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European court overturns ruling in Apple tax case: What it means for multinationals

Last week, the European Union’s second-highest court overturned a 2016 ruling ordering Apple to pay Irish tax authorities 13 billion euros for receiving undue tax benefits.

Background

The 2016 ruling followed a two-year investigation by the European Commission. The investigation concluded that Irish tax decisions in 1991 and 2007 gave Apple “selective treatment [that] allowed Apple to pay an effective corporate tax rate of 1 percent on its European profits in 2003 down to 0.005 per cent in 2014.” Selective treatment is illegal under EU state aid rules.

In August 2016, Apple published an open letter saying the Commission’s claim that the company had received special tax treatment from Ireland had “no basis in fact or law.” Both Apple and Ireland appealed the decision; nearly four years later, the General Court of the European Union (GCEU) ruled in their favour. In a 15 July press release, the GCEU said it annulled the 2016 decision “because the Commission did not succeed in showing to the requisite legal standard that there was an advantage” for Apple.

Another possible appeal

The European Commission must now decide if it will take the matter to Europe’s highest court. The Commission’s executive vice president, Margrethe Vestager, said in a statement  that her office “will carefully study the judgment and reflect on possible next steps.”

Some regard an appeal as inevitable. In the run-up to last week’s decision, Irish Deputy Prime Minister Leo Varadkar predicted  that no matter what the outcome, “this case will almost certainly be appealed by one party or another to the European Court of Justice.”

 

Ireland’s motives

One of the fascinating aspects of the Apple case is Ireland’s decision to contest a judgement that would have instantly increased its tax revenues by 13 billion euros. In a brief initial comment last week, Ireland’s Department of Finance confirmed it welcomed the decision that prevented it from receiving the windfall.

The simple answer to why Ireland appealed is that accepting the 2016 ruling — and the billions that came with it — might have killed, or at least wounded, a golden goose. As I mentioned in a 2016 post on the original Apple ruling, Ireland has for decades courted tech companies with low corporate tax rates and benefited by resultant inward investment and jobs. Apple’s own website  boasts the company employs 6,000 people in Cork, and has spent almost 220 million euros on its Hollyhill campus there.

Despite these benefits for Ireland, at least some in the country will be ambivalent about the recent GCEU decision. Revenues everywhere are decreasing due to the coronavirus pandemic, and tax dollars are desperately needed. Furthermore, many in and outside Ireland have long questioned the country’s corporate tax rates, alleging they essentially create a tax haven within the EU. The BBC reports  that after last Wednesday’s decision, a spokesman for Sinn Fein “called it a bad day for the Irish taxpayer that would draw negative attention to the country's international tax reputation.”

The Apple case in context

The GCEU ruling is a powerful reminder that individual jurisdictions — even EU member states — have autonomy when developing, implementing and enforcing direct tax rules and rates. Multinationals have for decades been accused of unduly benefiting from the arbitrage opportunities afforded by country-specific tax-rate differences. In recent years, tech companies in particular have come under fire from tax authorities, the media and the public for not paying their perceived ‘”fair share” of taxes.

Vestager has been at the forefront of the EU’s efforts to ensure tech and other companies aren’t engaging in anti-competitive behavior by getting sweetheart tax deals — effectively subsidies — from EU member states. The New York Times points out that as a result of Vestager’s investigations, Google is appealing three decisions with a cumulative 8.2 billion euros of fines, and Amazon is appealing a decision involving 250 million euros in unpaid taxes to Luxembourg. Vestager has similar cases pending against Nike and Ikea.

What the GCEU decision means for multinationals

The GCEU decision may be a welcome event for Apple, and even Ireland, but multinationals should beware of taking it as a sign that the world of international taxation is reverting to some earlier era. Even last week’s decision could be appealed and ultimately overturned. More importantly, OECD and G20 efforts to combat tax-base erosion and profit shifting have not stopped, nor have individual tax regimes stood still, as the recent proliferation of country-specific digital services taxes makes clear.

Last week’s decision may also change the way Vestager and other reformers attack the problem of how and where to tax multinationals in our digital economy. Ireland’s finance minister Paschal Donohoe, for example, indicated  that policymakers will now pay more attention to the law when developing tax rules. He told reporters, “I imagine that one of the consequences of this is that care will be given for what are the legal foundations for pursuing change in this area, and maybe that is the most likely development of the ruling.”

If anything is certain in the ruling’s wake, it’s that multinationals, tax authorities, the European Commission and the OECD will each continue to work on developing a transparent, equitable international tax framework that accounts for cross-border electronic commerce. Vestager said as much in her statement last Wednesday. The final passage can be read as a warning to multinationals as much as an exhortation to fellow reformers: “State aid enforcement needs to go hand in hand with a change in corporate philosophies and the right legislation to address loopholes and ensure transparency. We have made a lot of progress already at national, European and global levels, and we need to continue to work together to succeed.”

 

 

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