Apple ruling could weaken State’s hand in future EU decisions

Whether or not the Government appeals the European Union decision on Apple, the technology giant will certainly appeal the ruling and it will be some time before the European Court of Justice (ECJ) rules on the decision.

But, whatever the final outcome of the case, the European Commission decision has damaged Ireland’s reputation among its allies in the EU.

For many years, irritation with Ireland’s low corporation tax regime has been building across the EU. This was manifested during the economic crisis when the French government wanted to use Ireland’s parlous position to force changes in the tax regime.

However, the commission recognised that requiring Ireland to raise its tax rate would have been very damaging, as well as being outside its remit. Still, the conversation demonstrated Ireland’s vulnerability.

EU allies

The commission decision on Apple, even if not justified legally, will further convince other EU states that Ireland has used unfair means to further its interests. This could leave Ireland without allies in Europe in the future when critical decisions are being taken.

It is not too difficult to justify to our colleagues in the EU levying a 12.5 per cent rate of tax on the profits of goods that are produced in Ireland and sold in the rest of the EU. It is a bit harder to explain why Ireland receives huge tax revenue on goods produced in China and sold in Italy or France, when the goods never pass through Ireland.

However, it was clearly unacceptable, though legal, that Apple used Ireland, and what is referred to as the “double Irish”, to avoid paying corporation tax anywhere, whether in Europe or the US.

It was a serious error by previous governments to allow Ireland to be used by companies such as Apple to avoid all tax liabilities. The fact that this was possible only due to a defect in US tax law did not make the situation any more palatable. The latest events reinforce the need to close any further loopholes that may be allowing firms to avoid paying appropriate taxes.

Since the late 1990s, it has been clear that Ireland needed to wean itself off its dependence on a low corporation tax rate as a driver of economic growth. Significant progress has been made on this, but much more needs to be done so that, in the next decade, Ireland no longer has to devote major strategic resources to protecting its tax regime.

Statistical challenge

The EU decision poses a challenge for the Central Statistics Office (CSO) and for the commission ’s statistics arm, Eurostat. We now know that the revision to the Irish national accounts in July was due to Apple moving head office to Ireland, generating about €2 billion in corporation tax revenue for Ireland and raising Ireland’s EU budgetary contribution by about €200 million.

The question now arises whether the EU decision should require a revision to the Irish national accounts since 2004.

Over the period 2004-2014, the activities of the relevant Apple subsidiaries were excluded from the Irish national accounts because they undertook no activity in Ireland and, as a result, paid no tax. This treatment accorded with the United Nations System of National Accounts rules. The CSO’s decision on the appropriate treatment of Apple’s activities was audited by Eurostat.

While the commission may have decided that Apple owes €13 billion in tax, this does not mean the accounting treatment can (or should) change.

If the ECJ upholds the commission decision, and if there is no retrospective revision to the national accounts, it is likely that a small additional budgetary contribution to the EU will be due of about €130 million out of the €13 billion.

However, if there was a retrospective revision to the national accounts to include the Apple subsidiaries’ profits, then the retrospective contributions potentially owed could amount to about €1.3 billion – a big difference.

The CSO is independent of government and must make the decision on when and if retrospective changes to the national accounts are to be implemented. This decision will be audited by Eurostat, which is also independent of the commission.

This saga highlights the possibility that further changes, especially in US tax law, could see Apple move on at a later date. If this happened, Ireland would lose a big chunk of corporation tax revenue – which is separate from the €13 billion in back tax. This uncertainty argues for using the additional annual tax revenue from Apple of about €2 billion to run a budget surplus rather than spending it all.