Adverse ruling on Apple’s tax would be very damaging

The European Commission’s long inquiry into Apple’s tax arrangements in Ireland is coming to a head. With rulings from Brussels imminent in parallel investigations into Starbucks’ affairs in the Netherlands and Fiat in Luxembourg, a decision in the Irish case cannot be far behind.

At issue is whether Apple’s agreements with the Revenue broke European state-aid rules, which the Government and the company itself reject. The case is critical. An adverse ruling would undermine the corporate tax regime after moves to eliminate the most contentious schemes and participate in an overhaul of global rules by the Organisation for Economic Co-operation and Development.

The OECD process – under instruction from world leaders, among them US president Barack Obama – follows international concern that multinationals are deploying aggressive practices to avoid tax. Political support for changing rules in the future, however, does not mean anyone is folding their tent immediately .

Little enough has been uttered publicly since the commission opened the tax investigations in mid-2014. But Apple, which derives a huge benefit from its Irish tax structure, told US regulators last May a negative ruling could have a “material” impact on its finances. Dublin is bracing for the possibility of an adverse finding, which it would appeal to the European Court of Justice.

All of this comes amid action behind the scenes. The Apple, Starbucks and Fiat cases come alongside another commission inquiry into tax rulings issued by Luxembourg to Amazon. Thus three of the four companies under investigation are American, with Fiat of Italy the only European company in the frame.

One undercurrent is the sense US business interests are deeply unhappy with the force of scrutiny in Brussels. This is nothing new, of course. Google and Microsoft are just two US giants entangled in investigations by the commission’s powerful competition arm. As complex talks slowly proceed on a free-trade deal between the EU and US, however, close observers believe the tax investigations could yet lead to political tensions between Washington and the European powers.

Synchronised announcements

Another dimension is timing. The early signals from Brussels were that each of the four decisions would be issued together in a single package, meaning no individual company or member state would be singled out in the event all rulings were adverse. That changed in recent weeks, when the commission indicated rulings might be issued separately or in batches.

This prompted some alarm in Dublin. There was concern to avert a situation in which any negative ruling in the Apple case would be issued first, taking all the attention at once and leading to diminished international interest in the other cases whenever rulings were published. Take note that the Government was greatly antagonised by international media leaks last year of the commission’s preliminary findings against Apple and Ireland. Dublin pushed back, seeking the release of the four rulings together.

With that in mind, the combined issuance of any negative decisions in the Starbucks and Fiat cases could well be seen as an effort to highlight the only European case alongside an American one and to deal at the same time with a couple of member states.

The stakes are huge. The sense remains that officials in Brussels are pushing for a negative finding in the Apple case. Yet considerable speculation surrounds the stance of competition commissioner Margrethe Vestager, Denmark’s member of the EU executive. Given the inevitability of a challenge in Europe’s highest court against an adverse decision, it is a given any court ruling to overturn such a decision would be highly damaging politically.

Dublin’s argument all along was there was nothing at all untoward in Revenue’s dealings with Apple and that no selective treatment was conferred on the company. Serious political damage would be incurred if the commission issued an adverse finding.

A definitive ruling against Ireland could call into question Revenue arrangements with other global firms. Tax structures can be slippery at the best of times, but any special Revenue arrangement for Apple would be in defiance of domestic law. The original agreement was struck in 1991, when the firm was a lot smaller. The world – and Apple – has changed since then.