U. authorities and their bigger neighbors.
Aidan Regan is an associate professor in the School of Politics and International Relations at University College Dublin