Last month one of the largest tech companies in the world, and certainly the biggest in revenue, Apple Inc. was issued with a 13 billion Euro ($14.5 billion) fine from the EU Commission, for unpaid taxes; the largest tax penalty for a US tech company.
This logically set in motion a trail of discussions and actions that will inevitably change the way tax evasion and avoidance is dealt with, in some form. At the end of August, an EU investigation concluded that the Irish government provided Apple with a favourable tax rate that would enable Apple to pay 1% on EU profits in 200, down to 0.005% in 2014.
Both Apple and Ireland are appealing the huge fine, on the grounds of a government tax break that the EU ruling qualifies as ‘state aid’, the issuing of which would be against the EU’s tax rules.
European Union Competition Commissioner Margrethe Vestager recently admitted that this ordeal would not be the last for American companies that don’t like paying tax.
On this matter, Lawyer Monthly has heard from several experts around the globe, from tax partners to commercial law and corporate law specialists. We’ve also had the pleasure of hearing from Dr. Liza Lovdahl Gormsen, Director of the Competition Law Forum & Senior Research Fellow in Competition Law at the British Institute of International and Comparative Law.
Offering some insight into the variety of perspectives that exist on this ongoing tax affairs, our guests answer the following questions:
• Is this situation shadowed by a political agenda?
• Is this contributing towards the fight against white collar crime?
• What are the facts we are not hearing in the press?
• How important is the repatriation of assets and how should corporate taxes function?
• What are the biggest legislative obstacles ahead in relation to tax avoidance or corporate tax payments?
• Will Apple’s fine incite reform for multi-nationals tax practices and what could the foundations of that ideally look like?
• How do you believe the EU can modernise taxations systems to reflect a 2016 globalised economy?
Rufus Ballaster of Carter Lemon Camerons LLP Solicitors:
The idea that a business can face a retrospective tax charge for having agreed a deal with a country in which it expanded following that deal – a charge possibly imposed decades later – is a massive constitutional problem and one which may well cause problems rippling in current and future activity.
We see some of the world’s largest and most successful corporations under attack recently about the tax they are paying and the business practices they have adopted and this is sure to prevent any sympathy emerging from the media or the population generally.
Other contexts though might produce other reactions. If a whole industry were saved with jobs and areas preserved from mass redundancy because a major company is persuaded to rescue it, the idea that years later the ‘White Knight’ may be told by a supra-national power that it must pay more tax would offend sensibilities. Even worse, it reduces the likelihood of a state in the future managing to attract a similar rescue bid if there is another industry in crisis.
Economists might say this is a good thing – that only if failing businesses go to the wall rather than being rescued can a truly fair international market apply – but it is socially and politically appropriate and economically beneficial for the area in question if jobs can be saved and activity preserved and it is constitutionally important that a deal done by a taxpaying business with a tax raising state is certain, that it cannot be undone years later to the detriment of the business which relied on it.
If what a sovereign state offers to a business in return for it doing certain activity in that state is not something upon which the business can rely in the future, we have a degree of business uncertainty which is potentially catastrophic.
Sheraz Akram – Head of Corporate & Commercial Law at DJM Solicitors
Apple has made it clear that it sees the EU ruling as a purely political move rather than an enforcement of legal position. In my opinion, the decision has an element of political agenda. The effort to crack down on corporate tax avoidance within the EU resonates heavily with EU members and their voters.
The issues around taxation and white-collar crimes should not be confused. There is not a discussion around whether Apple has committed any crime, but whether the organisation needs to pay any additional tax for its operations in Ireland.
The particular contentious issue within this case is whether the tax agreements between Apple and Ireland are contrary to EU rules. Apple has not been reprimanded, or given a penalty to pay; it is simply required to pay tax it may have avoided in the existing arrangements.
The media is reporting this particular tax issue as a scandal and something out of the ordinary. The fact is that this is not the only case of its kind. The Netherlands was ordered to recover large sums of money from Starbucks in 2015, so we could just be looking at the tip of the iceberg.
From a pure common sense point of view it cannot be ethical for Apple to have paid the alleged 0.005% tax in 2014 for its European operations. Once a case such as this has been identified it is essential that action is taken, particularly given the austerity measures that are still being introduced throughout the world.
There needs to be a consistent approach to corporate tax that works to retrieve a fair amount of tax from organisations of all sizes. I believe that if you set tax levels sensibly, you are more likely to get corporates paying the correct amounts, rather than putting complex structures in place to (legally, for most parts) avoid taxes.
The process of establishing how much corporate tax a company should pay is, in itself, extremely complex due to the international nature of large organisations. The flow of monies and inter-company arrangements make it extremely difficult to capture tax in any one jurisdiction. The global community has not, as yet, come close to achieving a solution that can ensure large corporations pay a fair amount in tax.
Stuart Green – Teacher in Taxation at Durham University Business School
An effective corporate tax rate of 1% on profits booked in Ireland might suggest that the hissing coming from Apple is not justifiable. Apple is the world’s most valuable company. Back taxes of £11 billion would be a tail feather or two for the company. Still, one might consider that some of the noise from Silicon Valley is justified. Retroactive changes to tax systems hardly provide for certainty. Many would question their equity, too. Accountants at Apple might be checking their iPhones for a time-travel app.
Will Apple and other US tech-companies flock back across the Atlantic? Probably not. The long-established and close ties between San Francisco and Ireland bring strategic and operational benefits to their European operations. Corporate tax rates in Ireland, even without ‘sweetheart’ deals, compare favourably with those in the US. McDonalds, Amazon and other US companies that use similar tax arrangements in Europe have vast cash reserves.
