Apple ruling opens new front in EU policy battle on corporate tax

Ruling gives momentum to other tax proposals currently in EU pipeline

EU competition commissioner Margrethe Vestager: announced the biggest state-aid ruling in the bloc’s history.  Photograph: John Thys/AFP/Getty Images

EU competition commissioner Margrethe Vestager: announced the biggest state-aid ruling in the bloc’s history. Photograph: John Thys/AFP/Getty Images

 

In Brussels it’s called “la rentrée”. The first week back at the European Commission after the summer break is usually a slow start for European Union officials, as the Brussels machine slips back into action after a long, languid August. Not so this year.

On Tuesday, EU competition commissioner Margrethe Vestager returned to work with a bang. As her fellow EU commissioners headed off by coach to the Belgian coastal town of Knokke for a think-in, the steely Danish commissioner stayed behind to announce the biggest state-aid ruling in the EU’s history.

The ruling – squeezed through in the final days of August and not in September as expected – was fast-tracked, with the commissioner deploying a 24-hour rather than two-week notification period.

Irish officials were not fully apprised of the details until Tuesday morning.

The reason for the secrecy soon became clear. While an adverse finding had been expected, the scale of the numbers involved shocked virtually all observers, propelling the story to the top of the global media agenda.

The commission’s finding against Apple is the biggest judgment in the history of EU competition law. The previous record for an EU state-aid case was €1.3 billion in a 2014 case involving Nürburgring racetrack in Germany. The cumulative total of all EU cases involving the repayment of illegal state subsidies over the last 15 years comes to less than €11 billion.

EU competition law

While Ireland’s corporate tax regime has long been a politically sensitive issue, a rare black spot in the country’s generally positive relationship with the EU, the Apple judgment marks new ground.

The true significance of the judgment is that it falls under the remit of EU competition law.

The commission’s antitrust division has long been the most powerful part of the EU executive, wielding power of which other divisions can only dream. About 800 permanent staff are employed by the competition directorate general at the commission’s headquarters in Brussels, whose activity in turn generates work for the hundreds of competition lawyers based across the Belgian capital, including many from top-tier Irish law firms.

The EU’s competition division has made industry-defining, market-moving decisions over the decades as Irish companies such as Ryanair, bruised by three thwarted takeover bids for Aer Lingus, know only too well.

Crucially, competition decisions have to be enforced, though they can be appealed to the European Court of Justice. In this sense they differ profoundly from other parts of the commission’s decision-making process, where the commission proposes legislation which then must go to the European Council (representing member states) and – to varying degrees – to the European Parliament.

This means that most other proposals from the commission on corporate tax – such as the imminent announcement on a common consolidated corporate tax base (CCCTB) or country-by-country reporting – will always be scrutinised, and potentially watered down, as they are considered by ministers or prime ministers at the council stage.

In the area of tax, unanimous agreement is required, giving Ireland an extra cushion against any proposals it opposes.

The incursion by Vestager into the realm of tax-related state aid thus breaks new ground. While the commissioner argued this week that the commission has always taken an interest in tax-related issues affecting the single market, previous cases against Belgium and Italy were on a much smaller scale.

Leadership role

The Apple judgment has led to accusations that the EU’s competition division is overstepping its remit and targeting member states’ tax rates – which remain the preserve of national tax authorities – under the protective guise of competition law. But for others, Vestager’s move is a welcome example of the EU taking a leadership role on the question of tax avoidance.

As a result, how the Apple case plays out in the courts will be closely watched by competition law experts. Some Irish officials believe Ireland may have a strong case. Following Tuesday’s announcement, one EU official with knowledge of the Irish position said that while there was widespread shock at the final figure there was quiet relief at the strength of the commission’s legal case.

Others point out that the Apple ruling, though politically popular, does not address the real issues underpinning the fiendishly complex world of transfer pricing and cross-border tax arrangements.

While last year’s OECD rules on base erosion and profit shifting (BEPS) tried to ensure that profits are taxed where economic activities occur, the Apple ruling arguably fails to address the issue of whether the tech giant should be paying more tax in the US, not Ireland, given that most of Apple’s research and development activity is US-based.

Other measures being devised by the commission’s economic and financial affairs directorate general under economics commissioner Pierre Moscovici may be more effective in ensuring that tax is linked to the jurisdiction where the economic activity takes place and may offer a more sustainable model going forward, rooted in OECD principles.

Tax proposals

But the Apple ruling, though a competition move, has undoubtedly given renewed momentum to the many other tax proposals that are currently in the pipeline.

These include a relaunch of the controversial CCCTB, most likely in November, though the consolidation element is likely to be deferred.

Other tax measures introduced under Moscovici include the automatic exchange of tax rulings which will oblige member states to share details of tax rulings with each other. This enters into force in January, with countries obliged to start sharing information by next September.

Similarly, new country-by-country reporting requirements for multinationals comes into force in 2018.

Ireland broadly supports these measures, most of which the country has already endorsed at an OECD level, and Irish officials from the Department of Finance and Department of Foreign Affairs in Brussels have worked with other member states to amend and shape these rules at the council table.

But Vestager’s clampdown on Apple’s tax arrangements with Ireland has opened a new front in the EU’s battle against tax avoidance. There is already speculation that a new case involving Luxembourg is imminent, while the Apple investigation has raised the real possibility that other multinationals may soon be in the firing line.

Whatever Ireland may feel about being unfairly targeted, the political reality is that scant public support exists in Europe for Ireland’s position, particularly in larger member states such as France and Germany.

Ireland’s isolation may also be accentuated by Brexit.

Though traditional free-market allies such as the Netherlands, Luxembourg, the Baltic states and the Czech Republic remain, the Apple ruling confirms the fears of some that Ireland would become wedded to a more protectionist continental Europe post-Brexit.

Britain may also seek to capitalise on the EU- US tensions over Apple and other state-aid cases as it seeks to bolster its investment offering post-Brexit.

While it will not become clear until Britain’s access to the single market is clarified whether Britain will be bound by EU competition law, assuring companies operating in Britain that they will be free from the probing eyes of the EU’s competition enforcers would undoubtedly be a selling point.

Whatever the rights and wrongs of the EU’s incursion into the taxation arrangements of member states, the battle on corporate taxation may become one of the dominant policy issues for the EU in the coming years.

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