Apple – Time to move on

Aug 06, 2020


Originally posted on The Business Post, July 19, 2020.

On the face of it, Ireland won the Apple case last Wednesday.  The General Court of the European Union held that Ireland was not in breach of EU state aid rules in the manner it had taxed Apple entities in this country.  Some political noise following the ruling had to do with the €13 billion of tax that the Exchequer “lost” as a consequence of the ruling.  This is nonsense.  The €13 billion never belonged to Ireland, because Irish tax law doesn't work that way for anyone, let alone Apple.  

The tax rules for the profits which are subject to Irish tax existed long before major multinationals came to our shores.  The Commission's case against Ireland hinged around their misreading of the way Irish tax law operates, and the General Court confirmed that the Commission had indeed got it wrong.  

The Revenue Commissioners were also winners.  The Apple case differed from many other state aid cases taken by the Commission in that the focus of the examination was how Irish officials applied the law of the land, and not on the state aid compliance of the law itself.  The judgment is not an undiluted victory for Revenue.  The court cited problems with the methodology applied in calculating the tax liabilities involved.  They talked about there being insufficient documentation being retained.  The judges though allowed common sense to prevail and recognised that an absence of paperwork in itself is insufficient to prove that there was a problem.  

Of the scant paperwork which did exist and was discussed in the ruling, one item seemed to suggest that promised employment levels might have a bearing on corporation tax arrangements.  This was worrying from the Irish viewpoint as it highlighted a point of general unease among European institutions about the way Ireland conducts its tax affairs.  Nevertheless the court found that the Commission couldn’t argue that job creation was a factor in the case.

There is an assumption in some quarters that the Commission will take this week’s decision to appeal.  To what end?  Though it may feel to them like a pyrrhic victory, the Commission’s entitlement to look at tax issues when it comes to challenging state aid rules was confirmed by the court ruling.  This entitlement, along with the entitlement of national officials to apply domestic law as best they see fit, may well be the only enduring lessons from the Apple case.  The world has changed since 2016 when the Commission first issued its findings against Ireland.  

The tax point at issue in the Apple case is no longer an issue, resolved neither by Irish legislation nor by European Commission activity but by changes in US tax law.  The US Tax Cuts and Jobs Act of 2017 cancelled out the strategy of deferring tax on profits of US multinationals earned outside the US by keeping those profits outside the US.  

It is not just the US system which has moved on.  The underlying rules of the global corporation tax collection system were created over a century ago.  Now the concepts of company management and control as factors in deciding where tax is paid (and which helped give rise to the Apple conundrum) are the focal point for the international corporation tax reform agenda led by the OECD.  It is hard to see how additional Commission challenges in the Apple case could further that agenda.

The Commission should therefore now be looking forward and outward, rather than pondering whether it should be appealing the General Court’s decision.  Anyone who has read the written verdict will be struck not just by how considered and detailed it is, but also by the amount of time and effort taken up by the case from all parties.  All this time and effort could be better applied elsewhere.  Not only that, the European Treaties stipulate that a further appeal can only be on a point of law, which may be difficult given that the outcome was largely determined on the facts.  Losing an appeal on a point of law in a case this big holds significant political risks for the Commission.

Giving evidence to the House of Lords last month, the EU's chief Brexit negotiator Michel Barnier underlined the importance of the single market in the context of an ever more disrupted and unstable international trading environment.  Regulating state aid is an internal management problem for the European Union.  Commission resources should now, as Barnier has highlighted, be devoted towards securing Europe's place as an international trading bloc and not fighting internecine tax wars with its member countries.  

Future history books will note the Apple case as one of the last tests of an old corporation tax system before it became displaced by a new regime involving where companies generate their sales as well as where they generate their value.  That change will present challenges for small countries like Ireland where the capacity of companies to generate profits here is not matched by the size of the domestic Irish market.  

We will have to secure wins as this change is developed if the corporation tax yield is to be sustained.  God knows, we've had plenty of practice fighting our corner in the international tax debate.

Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland