US steps up pressure on EU ahead of Apple’s Irish tax ruling

The US Treasury's missive, fired at the EU Commission warning about the effect of its antitrust investigations into Irish tax arrangements of Apple and other US firms, had plenty of legalese.

But the use of words such as “disturbing,” “troubling” and “chilling” point to how serious Washington is taking this and what responses it may consider.

After months of back-room peddling between the two sides, the Obama administration escalated the dispute this week over what Washington sees as the unfair targeting of American multinationals and their tax arrangements with individual EU members states in investigations that have “major implications” for the US.

The white paper published by the Treasury on Wednesday warns very publicly that the investigations are trampling over existing bilateral tax treaties, “broadly accepted” international tax arrangements and global efforts to combat corporate tax avoidance.

Washington accused Brussels of becoming a "supra-national tax authority", an arbiter of member states' corporate tax regimes, beyond the role of enforcer of competition and state-aid law. They warned that such investigations, should they continue, would have "a growing chilling effect on US-EU cross-border investment" – a warning that should sound alarm bells in Dublin.

At issue is the practice of “transfer pricing” – how multinationals channel international profits through low-tax countries and internal corporate structures. The Treasury’s complaint is timed to sway the Commission’s soon-to-be-published findings in its investigation into Apple’s use of Irish shell companies to keep tens of billions of overseas profits offshore to avoid the 35 per cent US corporate tax rate.

Effective 2 per cent tax rate

The disclosure at a

Senate

panel investigation three years ago that the Californian tech giant was paying an effective rate of 2 per cent – well below the Irish corporate rate of 12.5 per cent – on Irish-warehoused international profits sparked this whole furore and led to the Commission’s investigation.

The Treasury is acting here out of self-interest. The investigations, which may apply heavy penalties retrospectively, could result in substantial tax demands on US firms that would, in turn, reduce American taxes given the firms’ use of foreign tax credits.

"That outcome is deeply troubling as it would effectively constitute a transfer of revenue to the EU from the US government and its taxpayers," said Robert Stack, the Treasury's top international tax lawyer, who authored the paper.

Some US observers understand the Treasury’s decision to try to meddle in internal EU business given what it is at stake but are not convinced by its arguments.

"I totally understand and sympathise with what the Treasury is doing here from an American standpoint but I don't think the arguments are actually that strong," said Daniel Shaviro, a tax professor at New York University's School of Law.

“If I were an EU person, I would want the EU to be doing this, I would think it is right, and if it is tough luck for US companies, I would say that is really a shame.”

Shaviro sees the retrospective application of tax penalties being most damaging from an American perspective.

“The US should be glad that the EU did this because the US companies cannot play tax games in the future that the US loses from, but applying it to past transactions, there is no upside to the US,” he said.

For Brussels, the line that should jump out of the paper was the warning of retaliatory action at the end: "The US Treasury Department continues to consider potential responses should the Commission continue its present course."

In January, Itai Grinberg, a law professor at Georgetown University and a former treasury international tax lawyer, suggested that the Obama administration should remind Brussels of a little-used statute, section 891 of the Internal Revenue Code, that allows the US president to double US taxes on foreign individuals and corporations from countries deemed to have subjected US companies to "discriminatory or extraterritorial taxes". Using the statute in response would amount to an all-out tax war. Grinberg declines to say whether the Treasury had this in mind.

‘Forceful response’

“I am not prepared to divine what the Treasury means beyond that sentence,” he said. “But a forceful response by the

United States

to these investigations would be appropriate given the significant consequences that the investigations have for the international tax architecture – consequences that go well beyond the individual tax rulings under investigation.”

Grinberg goes further than the Treasury, saying that the investigations are “untethered from any legal or economic principle” and “inconsistent with EU law”. He sees the Treasury’s concerns and mulling of potential responses as “appropriate”.

The paper was "simply an acknowledgement" by the Treasury that the Commission has "put itself on a crash course" with the OECD, the G20 and their Base Erosion and Profit Shifting project, and the stability of the international architecture.

“It is an attempt to warn the Commission and give the Commission appropriate notice of the unfortunate consequences of proceeding,” he said.