Tax & Accounting Blog

Apple-Ireland EC Tax Ruling Could Shape Corporate Tax Policies

Blog, Corporations, ONESOURCE, Tax October 4, 2016

The European Commission (EC) ruling that Ireland provided illegal tax benefits to Apple could cost Apple €13 billion ($14.5 billion) and significantly impact how companies do business in Europe. The ruling also underscores the challenges the EC increasingly faces and predicts how decisions made in Brussels could impact US tax revenues.

The EC takes a democratized view of taxation practices of member states. While they take no position on taxation rates within a country, they do require member states apply tax policies evenly to all corporations and individuals. This requirement is borne from the need to create a competitive environment where a state cannot provide aid that benefits a particular company, region, or sector.

The EC did not take issue with Apple recognizing profits in Ireland from sales made in other EU countries, or Apple paying Ireland’s relatively low 12.5% tax rate. The EC took issue with two specific tax rulings Ireland provided Apple: one in 1991 and the other 2007, which allowed Apple to transfer most of its profits to two stateless entities, neither subject to Irish taxes. The EC states that those rulings amount to state aid and that Apple owes Ireland for decades of under taxation. Ireland, however, sees the ruling differently and is appealing it, stating that Apple has fulfilled its tax obligations.

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The US Treasury and members of congress expressed disappointment in the ruling, calling it unfair. It is worthwhile to note that any potential tax Apple would pay for moving funds to US would be offset by taxes paid to countries where the US has agreements to avoid double taxation. Ireland is one of those countries.

The ruling begins to take on a new dimension when viewed under the prism of corporate tax policies and current sentiments around tax inversions. The current election cycle shows that both major parties view this as a hot topic and important platform issue. On one side, corporate taxes are viewed as being too high and should be brought down simultaneously with an end to tax deferral on overseas profits. On the other side, there is a similar pledge to end tax deferrals, but without the offsetting concession of lower rates. Assuming each party could translate their policies into law; companies would have to make some important strategic decisions based on how they view corporate tax rates could evolve.

Why was the EC ruling made decades after the initial Ireland ruling in 1991? The answer is transparency or lack thereof. State aid regulations were introduced into European Law in 1958 and in affect long before the Apple rulings; however, those rulings were not easily visible to EU regulators and other member states. There are 28 member states and 24 official languages in the EU so without clear guidelines, oversight and transparency do not naturally occur. The path towards greater transparency was reached in December 2015 when the EU enacted a directive to improve tax transparency by member states and the law will come into full effect on January 1, 2017.

In the coming years, the EC will have their hands full reviewing, commenting and possibly ruling against any special tax rulings made by member states. This highlights the complexities faced by multinational corporations and the unsettling feeling that it may not be well enough to comply with the regulations of any particular country – they might also do well to brush up on the inner workings of the Maastricht and Rome treaties.

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