At 5am last Tuesday, dozens of police and financial prosecutors swooped on Google’s headquarters in Paris, stepping up a long tax inquiry into the internet titan by the national authorities in France.
One entity in the frame is Google Ireland Ltd, a key vehicle in the group’s large Irish unit.
Although Google insists all its tax affairs are fully compliant with the law, the raid was but the latest manoeuvre in a European crackdown on aggressive tax avoidance by large multinationals.
Such developments, including international inquiries by the European Commission, have long spurred anxiety in Dublin about reputational damage to Ireland’s successful inward investment policy, a crucial lever for job creation in the recovering economy.
In the noisy cauldron of US politics, however, frustration at this state of affairs is growing.
In Washington last Monday, just as Paris police made final preparations for their raid on Google, ranking members of the Senate finance committee published an open letter to US treasury secretary Jack Lew. In it, the senators called on Lew to continue “aggressive engagement” with the Brussels authorities against what they claim are inappropriate efforts to target US groups.
At issue primarily is a line of state-aid investigations by the European Commission into tax rulings issued by member states to five large companies: Apple, Amazon, Starbucks, McDonald’s and Fiat. All of them are American except Fiat, which is Italian.
The biggest inquiry centres on the Irish affairs of Apple, which stands accused of receiving unique benefits from the Revenue Commissioners in tax rulings in 1991 and 2007. This is rejected outright by the Government, Revenue and Apple itself.
Indeed, the Government has promised to appeal any adverse ruling in the European Court of Justice in Luxembourg.
No state aid
“Detailed and comprehensive responses have been provided to the commission demonstrating that the appropriate amount of Irish tax was charged in accordance with the relevant legislation, that no selective advantage was given, and that there was no state aid,” the Minister for Finance, Michael Noonan, said last week in parliamentary replies to Fianna Fáil and Sinn Féin.
“While the commission has opened a formal investigation in relation to one particular case involving Ireland,” Noonan said, “it has not made a final determination in the matter. There is no formal timeline for when the final decision will be made in our case.”
Still, almost three years have passed since the commission first moved to seek information from Dublin on tax rulings linked to Apple. Preliminary finding against Ireland were issued in September 2014, yet still there is no sign of a definitive judgment.
Some well-placed figures say the uncertainty persists despite moves by the last government in three successive budgets to eliminate the most contentious elements of the Irish corporate tax regime and adopt new OECD measures to boost tax transparency.
For all that, the European competition commissioner, Margrethe Vestager, told MEPs seven weeks ago that it was “very difficult to make predictions as to when the case will be ready for a decision”. And so it continues. According to an informed source in Brussels, there is nothing on the radar to suggest a ruling is imminent.
“At this stage, you’d have to imagine there would be an adverse finding,” says Séamus Coffey, a lecturer in economics at UCC. “But the key issue would be size of or the type of ruling. Is it going to be a ruling that might just relate to Apple’s operation in Ireland, or is it going to be a ruling about Apple’s global profits?”
In Washington, the investigations are seen as a “direct threat” to US interests. In February Lew challenged the president of the European Commission, Jean-Claude Juncker, over the inquiries.
This prompted a forthright response the same month from Vestager, who said the rules under investigation applied all companies regardless of their origin, and that the inquiries did not call the US tax system into question.
This was not good enough for the Senate finance committee chairman, Orrin Hatch, and colleagues Ron Wyden, Rob Portman and Chuck Schumer.
“We are disappointed that, to date, [European Commission] officials generally have dismissed our concerns and continue to insist they are not targeting US companies,” they told the treasury secretary on Monday.
“At the same time, their responses have actually shown our concerns are justified,” the senators said. “[Commission] officials have tried to assure us that these investigations are routine and that our concerns are merely due to our ‘misunderstanding’ of EU law.
“In fact, however, in her February 29 letter to you, commissioner Vestager states that the [commission] is now using state aid as one of its ‘tools’ to achieve a ‘reform agenda’, which confirms our suspicion that these cases are about more than objectively enforcing existing competition policies.”
All of this is in keeping with wider anxiety about the investigations in US corporate and official circles. One observer said there was concern at the outset that four initial investigations might morph into 24, casting a cloud of uncertainty over the affairs of many more companies.
That has not happened, yet concern lingers in Washington that the affair could lead to “lunch” being made in Europe of American corporate money.
De facto policeman
One key issue is the question of transfer pricing within companies. The treatment of transactions between subsidiaries can have a big bearing on the ultimate tax liability of a business. US critics of the commission’s approach say the commission may be casting itself as a de facto
policing authority on previous transfer pricing arrangements within companies, without ever putting companies on notice.
“If the European Commission says all of Apple’s global profits are taxable in Ireland, then we’re in the realm of big numbers,” says UCC’s Coffey. “While there might be some justification for questioning the transfer pricing used to allocate profits to Apple’s Irish operations, there is little to justify Apple’s global profits being subject to Ireland’s 12.5 per cent rate.”
Indeed, the possibility of large settlement being sought has been raised by Apple’s investment bank, JP Morgan. In a report last year, it said up to $19 billion (€17 billion) might be required if the final decision went against Ireland and Apple.
Further uncertainty surrounds the possibility of precedent-setting retrospective tax rulings.
Last December, for example, a public hearing of the US Senate finance committee heard concern about European inquiries from Robert Stack, the top treasury official on international tax affairs.
“We are concerned that the EU commission is in effect telling member states how they should have applied their own tax laws over a ten-year period,” Stack said.
“Plainly, the assertion of such broad power, with respect to an income tax matter, calls into question the finality of US taxpayers dealing with member states, as well as the US government’s treaties with member states in the areas of income taxation.”
This remains a concern. In their letter to Lew, the Senate committee member said the “retroactive effect” of state aid investigations contradicts the notion of reform. “Any retroactive application of a ‘reform agenda’ is improper and plainly undermines legal certainty and the rule of law.”
Some kind of a denouement now looms, but it might not be the final act in the saga.