Brussels broke the rules in its pursuit of Apple’s €13bn

European Commission has failed to show how state aid law damaged competition

As the Apple tax case moves towards the European Union courts, €13 billion has been transferred to Ireland. The implications of the case will effect how multi-national companies implement taxes across Europe.

 

If taxes are the price we pay for civilisation then certainty of law is the manufacturer’s guarantee. Companies, like individuals, must pay their taxes and contribute to the proper functioning of the societies in which they operate. In return they have the right to understand how tax laws apply to them and to reasonably expect they have complied if they follow them.

I am not a politician. I don’t have the unenviable job of determining what a fair corporate tax regime looks like or what tax rate will provide a sufficient return to the exchequer while boosting investment and creating jobs. I do, however, know about state aid law and I know it’s not a shortcut to tax reform. I don’t believe I am exaggerating when I say the European Commission’s aggressive use of state aid rules to pursue its corporate taxation agenda risks undermining legal certainty, a principle that has contributed more than any other single factor to our society’s prosperity.

The corporate tax system absolutely needs reform, but state aid enforcement is not the appropriate tool. The recent ruling by the European Commission against Ireland and Apple was ill-conceived, wrong and makes reform harder to achieve. It introduced a new interpretation of state aid rules mid-game and extended the scope of the European Commission’s power in a way that is highly questionable from a legal perspective. This has worrying implications for national sovereignty as direct taxation remains a competence of the member states and is not shared with the commission.

State aid was originally introduced into the treaty to prevent member states from propping up inefficient national firms or industries and distorting competition in the single market. It is not new that state aid laws can be applied to corporate tax.

The commission has rightly clamped down in the past on instances of countries attracting foreign investment through schemes that allow certain types of companies to pay less tax than others. What is completely new is to use state aid laws against decades-old legislation, practice and guidance given by tax authorities to companies that tell them if they have understood tax laws correctly.

Tax returns

In the Apple case, the company asked the Irish authorities in 1991 and 2007 how changes to the laws applied to its business and whether it was paying the right amount of tax. The Revenue Commissioners gave its opinion and the company relied on this when filing its tax returns.

Now, over 25 years later, the European Commission is saying that Ireland did not charge the right amount of tax. It claims Ireland misapplied its own laws and should have taxed profits that Ireland, the US and international tax principles all agree should be taxed in the US.

There is no way Ireland or Apple could or should have known that this would amount to a breach of state aid rules. Nor has the commission shown any opinion from Ireland on how its own rules benefited Apple only or damaged competition – both key tests of state aid rules. So it is disproportionate to ask Ireland to recover €13 billion plus interest dating back over a 10-year period. It is clear the approach is politically motivated and the huge headline-grabbing number and endless rounds of interviews are designed to maximise PR impact for the commission at a time when some member states are losing faith in EU institutions.

It is understandable why people in Ireland might be keen for the Government to recover the €13 billion. However, it is telling that, according to polls, the majority of Irish voters support Ireland’s decision to appeal as they understand the wide implications of the commission’s novel approach, even if the commission refuses to. This approach undermines long-standing international consensus, and a global tax system, that is based on the logical concept of profits being attributed to where the value in a product is created. Nearly all of the innovation that created the iPhone came from California, and that’s why profits from its sales are largely attributed to the US and not Ireland or elsewhere.

Investors’ caution

This ruling will make companies more wary of investing in Europe in the future. While European commissioner for competition Margrethe Vestager claims only to be targeting the “outliers”, she has also said the only way for a company to know for certain it has received the correct advice from a sovereign tax authority is to ask the commission. That’s an impractical and unacceptable state of affairs and is a clear affront to member state sovereignty.

It also undermines efforts to reform the international tax system being led by the OECD, which has tried to foster international co-operation, not antagonise it. Indeed, a lot of this comes down to the commission’s unhappiness at a US system that allows companies to defer repatriating foreign income and the tax resulting from it. But that is a topical and ongoing challenge for US policymakers, not the European Union.

The EU faces many and varied threats, but bending the rules to chase positive headlines risks making Europe a less attractive place to do business and that’s in no-one’s interests. What’s more, over-reaching into an area of national sovereignty will derail tax reform efforts – and you don’t need to be a politician to know that’s not what the citizens want in today’s Europe.

Liza Lovdahl-Gormsen is director of the Competition Law Forum and senior research fellow in competition law. 

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