On Wednesday, July 15, the European Union's General Court overturned a European Commission decision from 2016 that found Apple's tax arrangements with Ireland to constitute an illegal award of state aid (subsidies) that was incompatible with the common market, ordering the company to pay back €13 billion plus interest to the Irish government. As it has been almost four years since the Commission decision, let me refresh your memory on what brought about that outcome.
The Commission found that, as a result of negotiated advance pricing arrangements (APAs), Apple paid an effective tax rate of 1% in 2003 and just 0.005% in 2014. Since Ireland's official corporate income tax rate is 12.5%, these figures are more than a little concerning. Yet the General Court ruled the Commission had not proved that Ireland had given an advantage to Apple that it didn't give to other countries.
IANAL, but this is insane. As noted above, the APAs were negotiated, hence it is hard to see how other companies could have gotten the same deal. I'd like to hear what other firms have the right to pay just 0.005% of their profits in corporate income tax.
As I showed in 2016 just prior to the Commission decision, what was negotiated as the profit determination for the two Apple subsidiaries "non-resident" in Ireland, that is, Apple Operations Europe and Apple Sales International, had no reference to actual sales of these subsidiaries. Rather than defining "profit" as sales - costs, there was a very convoluted formula based solely on expenses, thereby making the "profit" subject to tax something very different from profit.
Then there's the question of these "non-resident" companies. According to the Wall Street Journal, "Ireland contended however that its tax rulings “did not depart from ‘normal’ taxation” because it had merely followed a portion of Irish tax code that says nonresident companies shouldn’t pay income tax on profit that isn’t generated in Ireland." Wait a darn minute! Anywhere but Ireland, a "non-resident" company is one incorporated in some other country. Apple, Inc., the parent company, is non-resident in Ireland. But Apple Operations Europe and Apple Sales International are both incorporated in Ireland, and merely managed from abroad. Ireland, contrary to the practice of any other country I'm aware of (and God help us if this practice spreads to other countries!), classifies corporations with this bizarre form of organization as non-resident for tax purposes even though they are domestic corporations by ownership. Ireland had to affirmatively create such a form of organization in order to establish a corporate form that is not taxable in any country. It is this creation of a tax-immune corporate structure that makes Ireland destructive to the world economy, a "fiscal termite" in the evocative phrase of retired International Monetary Fund economist Vito Tanzi.
One last point from the Journal: "Those rulings [the APAs] allowed two Irish-registered Apple units to attribute only a small sliver of some $130 billion in profit to Ireland in an 11-year period. The commission said all that revenue should be attributed to Ireland, but the Irish government and Apple say they split the profit reasonably, given that almost all of Apple’s intellectual property is developed in the U.S., not Ireland." No, no, no, no, no! These two Irish-incorporated "non-resident" subsidiaries actually own gigantic swathes of Apple's intellectual property, that is, the patents, copyrights, etc., embedded in Apple products. By virtue of owning this intellectual property and charging royalties to other subsidiaries for the right to use it, these subsidiaries stripped $130 billion in profits from Apple units in the rest of the world, transferring them to low-tax Ireland. To try to then turn around and claim that the profits based on ownership should be massively diluted because the software was designed in the USA makes a travesty of the very concept of ownership. The intellectual inconsistency of the Apple/Irish government position takes your breath away.
What happens next?
According to the BBC, the Commission has 14 days to appeal this decision to the European Court of Justice, the EU's equivalent to the U.S. Supreme Court. Since I think the Commission's decision was correct, I hope it appeals. The Commission was upheld by the General Court on a similar case involving Fiat Chrysler in Luxembourg, but overturned by the General Court last year on another similar case involving Starbucks and the Netherlands. We'll know soon if the appeal happens.
In addition, as Richard Murphy points out, the Commission is now very far advanced in discussion of an alternative tool to get around the fact that unanimity is required for EU decisions regarding direct taxation, which includes corporate income tax. As it stands, a single country (read: Ireland) can block changes such as a minimum level of corporate income tax rate that would exist throughout the European Union. However, if the Commission adopts rules under Article 116 of the EU Treaty that allows it to correct distortions in the Single Market, these would require only a qualified majority vote rather than unanimity. But this approach, too, would certainly be challenged at the European Court of Justice by Ireland and other low-tax Member States.
Score this round for the tax avoiders. May they not prevail in the end.
CORRECTION: The BBC was incorrect in stating that the Commission had 14 days to appeal. In fact, the Commission announced Friday, September 25, that it would appeal the decision. New post to follow.