Not Just One Bad Apple: Tax avoidance in Europe

July 23, 2020

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2 min read

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What's going on here?

The General Court of the EU has found that Apple does not need to pay €14bn in back taxes to Ireland, but that won’t stop the EU’s fight for tax accountability.

What does this mean?

Ireland’s lenient tax rules make it an attractive location for multinational companies to set up base, but Apple went further than most to take advantage. Its arrangement in Ireland allowed it to record every sale made in Europe, the Middle East, Africa and India as a sale by one of two Irish subsidiaries. These subsidiaries then moved most of these profits to Apple headquarters in the US, and a tiny remainder was taxed in Ireland. The result? Apple’s tax bill was between 0.005% and 1%. 

In 2016, the EU Competition Commissioner, Margarethe Vestager ordered Apple to pay back taxes of €13bn to Ireland. The Commission believed that Apple’s arrangements constituted illegal “state aid” from the Republic, and therefore broke competition rules. 

But, on appeal, the General Court agreed with Ireland and Apple that Apple did not enjoy an exclusive benefit. It said that the Commission “did not succeed in showing to the requisite legal standard” that Apple had received an advantage from Ireland.

What's the big picture effect?

The pursuit of Apple is just one battle in a much larger war against tax avoidance in Europe. Ms Vestager has spearheaded a campaign against the likes of Nike, Ikea, Starbucks, Google and Amazon for their anti-competitive “sweetheart” deals with member states.

These controversial arrangements are a cause for major tension in the EU, particularly where they lead to a loss of tax revenue for other member states. Italy has called Ireland, Luxembourg and the Netherlands “European champions” in tax evasion. Within Ireland, there is mounting pressure for reform too, particularly after the monumental cost of COVID. The tax allegedly due by Apple is equal to Ireland’s entire healthcare budget

But for the Irish government attracting multinational investment has been at the heart of its economic strategy since the 1980s. Its low corporation tax of 12.5% (compared to 19% in the UK, and up to 33% in Germany) has “helped transform Ireland from an economic backwater into one of the world’s richest countries”.  

However, Ireland may have met its match. Ms Vestager (the “tax lady”) is expected to appeal the Apple ruling to the European Court of Justice, and she is also striving for systematic change. Under her watch, Brussels plans to implement a new form of digital services tax to crack down on big tech. It has also unveiled plans for extensive tax reforms, focusing on simplifying procedures and enforcing compliance. We may yet see unconventional methods from the Commission to ensure that compliance and fairness across the single market are adhered to.

Are Ireland’s days as “the world’s number one tax haven” numbered or will the luck of the Irish win out?

Report written by Rory Crawford

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