Apple’s EU Tax Battle: The Issue of Tax Fairness
The Background
After a two-year investigation, on 29th August 2016, Margrethe Vestager, as the European Commission’s competition commissioner, ordered Apple to return €13 billion to Dublin due to unpaid corporate taxes. The EU Commission’s decision that the Irish tax break was an illegal subsidy and the accusation that Ireland gave Apple a ‘selective advantage’ (by decreasing the MNC’s effective corporate tax rate from 1% of its European profits in 2003 to 0.05% in 2014) has resulted in the largest corporate tax fine in history.
In essence, the issue was the way in which Apple was structured in the ‘Double Irish’ tax system, enabling Apple to shield €110.8 billion of non–US profits from tax. Apple’s variation of the system deviated from other MNCs through receiving two rulings from the Irish Revenue Commissioners. The Irish tax arrangement through the rulings meant that the taxable profits in Ireland were minimal and, as a result, most profits were allocated to head offices which ‘weren’t subject to tax anywhere’ according to the Commission. The fact that these were private rulings to Apple and not given to any other Irish-based US MNC caused the EU Commission to charge Ireland with ‘illegal state aid’.
Both Ireland and Apple challenged the decision reached by the EU Commission. Ireland’s government fundamentally disagreed with the commission’s analysis as the government stated that no ‘illegal state aid’ was given. Likewise, Apple believed that it has abided by all tax laws and has paid sufficient amounts of tax as the MNC did not receive any tax advantages.
Recent Updates
On 15 July 2020, Apple had the €13 billion Irish tax bill overturned, meaning that it will not have to pay Ireland the money back in taxes after winning an appeal at the EU’s second-highest court. The European General Court ruled that the EU Commission ‘did not succeed in showing to the requisite legal standard’ that Apple received illegal state aid.
The annulment by the General Court in Apple’s favour is a huge setback for the commission as it not has to find a way to appeal the decision within the next two weeks at the EU’s supreme court, the European Court of Justice.
Legal Implications & Questions Raised
The on-going tax battle has raised multiple questions about tax fairness in Europe. The decision reached on the 15th July illuminated two major enquiries.
Firstly, the court did NOT rule that Apple did not receive illegal state aid and that the claim was wrong. It merely stated that the claim had not been proven; not to the ‘requisite legal standard’. Thus, there is the possibility for the commission to try and further prove its case.
Secondly, however, it also points to the possibility that the case could never be proven. As a result of Apple being an MNC whose value is mainly in intellectual property and knowledge, the vast majority of its value is difficult to attribute to any activity done in any location. Apple said in a statement that the case was ‘not about how much tax we pay, but where we are required to pay it’. However, it is inherently difficult to determine where the MNC is required to pay the tax. Thus, as Dan Neidle (Partner at Clifford Chance LLP) has noted, it is hard to find ways of getting digital MNCs to pay materially more tax under the existing frameworks; the only way would be to change the rules.
There is also the question being raised about tax fairness. With MNCs paying such low rates of corporate tax (0.05% in Apple’s case), it can be seen as ridiculously unfair as many individuals arguably pay more in taxes. However, the Irish government itself has argued that Apple should not have to repay the back-taxes. The reasoning behind this is that MNCs seek tax cuts as they are looking to make a profit, thus Ireland with its low tax rates becomes attractive. As a result, with MNCs coming to the country, there will be an increase in GDP and lower unemployment. For example, US-controlled multinationals are 25 of Ireland's top 50 companies directly employ 23 % of the Irish labour force (excluding the public sector) and indirectly pay half of all Irish salary taxes.
Finally, the EU’s battle with Apple and the Irish government has high legal stakes as the case has raised major concerns in Dublin, including claims that the EU is infringing on Irish sovereignty and that it is deviating from standard international tax practices.
By Bobby Zhu