What has just happened?
Judges at one of the EU’s leading courts quashed an order by the European Commission (EC) for Apple to repay over €14.3bn in taxes to Ireland.[1] The ruling stated that the EC had failed to achieve the ‘necessary legal standard’ when claiming that Apple had received an illegal and selective economic advantage from Irelands’ Revenue Authority.
What does this mean?
Primarily for Apple, this ruling has an obvious effect of saving the company over €14.3bn in tax payments. Apple, as the largest company in the world, has been continuously berated by critics and consumers for their lack of social enterprise and tax contributions. Especially as the €14.3bn could be used to pay for the education of 121 million children.[2]
Ireland has also been thrown into the spotlight for its financial treatment of large profitable companies (commonly referred to as leprechaun economics).[3] Since 2015 Ireland has become the ‘number one shifting destination’ for corporate profits.[4] Multinational corporations shifted over €90 billion in 2015 alone to Ireland, which is greater than the figure for Singapore, Switzerland and all the Caribbean islands.
More specifically the relationship between Apple and Ireland is mutually beneficial. Apples’ presence in Ireland has created over 6000 jobs within the Cork area. In return, Apple has paid a tax rate ranging from 2.5% to 0.005% compared to the national corporate rate of 10% / 25%.[5] Yet, this preferential relationship sends a message to other multinational entities (MNEs) that tax avoidance is all right and that having an unfair advantage is simply part of competing.
Consequently, this casts doubt on the viability of the Competition Commission’s strategy to overcome market power abuse. Margrethe Vestager is the EC Commissioner who is driven to rectify abuses of market power and the indiscriminative payment of corporation tax by large companies.[6] During her two elected terms, her biggest success has been fining Google $9bn due to their involvement in a series of illegal and market-controlling practices. As well as the landmark 2016 ruling which made reference to the ‘sweetheart’ deal between Apple and Ireland’s Revenue Authority.[7] Yet, this momentous reversal of her biggest achievement can be seen as a blow on her tyranny against large tech companies.
How Does it impact the Legal Sector?
Firstly, the interim period between the ruling and the likely appeal case is damaging to Ireland’s reputation abroad. The in-depth investigation by the EC and the personal vendetta of Vestager against tax havens will cast a ‘long shadow’ over the competitive corporate tax system. Which on the eve of Brexit is not a strong stance of negotiation, as Ireland relies on the 27 other EU states for support of a border backstop. However, since the case in 2016, Ireland has been reforming its tax system following the negative public opinion surrounding its policy of stateless income.[8]
As international tax systems have developed, businesses have become wiser to the taxation loopholes. The growth of tax havens and money shifts has outpaced the development and application of preventative laws. This issue has been contextualised by the Apple case, as it demonstrates the fragile and not so simple test of Article 107 of the Treaty on the Functioning of the EU.[9] This article has been nicknamed the ‘miracle clause’ due to many things being attributed but nothing being clearly stated.[10] Following Apple, there have been calls to clarify the statute. With Mason working closely with the EC to identify and clarify the five elements which constitute illegal state aid.[11]
It is highly probable that the EC will appeal the ruling taking the world’s largest company to the highest European Court.[12] It is clear that the tax measure in the Apple case satisfies the definition of harmful tax measures as defined within Article 107 of the Treaty on the Functioning of the EU.[13] For Vestager and the EC what is clear is the uphill battle they face as they continue the campaign and demand the more equitable distribution of income. They are trying to prove that the tax rate and actions of Apple and other international corporations constitutes illegal State aid, while the test for State aid is still in development and clarification.
Written by Megan Hornsby
Assessing Firms:
#CliffordChanceLLP #Linklaters LLP #SlaughterandMay #Allen&OveryLLP #BakerMcKenzie #FreshfieldsBruckhausDeringerLLP #HoganLovellsInternationalLLP #Kirkland&EllisInternationalLLP #MacfarlanesLLP #AddleshawGoddad#Ashurst #BryanCaveLeightonPaisnerLLP #CMS #HerbertSmithFreehillsLLP #NortonRoseFulbright #Simmons&Simmons
References:
[1] Javier Espinoza, Arthur Beesley, Tim Bradshaw, Aime Williams, ‘Apple wins landmark court battle with EU over €14.3bn of tax payments’(2020) FT < https://www.ft.com/content/1c38fdc1-c4b3-4835-919d-df51698f18c4>
[2] Cogley, M., and K. Doyle, ‘Apple Used Two Subsidiaries in Ireland in Way that ‘Did Not Correspond to Economic Reality’ (2016) Independent IE < https://www.independent.ie/business/irish/apple-used-two-subsidiaries-in-ireland-in-way-that-did-not-correspond-to-economic-reality-35304707.html >
[3] Arthur Sullivan, ‘Apple tax ruling for Ireland shines light on global tax avoidance’ (2020)DW<https://www.dw.com/en/apple-ireland-tax-avoidance/a-54274213>
[4] Mark Paul, ‘Ireland is the World’s Biggest Corporation ‘Tax Haven’ says academics’ (2018) The Irish Times <https://www.irishtimes.com/business/economy/ireland-is-the-world-s-biggest-corporate-tax-haven-say-academics-1.3528401>
[5] Isabel Togoh ‘Apple And Ireland Challenge EU Over $14.4 Billion Tax Ruling’ (2020) Forbes <https://www.forbes.com/sites/isabeltogoh/2019/09/16/apple-and-ireland-challenge-eu-over-144-billion-tax-ruling/#7b8f654e3c2f>
[6] Jennifer Rankin, ‘Margrethe Vestager gets a second term in EU competition job’ (2019) The Guardian < https://www.theguardian.com/world/2019/sep/10/margrethe-vestager-gets-second-term-in-eu-competition-job>
[7] Nils Pratley ‘Margrethe Vestager was 100% correct over public mood on Apple tax case’ (2020) The Guardian < https://www.theguardian.com/technology/nils-pratley-on-finance/2020/jul/15/margrethe-vestager-100-correct-over-public-mood-on-apple-tax-case-brussels-court-defeat>
[8] For reference, Stateless income thus can be understood as the movement of taxable income within a multinational group from high-tax to low-tax source countries without shifting the location of externally supplied capital or activities involving third parties
[9] TFEU - sets out the standards indirect tax measures in order to identify them as State aid
[10] Paran Khusndip Kumar, ‘A new approach to Article 107(1) TFEU? - An investigation Into Commission’s “New” Approach in State Aid Cases Relating to Tax Rulings’ (Master Thesis, 2018)
[11] R. Mason, ‘Tax Rulings as State Aid FAQ’ (2017) Law and Economics Research Paper Series
[12] $1.3bn using the market capitalisation as a measure – Mark Kolakowski ‘At $1.3bn Trillion Apple is Bigger Than These Things’ (2020) Investopedia < https://www.investopedia.com/news/apple-now-bigger-these-5-things/>
[13] Results in an effective level of taxation which is significantly lower than the general level of taxation in the country concerned, which has a significant impact on the location of a business within the EU.
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice