Ireland’s sweetheart tax deals under threat as EU investigates

European Commission to issue decisions on four test cases, including Apple in Ireland,

Until a few months ago, the medieval town of Athenry in County Galway owed its fame mainly to a song. Irish rugby and football fans often burst into stirring renditions of "The Fields of Athenry", a ballad about the country's devastating 19th-century famine.

In February, Tim Cook, Apple's chief executive, gave Athenry another taste of the limelight, saying the tech group would build an €850 million data centre there to power critical online services such as the iTunes and App stores.

For Ireland's politicians, the pledge of investment from Apple, which already has its European headquarters in Cork, has been a godsend. Taoiseach Enda Kenny promises that there will be "knock-on benefits for the region" as the rural west coast battles to pick itself up from the country's financial crisis.

Crucially, Apple's big gesture suggests that Ireland's strategy of turning itself into the European base for leading US technology companies is still paying dividends and creating jobs. Richard Bruton, the jobs minister, calls the Galway data centre "a great example of what is possible with the right policies".

But those policies, so alluring to multinationals, now face an imminent threat. At the heart of Ireland’s cosy relationship with Apple lies one of the most inflammatory global political issues: preferential tax deals.

Dublin is at the forefront of an investigation by the EU into countries that it suspects of offering illegal sweetheart tax deals to multinationals. The European Commission says it will "shortly" issue decisions on four watershed test cases: Apple in Ireland, Starbucks in the Netherlands and Fiat Finance and Trade and Amazon in Luxembourg.

Billion-dollar threat

Brussels is using a revolutionary but highly contentious methodology to argue its case and, if it rules that there has been wrongdoing, it has the powers to impose some of the biggest penalties in the EU’s history. The commission can force governments to recoup 10 years of unpaid taxes. As one EU official puts it: “We are talking billions and billions.”

Apple has already warned its investors that it could suffer a “material” hit from the EU probe if Ireland is forced to claw back the money.

JPMorgan has estimated that, in the worst case scenario, Apple is on the hook for about $19bn. Very few competition lawyers in Brussels expect any bills to be that high, but big penalties would nevertheless change the rules of the tax-dodging game by adding a muscular level of deterrence.

Until now, tax reforms have largely centred on voluntary and often toothless international guidelines. EU countries have doggedly defended their sovereign right to raise taxes as they want. Britain has easily resisted moves to harmonise tax rates across Europe.

So Brussels is resorting to the sort of imaginative tactics that are usually the hallmark of the multinationals’ tax advisers. It is arguing that preferential tax deals - the “comfort letters” given to the companies by EU governments - fall within the realm of state aid. This means that they are illegal state subsidies and Brussels can use its “big bazooka” of recovery orders to recoup them.

"These are all highly significant cases - and the verdicts will be very important," says Anneliese Dodds, rapporteur on corporate tax at the European Parliament. She stresses that the cases will cut to the heart of whether multinationals receive advantages that domestic companies would not. "It is that kind of fundamental unfairness - a complete lack of a level playing field - that has made so many millions of people in Europe angry."

Ms Dodds adds that the four initial cases are probably only “the tip of the iceberg”. The LuxLeaks whistleblower revelations suggest thousands of comfort letters have been issued. Brussels is already investigating more than 100 cases in 21 countries. The commission insists that it does not oppose tax rulings per se, which multinationals need to clarify where their profits will be taxed, but is targeting abuses where companies try to whittle their obligations down to virtually nothing.

Margrethe Vestager, the EU competition commissioner, was expected to announce her decision on the four cases by the end of last month but this has been delayed. "They are taking no risks," says one lawyer involved in the cases, explaining that the commission needs more time to establish a watertight legal precedent in highly complex probes, where information often has to be prised from recalcitrant states. Luxembourg, Estonia and Poland have all been rebuked by the commission for not being forthcoming with information.

According to lawyers familiar with the inquiry, there is a consensus that Ms Vestager’s team is seeking to issue recovery orders in the autumn, although one of the cases could be concluded earlier. However, the commission would then face immediate appeals in the Court of Justice of the EU, where the state aid argument will be tested for several years. To steel themselves for the battle, EU competition officials are bringing in lawyers from other departments to test the commission’s logic.

Ireland insists there is nothing illegal about its tax rulings, which are "non-binding" guidelines. Michael Noonan, finance minister, said last year that Dublin would "win the case quite legally and there isn't a very strong case by the commission". Luxembourg and the Netherlands also say that they have done nothing illegal.

Commission’s case

To beat the member states, Brussels will have to prevail in three contentious areas: “selectivity”, “advantage” and the value of intellectual property.

One of the defining characteristics of illegal state aid is that it must be tailored to a particular business or sector. In its bid to prove “selectivity”, the commission’s initial evidence about Apple’s deal focuses on a discussion between a company tax adviser and Ireland’s revenue service in 1990. According to a document published by the commission, Apple’s tax adviser made his pitch with the veiled threat that the company was “reviewing its worldwide operations”.

The discussion then focused on locking in a special $30m-$40m bracket on which Apple would pay tax. According to the commission’s document, Apple’s tax adviser “confessed that there was no scientific basis for the figure”.

This arrangement became even more startling after the iPhone and iPad transformed Apple into the world’s richest company. According to the commission, Ireland-based Apple Sales International accounted for 64 per cent of Apple’s overall 2011 pre-tax income of $34.2bn. Despite this, the tax paid in Ireland in 2011, where Apple’s international sales are almost all booked, was somewhere between €2m and €20m, the commission says.

To campaigners, the case is clear: Ireland gave Apple a selective deal to keep it in the country. But the commission is on its guard; at the end of last year, the CJEU rejected commission decisions over selectivity in two Spanish tax cases.

State aid lawyers, particularly in the case of Luxembourg, also argue that anyone who wanted a comfort letter received one. By this reasoning, comfort letters do not look selective.

"It is difficult to apply the concept of selective advantage in the context of tax rulings. There are thousands of such rulings," says Jay Modrall, a lawyer at Norton Rose Fulbright. "While each ruling applies to a specific situation, it is difficult to see how the commission could show that a similarly situated company would not have received an equivalent ruling, taking account of the practices in the relevant member state."

Apple stresses that it is "subject to the same tax laws as scores of other international companies doing business in Ireland". Ms Vestager counters that Brussels is focusing on cases where there is a "suspicion that you can have it but your competitor next door cannot have it".

The obligation to calculate the “advantage” conferred by a comfort letter will demand highly complex sums about what a company would have paid without a tax ruling. The cases hinge on transfer pricing - whereby companies buy and sell goods and services internally between various units, shunting around profit to pay tax in the most advantageous jurisdiction. Campaigners view transfer pricing as one of the gravest injustices.

But to win the case, the commission will have to be exact about the scale of unjustified transactions. One of the details in the Starbucks case is that its Swiss operation sells coffee beans to the Dutch unit at a 20 per cent mark-up. Determining whether this is acceptable or not requires a pioneering verdict on the correct methodology for the “arm’s length principle” - how much the same transaction would have cost if it were conducted on the open market. Starbucks denies any wrongdoing.

Calculating an appropriate value for intellectual property is another minefield for EU competition officials. Technology companies often argue that their taxable profit should be attributed to know-how generated on the US west coast. Tax is lower elsewhere, they argue, because bread-and-butter assembly, packaging and distribution operations contribute little to profits.

Because of those IP implications, some in the Irish camp even raise the provocative argument that any money recovered would be due to the US Treasury, as Apple's taxable profit is created in California. Whoever is entitled to it, Dublin would not put the money into the national budget, with officials saying the money is simply "not ours".

Despite the legal hurdles, Ms Vestager is vowing to decide on the cases "as soon as possible". She has already shown a fearless appetite to take on big names, launching antitrust cases against Google and Gazprom. In terms of tax, she promises to ensure "a level playing field is re-established".

She is supported by Gert-Jan Koopman, the state aid chief at the commission. One lawyer observed, only half joking, that the countries under investigation should be deeply worried that Mr Koopman also dealt with the state aid implications of the billions poured into rescuing Europe’s banking system. While many commission officials fret over imposing fines of tens of millions of euros, the lawyer warned: “Koopman lives in this world of very big billions.”

Ms Vestager insists that her tax drive is only one plank of a broader EU initiative. The commission is reviving plans to establish a common EU tax base - essentially a set of rules mapping out what countries can expect to pay tax on. This harmonisation is also intended to help curtail on transfer pricing.

Sol Picciotto, emeritus professor at Lancaster University, says the EU's state aid cases are just "one stick" but will help harmonise standards. "At some stage, corporates might say a rational approach is better than being hit from all sides by all these sticks."


Referendum important but no deterrent to action

For the Netherlands and Ireland, something seems deeply unfair about the EU’s tax probe. When will the European Commission go after Britain? “We want to see that they are not just picking on the little guys,” says an official from one of the smaller countries in the EU’s crosshairs.

In private, commission officials insist that they are not blind to Britain’s role as a tax haven. An investigation into Gibraltar’s tax regime was launched in 2013 but a decision is not expected before judgment is delivered in the cases involving Ireland, Luxembourg and the Netherlands.

Britain was among the first countries from which the commission requested tax rulings. State aid lawyers in Brussels say that the commission’s concerns about Britain are almost certain to yield a big case. They predict that the commission’s interest will probably focus on “patent boxes” schemes, which allow companies to pay less tax on revenues associated with intellectual property.

Some add that commission officials are also showing an interest in the relationship between some big UK-based companies and Luxembourg.

As with many big competition cases, much of the argument about the silence on Britain hinges on politics. Britain’s forthcoming referendum on whether to remain in the EU is widely viewed as a major existential threat to the broader European project in Brussels. Given those political tensions, several commission officials concede that they want to avoid any immediate battles with London. But Margrethe Vestager, the competition commissioner, has an unusual degree of freedom to launch cases when she wants. She used a speech in London to stress that she would not allow politics to weigh on her cases.

“We are committed to the principles of fairness, good administration, transparency and due process. There is simply no room to spare for political interference.”

Britain’s tax dodgers have been warned.

Speed read

On the hook If the commission rules there has been wrongdoing in the four cases, Brussels can force governments to recoup years of unpaid taxes via recovery orders

Making the case The commission needs to prevail in three contentious areas of argument: 'selectivity', 'advantage' and the value of intellectual property

More to come? The rapporteur on corporate tax says the four cases are only 'the tip of the iceberg'. Ultimately Brussels wants to establish a common tax base



Case against Tax deals struck in 1991 and 2007. Brussels investigating whether low level of tax on most international sales amounts to illegal state aid from Dublin.

Defence Ireland says that it has done nothing illegal and Apple says that it was given no special treatment



Case against A tax ruling issued in 2012. The commission argues that complex transfer pricing arrangements appear to create an artificially low tax base of €2.5m.

Defence Luxembourg says it has done nothing illegal. Fiat Finance and Trade denies receiving any 'favourable' treatment.

The Netherlands


Case against Focuses on whether Dutch authorities allowed the coffee company to engineer artificially low tax bills through purchases between various subsidiaries, based on an agreement in 2001. The tax paid by the roasting operation - together with its Dutch parent company - was €715,876 in 2011 and €600,000-€1m in 2012.

Defence Both the Netherlands and Starbucks deny wrongdoing.



Case against A tax ruling in 2003. The commission is concerned that Amazon’s main Luxembourg subsidiary paid too little tax because it made too big a tax-deductible royalty payment to a partnership.

Defence Both Luxembourg and Amazon deny any wrongdoing.

The Financial Times Limited 2015