Tax Analysts Blog

Will the EU Commission Crack Down on Irish Tax Deals?

Posted on Oct 7, 2014

The European Commission is on the offensive about possible illegal state aid. In June it announced that it was investigating deals between Ireland and Apple and between Fiat and Luxembourg. On September 30 the commission released two letters outlining portions of its case against both countries. While many believe it is unlikely that the EU will be successful in proving that the transfer pricing agreements between Apple and Ireland will be thrown out, the very fact that the commission is shedding light on them might signal a change in the corporate tax environment.

Obviously, the EU isn't alone in fighting the type of profit shifting Apple has engaged in for years. The OECD's base erosion and profit-shifting initiative is designed to stop the same kinds of practices. The OECD, traditionally the world's biggest enabler of weak transfer pricing rules and separate company accounting, was pushed to act because of rising furor over the low effective tax rates paid by intellectual-property-heavy companies such as Apple and Google, along with large pharmaceutical firms. The furor over Starbucks in the United Kingdom also didn't help the image of multinationals, particularly those based in the United States. But the BEPS action plan is something that must be voluntarily entered into by OECD members. The United States and the United Kingdom can opt never to implement any of the action item recommendations. That's what makes the EU action both more interesting, and more threatening to a company like Apple.

The specifics of the EU's allegation are complicated. The commission is objecting to two tax rulings Ireland gave to Apple in 1991 and 2007. The release from the EU, a letter to the Irish foreign minister, says that the 1991 ruling seems to have been negotiated rather than substantiated. There is no transfer pricing documentation to support the findings, and the ruling went unchanged for 15 years. The commission writes that the 2007 memo relied on a profit allocation method that was effectively the transactional net margin method with operating costs as a net profit indicator. But the method was never adequately explained. As a result, the two rulings constituted state aid to Apple, the commission argued.

Apple and Ireland quickly defended their actions, as might be expected. If many of the arguments used by the parties targeted in the investigation sounded familiar to observers, it's because they should. They are almost identical to the flurry of damage control that happened last year after Apple's head of tax strongly implied at a permanent subcommittee hearing that the company had obtained a very favorable arrangement with Ireland that allowed it to pay an effective tax rate of just 2 percent. Ireland and Apple quickly denied that any special arrangement existed, but the damage was done.

It's not clear if Apple's admission that it had a special deal with Ireland touched off the EU investigation or if it was just a coincidence. It's also not all that clear whether anything will happen as a result of the EU's actions. It will take years for the case to be developed, and many observers think the commission is treading on shaky ground. But maybe that isn't the point. Companies like Apple have been pushing their tax rates lower and lower for years. In many cases they have relied on the complicity of their home governments and leaky transfer pricing rules to do it. In all cases, they have exploited the vast differentials between corporate tax rates. The Apple case shows, however, that even the difference between Ireland's 12.5 percent corporate rate and the 39.6 percent rate in the United States isn't enough. Apple managed to get its rate down to 2 percent, whether through state aid or something less nefarious.

Maybe the BEPS initiative, the outcry over inversions in the United States, and the EU's crackdown are evidence that the world's tax administrators have finally had enough. If so, it's about time.

Read Comments (1)

Teri SpracklandOct 29, 2014

Extremely interesting development...What with Ireland's economic woes, Apple
might well be able to dictate its terms. But did someone talk out of turn?

Submit comment

Tax Analysts reserves the right to approve or reject any comments received here. Only comments of a substantive nature will be posted online.

By submitting this form, you accept our privacy policy.

* REQUIRED FIELD

All views expressed on these blogs are those of their individual authors and do not necessarily represent the views of Tax Analysts. Further, Tax Analysts makes no representation concerning the views expressed and does not guarantee the source, originality, accuracy, completeness or reliability of any statement, fact, information, data, finding, interpretation, or opinion presented. Tax Analysts particularly makes no representation concerning anything found on external links connected to this site.