By Emma Clancy.
The verdict of the General Court of the European Union – which overturned the European Commission’s finding that Ireland illegally granted state aid to Apple – is a win for the second-wealthiest corporation in the world. It is a win for Ireland’s tax-haven economic model, and for the government. But it is not a win for the people of Ireland.
The General Court verdict in favour of Apple and Ireland can be appealed by the Commission to the Court of Justice of the EU, so this is not the final word.
Limits of using ‘state aid’ rules to combat tax avoidance
The Court’s reasoning is very limited, as a result of viewing this solely within the framework of EU state aid law. There are a lot of limitations for using the state aid framework to tackle tax avoidance. The Commission’s ruling on Apple did not have the scope required to deal with the fact that Apple was booking its non-US sales through Ireland instead of paying tax in the countries where the sales took place.
So the issue at stake under the state aid rules was whether Apple was provided with an unfair advantage through two tax rulings by Revenue – a “sweetheart deal” that allowed Apple to pay as little as 0.005% tax.
The Commission’s 2018 ruling found Ireland provided illegal state aid to Apple through two tax rulings; that profits could not be attributed to the “head office” or stateless branches as there was no substance to them.
It found that these profits must necessarily then be attributed to Apple’s Irish-resident subsidiaries; and that as a result Apple owed Ireland €13 billion plus interest.
The Commission stated: “Specifically, Revenue endorsed a split of the profits for tax purposes in Ireland: Under the agreed method, most profits were internally allocated away from Ireland to a ‘head office’ within Apple Sales International. This ‘head office’ was not based in any country and did not have any employees or own premises. Its activities consisted solely of occasional board meetings.”
Apple’s tax structure before 2015 was not, strictly speaking, a Double Irish structure because the Double Irish requires another subsidiary to actually exist in another tax haven, like Bermuda. In Apple’s case the head office was located nowhere.
Court refuses to examine imaginary “head office”
The General Court of the EU today stated that the Commission incorrectly concluded “that the Irish tax authorities had granted ASI and AOE an advantage as a result of not having allocated the Apple Group intellectual property licenses held by ASI and AOE, and consequently [all non-American sales income], to their Irish branches”.
The Court continues: “The Commission should have shown that income represented the value of the activities and functions actually performed by the Irish branches of ASI and AOE, on the one hand, and the strategic decisions taken and implemented outside of those branches, on the other”.
This is a really poor outcome. The whole point of the Commission’s case was that Revenue endorsed a scheme in its tax rulings in which Apple was allowed to artificially internally allocate the profits of two of its subsidiaries in a way that had “no factual or economic justification”.
Again, Apple’s method of routing all of its European sales through its Irish subsidiaries was beyond the scope of this state aid investigation.
The Court appears not to have examined the position on the question of whether the phantom “head office” had any substance or not.
It asks for proof of something that can’t be proved. The Commission can’t prove that the Irish subsidiaries actually performed all of the activities that led to the value creation – because: (a) the value was coming from international sales, which the Court refused to examine, and (b) the profits were artificially allocated to an imaginary head office, which the Court also refused to examine. The Court’s refusal to acknowledge there was no substance to this “head office” is ridiculous.
Like with the Starbucks state aid case, which the Commission also lost, it shows the serious limitations of examining and regulating tax avoidance through transfer pricing in a “state aid” framework.
For example, if a tax haven wants to give several companies special deals where they don’t have to pay tax, it won’t meet the EU’s state aid criteria because the advantage is available to more then one company or sector.
Two EU proposals – for a common consolidated corporate tax base (CCCTB) and a digital tax on the turnover (as opposed to profit) of tech giants – could help end this farce but they are blocked in the Council by tax haven countries including Ireland.
The Green Jersey
Meanwhile, the Irish government actively helped Apple set up a new tax avoidance structure, using capital allowances for intellectual property. Changes in Ireland’s tax law in 2014 have provided Apple with a near-total offset mechanism for sales profits.
Apple organised a new structure in 2014-2015 that included the relocation of its non-US sales and intellectual property from “nowhere” to Ireland, and the relocation of its overseas cash to Jersey but the company is granted a tax write-off against almost all of its non-US sales profits.
It is based on the use of full capital allowances for expenditure on intellectual property and massive intra-group loans to purchase the IP, with full deductions on the interest paid for these loans, in order to cancel out the tax bill arising from sales profits.
We identified this technique – now being widely used by technology and pharmaceutical companies – calling it the “Green Jersey” in a report for GUE/NGL that I co-authored with Martin Brehm Christensen from the University of Copenhagen in 2018.
Apple’s offshore cash pile soared in the years after it transitioned to the “green jersey”.
Last year the IMF put Ireland in a list of the top 10 tax havens in the world, alongside the Cayman Islands, Bermuda and Switzerland, responsible for a rise in “phantom investments”. These phantom investments are so-called FDI that in reality passes through empty shell companies to avoid tax. The report singles out Ireland, and reports that two-thirds of its FDI is made up of these phantom investments.
State aid rules are clearly insufficient to tackle tax avoidance in the EU. The new proposal being floated by the Commission – to create a new tool under Article 116 of the EU Treaty on preventing distortions to the single market – will get around the issue of unanimity voting being required on tax matters in the Council, but may also face similar limitations as the state aid rules, in that they weren’t designed for this purpose.
The US has now pulled out of OECD talks on a new global framework that could ensure the digital giants were fairly taxed, and under which value would be taxed where it was created. In the longer term we need a UN summit on global unitary taxation, under which corporations can be treated as a single entity, tax is aligned with value, and tax avoidance through transfer pricing is made impossible.
Emma Clancy is editor of Irish Broad Left and economics advisor for Martin Schirdewan, Co-President of GUE/NGL. Follow her on Twitter @emmaclancy123.