Ireland risks being trampled in US/EU corporate tax fight

For the last three years, the international debate on tax policy was all about consensus. Led by the Organisation for Economic Co-operation and Development, countries across the globe agreed that aggressive tax planning by multinational corporations which pushed profits into low-tax countries – or indeed took profits outside the charge to tax altogether – was unacceptable.

Every developed nation sang from the same hymn sheet devising ways to step together to tighten up their tax rules. That was until last week, when the United States authorities clearly decided they had had enough of US interests being targeted by other countries.

For some time US officials have not been delighted with this European Union focus on tax and competition, leading to correspondence from US treasury chief Jacob Lew to European Commission president Jean-Claude Juncker earlier this year expressing concern at the commission’s interventions into the activities of US companies.

The Apple case – relating to the tax arrangements between Ireland and the US giant – is currently the single biggest case of this type under investigation by the commission.

But the dispute has been ratcheted up several notches with the publication on August 24th of a US treasury White Paper. This formally states the US view of what the commission is doing in targeting the tax affairs of US multinationals using competition law rather than tax law.

Chilling effect

The position of the Americans is that the commission’s investigations into whether tax arrangements constituted state aid would result in the transfer of tax revenue from the US to Europe, an outcome they describe as “deeply troubling”. Persistent investigation of US companies in this manner would lead to a “chilling effect” on US-EU cross-border investment, the treasury warned. The criticisms do not end there.

The US claims which might be felt most keenly in commission circles is that the EU is not operating its own rules correctly. The US treasury considers that the commission has departed from its established case law and practice in recent state-aid decisions.

Under the commission’s “new approach” all benefits granted to companies could be at risk of “state aid attack”, even if they were not selective. Where the commission seeks remedies for illegal state aid, those remedies should not be retrospective, the White Paper said.

For good measure the commission is accused of undermining the international consensus on how important tax rules should be applied, along with undermining the OECD initiative to achieve consensus approaches on the taxation of multinationals.

Robust defence

Brussels thus far has been robust in its defence of what it can and cannot do to enforce the state-aid rules. Competition commissioner Margrethe Vestager has strong support from the European Parliament. Back in January it voted in support of recovering any taxes illegally forgone by EU member states and the payment of any recovered taxes to the EU.

The parliament does not have authority to legislate on tax matters but nevertheless is bolstering the standing of the commissioner in pursuing tax issues using EU competition law. The commissioner herself has asserted to the US treasury that she acts to establish fair tax competition within the EU.

Fair tax competition within the EU is one thing, but this US statement has dragged the EU tax competition debate across the Atlantic. The US is also firmly setting out its stall by issuing a new legal model for the tax relationship between itself and countries.

A number of countries, including Ireland, the Netherlands, Norway and Luxembourg, are being invited to renegotiate their tax relationships with the US under the terms of this new model tax treaty. These treaties are outside and separate to any EU-wide treaty arrangements.

Brexit

There is also the question of competition post-Brexit. The UK might not have to trouble itself with concerns over EU competition law once it leaves the EU, and therefore could position itself as a haven safe from the “chilling” effects of EU intervention on foreign investments made into Europe from the US.

This would be to the cost of Ireland and other EU member states alike, and makes the need for Ireland to mount a robust appeal against any adverse EU ruling in the Apple case even more important.

Perhaps by coincidence, the Department of Finance launched a public consultation on a future Ireland/US tax treaty last week. Such a consultation is highly unusual. Tax treaty negotiations are usually conducted behind closed doors.

The new treaty when finalised will undoubtedly reflect US concerns over existing treaty abuses and high-profile corporate inversions, a practice whereby multinationals change their country of residence from the US to a lower tax jurisdiction to reduce their overall tax bills. It’s one thing though to renegotiate a tax treaty, but quite another to make it law. Washington gridlock has ensured that the US has not ratified any new tax treaties for almost a decade.

The African proverb has it that when elephants fight, the grass is the biggest loser. Because of the high level of US investment to this country Ireland, though a small player in economic and political terms, has a lot at stake in this transatlantic tax debate.

Nevertheless, recent events emphasise the primary concern of the US treasury to protect its tax base by pushing back directly against EU tax competition initiatives. Just as significantly it is pushing back indirectly against OECD initiatives to eliminate harmful cross-border tax competition by going it alone with its own style of tax treaty. Future Irish tax policy must reflect these developments – and react to them.

Brian Keegan is director of taxation at Chartered Accountants Ireland