European Commission v Republic of Ireland re Apple

On 30Aug2016, the European Commission held that Ireland had offered illegal state aid to American corporation Apple via the Irish corporation tax system.

Apple referred to the decision as “maddening” and “political”.

Advisers were surprised that the charge of €13bn was higher than they expected.

The US Department of the Treasury was also less than impressed with the EC’s decision.

Ireland has a tax treaty with America, dating from 1997 (updated 1999).  This appears all in order.  Yet, the Commission’s press release mentions neither “treaty” nor “convention”.  This is a stark omission from the Commission, and in so doing, it undermines the Commission’s whole case.

The substance of the Commission’s case against the Irish government is the same, in principle, as that against Netherlands and Luxembourg.  In all three cases, the Commission held that each government permitted a value-judgement required by international tax law (“transfer pricing rules”) relating to an “arms-length” valuation of transactions (“controlled transactions”) between corporations owned by the same beneficial owners (“controlled parties”).

Where a government agrees to a corporate taxpayer’s price and accounting treatments of controlled transactions, the government and the taxpayer create an Advanced Pricing Agreement (“APA”).  Thereafter, the taxpayer needs to demonstrate compliance to the APA.

The Commission held that the Irish government upheld an APA to allocate profits within Apple’s Irish corporations, resulting in the bulk of profits being siphoned off to a particular subsidiary that paid no tax at all.

And therein lies the problem for the Commission.  That the subsidiaries in question paid no tax is lawful and correct.  Whether tax was paid is irrelevant.  What matters is who is liable to pay.  Why?

Under American tax law, profits of American corporations held overseas are liable to deferred corporate tax, where the charge crystallises on the repatriation of those profits to America.  To comply with the double-taxation provisions of the tax treaty, Ireland’s APA with Apple needed to ensure that Ireland taxes business profits within the scope of Irish corporation tax, but no more, leaving the taxpayer with further taxation - in this case, American taxation - upon repatriation of those profits to America.

The Commission chose not to understand this bit.

So, in effect, the Commission’s decision has taken a fully lawful arrangement and declared it illegal.  The Commission was deliberately negligent for the sake of political theatre.

The European Commission holds out the following political position: “Well, if you Yanks are too stupid to tax cash just sitting there for the taking because of your own stupid tax law, we’ll take anyway.  Use it or lose it!”

Whilst socialists, anti-capitalists, pro-statists and anti-Americans rejoice in the decision on illiterate and emotional grounds, the real damage of the Commission’s is yet to be understood by the mass media.

The Commission has sabotaged existing states’ abilities to collect taxes due from corporations.

If you are an American tax authority, a Norwegian tax authority, a Russian tax authority or a Chinese tax authority, the European Commission has basically just made the APAs you agreed with European-based corporations largely unenforceable (pending judicial review, which shall happen).

I think the Commission should have reasonably foreseen this outcome.  Therefore:

• If if did foresee such outcome, then it is essentially vandalising international tax law, i.e. criminal intent.
• If it did not foresee such outcome, then it is a deeply negligent and stupid organisation, whose stupidity demonstrates why everybody should abandon the European Union and somehow ‘politically quarantine’ the people who work, and campaign, for the European Union.

Putting a spanner is the works is a political orgasm, but it only works if the spanner remains in place and doesn’t become a boomerang.

The American Government recognised immediately the sudden unenforceability of APAs that the Commission has unnecessarily created.  It appears to have bristled - barely containing its anger - at the arrogance of the Commission when - according to law firm partner Heather Self - “The Commission has tendered an olive branch to the US, by suggesting that the US could require Apple to pay larger sums for financing US research and development. Effectively, this may give a face-saving route to a solution for both sides, with more tax being paid in the US rather than Ireland."

I disagree with Ms Self.  That isn’t an olive branch.  It is, in fact, the political equivalent of a poke in the eye with a Cruise missile.  As if encroaching on national sovereignty within Europe wasn’t bad enough, the European Commission now feels entitled to wade into American national sovereignty as well!! (Specifically, telling the Americans that their arm’s-length valuation of a particular transaction is somehow wrong, then choosing not to tell the Americans what the ‘correct’ value should be, then vaguely telling the Americans that they should do something about it.)

I’m no fan of American encroachment of the extra-American world.  Neither am I fan of the ‘corporate racism’ that the Internal Revenue Service appeared to deploy in various cases, most notably IRS v GlaxoSmithKlein.  In this respect, even I will indulge in a tad of joy watching the European Commission give the Americans a taste of their own medicine.

But not at any cost.

The Commission just took a loaded gun and fired a round at its own feet, fired a round at its own genitals and emptied the bullet cartridge by repeatedly firing at its own head in an attempt to find its brain.  Failing to find its brain, it then re-loaded the cartridge and sprayed bullets at every tax authority around the world, seeking to destroy the only infrastructure they have to collect taxation from multi-national corporations, without regard for whether those tax authorities were European or non-European.

Uncertainty is now the issue.  And corporation tax authorities now face far more uncertainty about their taxable base than any taxpayer has about whether they pay tax at all.  This matters.  The big headline amongst western economies is that whole tax base is shrinking (a substantial cause of which is poor monetary policy, low non-market interest rates).  The latest discussions at the OECD is even called BEPS, “Base Erosion and Profit Shifting”.

If corporations are as evil as anti-capitalists like to portray them, then the Commission’s decision is perhaps the most entertainment that ‘evil’ corporations have had in decades.  To these ‘evil’ corporations, the supporters of ‘pro-tax big government’ appear to have rushed up their own backsides with excessive enthusiasm.

Observers of Irish politics probably also have a lot of fun in store.  Ireland is stoically pro-European, so an order on the Irish government by a European authority to break international law is going to go down like a lead balloon.  Far from containing “Brexit”, the Commission’s crass decision looks more likely to encourage the Irish to question their loyalty to an apparently treacherous supra-national wannabe-government.

Meanwhile, in the few years that it will take the Irish government to appeal against the Commission’s decision at the European Court of Justice, the Americans might well get their arse in gear and formalise their deferred corporate tax regime so that it becomes European-proof.  Better late than never, I suppose!

The sooner the British leave this toxic European Union, the better.