Still, the Irish government has much to consider. It is proud of its low rates of corporate taxation: only Cyprus and the Baltic states are similarly competitive. To be seen to support the EU ruling might undermine Dublin’s business-friendly reputation. On the other hand, an additional £11 billion in tax revenue would prove useful given the weakness of the Irish economy.
Multinationals lay golden eggs. The Irish government and the EU should be wary of killing this particular corporate goose. Apple is important to Ireland because of the personal taxes paid by its employees, not because of revenues from corporate taxes. The reasons for this imbalance are complex: their resolution is probably beyond the power of the EU. Approaches to both personal and corporate taxation have failed to keep pace with the consequences of globalisation.
That is the challenge for the governments in Europe and elsewhere. An approach to taxation that is rooted in the early twentieth century needs to be reformed to reflect the realities of 2016.
Erika Jupe – Tax Partner at international legal practice Osborne Clarke:
Tax avoidance has become front page news and this has undoubtedly caused it to rise up the political agenda.
The Apple case is just one of a number of cases brought by the EU Commission using EU State Aid rules to challenge tax rulings, which they view as facilitating tax avoidance. Is this an inappropriate attempt by the Commission to extend its influence to the field of direct tax which is supposed to be matter only for National Governments? The view that State Aid rules are not the correct way to challenge tax avoidance is a view that is supported by many, including former EU Commissioner Neelie Kroes who has argued strongly that tax avoidance is better tackled by changing international tax rules. The process of change is already underway as part of the Base Erosion and Profit Shifting (BEPS) Project being carried out by the OECD, which is expected to fundamentally overhaul international tax rules. These changes would not affect past tax avoidance, however.
In reality the EU Commission has an ever-increasing role in setting direct tax policy in the EU. Directives seeking to abolish withholding tax on cross border payments or enabling tax-free cross border reorganisations have been welcomed by business and national Governments alike. However more recent proposals such as the Common Consolidated Corporate Tax Base or “CCCTB” (which aims to harmonise the way in which EU companies determine their taxable profits and allocate then to different countries) have met with much less enthusiasm, in some cases outright opposition. The EU is also seeking to introduce a Tax Avoidance Directive which is intended to set minimum standards throughout the EU and a financial transaction tax.
There have been a number of recent legislative developments which are seeking to make multinational companies more transparent about their business and ownership structures to reduce the risk of tax avoidance. The major development is the adoption of Countryby-Country Reporting (CbCR) rules which require the largest multinational groups to disclose information about the business and financial arrangements to Tax Administrations. The CbCR rules are supposed to level the playing field between taxpayer and tax authority by giving Tax Administrations better access to information, allowing them to assess and challenge tax avoidance risks. The Finance Act allows the Government to introduce rules requiring companies to publicly disclose their CbCR reports – but whether this will be done remains to be seen.
Dr. Liza Lovdahl Gormsen – Director of the Competition Law Forum & Senior Research Fellow in Competition Law at the British Institute of International and Comparative Law:
The European Commission is not imposing a fine on Apple, but has asked Ireland to recover allegedly unpaid taxes. It is important to distinguish between a fine and recovery. The latter is a mechanism, which attempts to restore the situation before the granting of aid, and not equivalent to imposing a fine for anticompetitive behaviour.
An effort to deal with multi-national tax practices is already ongoing – and has been for some time. For example, the OECD/G20 Base Erosion and Profit Shifting (BEPS) project Action 5. Because an international effort is already underway, the US Treasury Secretary Jacob Lew has been angered by the Commission’s use of EU State aid law to scrutinize certain practices of tax administrations vis-à-vis advanced pricing agreements in various Member States. He has formally expressed concerns that the Commission’s “enforcement actions… are inconsistent with, and likely to contrary to, the Base Erosion and Profit Shifting (BEPS) project.” Given that reform of multi-national tax practices is already underway, what is more likely to happen is a debate before the European Courts of the Commission’s novel interpretation of the concept of selectivity in the State aid rules in relation to national tax arrangements.
There would be significant risks in changing the tax system retroactively. Thus, we should work towards avoid this happening.
There is a delicate balance between the Commission’s State aid powers and Member States fiscal sovereignty in the area of corporate taxation. What is clear is that the European Member States have explicit sovereignty in relation to direct taxation. Thus, the EU has to be careful. The Commission knows this, so in recent years there have been two major responses by the Commission to the perceived problems with Member States offering advanced pricing agreements. One response came when the Commission published a proposal to include an automatic exchange of advance cross-border rulings and advanced pricing agreements in the Council Directive on Administrative Cooperation in the field of taxation.
This Directive has been adopted and comes into force on the 1st January 2017. While it does not provide for public disclosure, although the Commission is currently pressing for public disclosure of the country-by-country tax reports which must be filed with tax authorities by large businesses, the new Directive requires tax rulings to be disclosed to the Commission. Another response by the Commission, and the focus of the discussion here, is the State aid investigations concerning advanced pricing agreements granted to certain multinational corporations by Member States.
I understand that Ireland has decided to appeal the Commission’s decision in Apple. I can only imagine the Irish conundrum following the decision. However, it would be short term thinking to support the Commission’s decision as Ireland would risk jeopardising its long term corporate tax base. A support for the Commission’s decision would create uncertainty, which would be bad for corporate investment.
