New York, NY; Wednesday, August 31, 2016: It’s been big news on both sides of the Atlantic. The decision announced with great fanfare in Brussels by European Commission regulators that Ireland’s tax treatment of Apple’s operations in the Emerald Isle violated Europe’s rules on state aids to industry – to the tune of a headline-grabbing $14.5 billion.
So what’s going on here? Here are a few facts that may be helpful:
- The European Commission decision affects only one company – Apple
- The decision does not question or have any impact on Ireland's corporate tax rate system
- No other companies in Ireland – from the United States or elsewhere - are subject to this decision by the European Commission
- The Government of Ireland disagrees with the European Commission ruling and will appeal the decision to the European Courts. It could take five years or more for a final decision on this ruling to be given
- Apple does not owe any money to the Irish Government and has fully paid all of its taxes in Ireland
- No fine or penalty was levied by the European Commission on the Government of Ireland in this matter
The Ireland-U.S. Council stands firmly with the Government of Ireland and with Apple in fighting this ruling. In many ways, it is a bellwether happening that will have far-reaching implications.
The European Commission ruling shows the extent to which the un-elected bureaucrats in Brussels have elbowed their way into politics in Europe – in this case tax politics. Far from representing a threat to Ireland’s low-tax arrangements with companies operating in the country, in its broadest context it could be seen as a clear and present danger to the European Commission itself.
As a sort of European Federal Bureaucracy, this egregious decision may finally energize elected Governments in Europe to exercise firmer control over the European Commission whose thicket of rules and anti-business muscle-flexing have grown to uncomfortable levels in the past few decades. Accountability may finally be around the corner, especially after the shock of Brexit. In our view, the European Commission may finally get its wings clipped – which is sorely-needed and long-overdue.
Most international tax accounting experts are of the opinion, it seems to us, that the tax treatment that Ireland decided upon for Apple’s operations in Ireland, conformed to generally-accepted principles and practice within the OECD and were appropriate. These two separate tax opinions – one in 1991 and a second one in 2007 - confirmed how Dublin’s tax authorities would treat various transactions in Apple’s Irish subsidiaries under the Irish laws that applied to everyone.
Without getting too deep into the weeds of transfer pricing and intellectual property rights, Apple’s Irish companies held the rights to the company’s intellectual property such as software protocols, product designs and so on. The revenues from these intellectual property licenses are what’s at issue in the European Commission ruling.
The paradox here is that ultimately these revenues and profits would be taxed in the United States at its prevailing corporation tax rate - America has the third-highest general top marginal corporate income tax rate in the world at 39.1 percent (consisting of 35% federal rate and a combined state rate). Of course, under long-standing U.S. Treasury Department rules on tax deferral, these taxes are not payable until those funds are repatriated to the company’s California headquarters.
An interesting aspect to the debate that this European Commission ruling has prompted is the reaction of the U.S. Federal Government itself. It has blasted the European decision as “unfair, contrary to well-established legal principles”….and “could threaten to undermine foreign investment and the important spirit of economic partnership between the U.S. and the EU.”
Ireland, as a founder member of the OECD, has been at the forefront of international tax reform. Ireland has been an early mover in implementing the OECD’s Base Erosion and Profit Shifting (BEPS) project and has participated fully in important reforms at EU level through the recent Anti-Tax Avoidance Directive. Ireland is a strong supporter of tax transparency and administrative cooperation, which are key to tackling the global problems of tax avoidance and aggressive tax planning. International tax reform is complex and requires all countries to work together. The evidence shows that real reform is happening and delivering results, with an unprecedented level of consensus on a way forward and a demonstrable commitment to making it happen.
Under European law, the European Commission has a legitimate role in enforcing competition rules. It is not appropriate, however, that European State aid competition rules should be used in this new and unprecedented way in the area of taxation. Tax matters remain a fundamental matter of national sovereignty. This issue is not settled. Watch this space.