Will the EU tax bite from Apple trigger crackdown or reform?
December 2016 | FEATURE | CORPORATE TAX
Financier Worldwide Magazine
Although hardly a face-off of David and Goliath proportions, the European Commission (EC) order requesting Apple pay $14.5bn in unpaid taxes to the Irish government does represent a major taking to task of a corporate behemoth.
Indeed, the ruling by the EC – action which Apple’s CEO Tim Cook has described as “maddening” and “total political crap” – is significant, not just in terms of the amount of tax revenue (accumulated over a decade) that the US tech giant has been ordered to pay, but also in terms of what the ruling represents.
In the view of many commentators, the EU verdict on Apple’s alleged tax shenanigans between 2003 and 2014 forms part of a wider international attempt to crack down on the issue of double non-taxation. This is one of the main aims of the EU’s base erosion and profit shifting (BEPS) project.
How, then, should the EU’s decision on Apple’s unpaid Irish taxes be interpreted? Is it foolish or fair? Perhaps it is an inevitable product of the BEPS agenda designed to tackle international tax avoidance techniques of high-profile companies.
“As countries scramble for ways and means to bolster their tax bases in the face of globalisation and the rise of e-commerce, with the benefit of 20/20 hindsight it was perhaps inevitable that structures such as Apple’s would be challenged at some point,” says Douglas Fone, managing director of Quantera Global. “It is now clear that any structure that contains elements that are not supported by economic substance will be vulnerable to challenge in the new BEPS era.
“The old style of international tax planning using loopholes in legislation and sometimes spurious technical arguments to achieve a particular result will no longer work if the structure is not supported by economic substance in terms of how the business really operates and how value is really created in the supply chain,” he adds.
The upshot of cases against Apple and other multinational corporations, including Amazon and McDonald’s, also under the microscope over tax deals struck with Luxembourg, is that tax structures need to evolve to keep pace with developments in international tax and transfer pricing.
The colourful language used by Tim Cook to condemn the EU/Apple tax case apart, the question as to what extent the ruling was politically motivated cannot be easily sidestepped. Furthermore, it remains to be seen how the EU stance over Apple is likely to impact the way countries such as Luxembourg, Holland and Ireland negotiate tax deals with major corporations in future.
“Ultimately, the issue is politically motivated in the sense that countries need to protect their tax bases in order to finance their national budgets – such as paying for schools, roads and pensions,” asserts Mr Fone. “It is also political in the sense that the design of tax structures used by US companies around the world is driven largely by the way the US tax code is drafted, coupled with the fiduciary duty of the directors of US companies to mitigate the overall tax rate of their companies to within reasonable levels, to thereby maximise shareholder value.”
In light of the tax bite out of Apple, other major companies with similar tax arrangements might expect to receive comparable consideration from the authorities. Indeed, in September 2016, the EC launched an investigation into how Luxembourg handled the tax arrangements of the GDF Suez group, now known as Engie. “These consequences are being faced by all large multinationals, not just US companies,” notes Mr Fone. “Hence, I doubt that any country would now agree the type of deal Apple has with Ireland.”
Although the US Treasury Department has warned the EC about taking action against US companies over tax deals, US grumblings are unlikely to curtail future globalisation. “Apple will continue to want to sell to European consumers,” says Mr Fone, “however the international tax and transfer pricing landscape is changing rapidly and old structures need to be revamped as a result.”
Currently, the EU’s order for Apple to pay its back taxes is in limbo. The Irish government has appealed the decision, its position being that it has not artificially reduced Apple’s tax burden for more than 20 years, as the EC claims. The payment is being kept in an escrow account pending the outcome of the appeal.
EC officials have stated that the appeal is likely to go through both the General Court and the European Court of Justice, which could potentially take up to six years to be resolved. The question as to whether the Apple tax ruling will lead to further crackdowns on alleged dubious tax practices or a reform of international tax rules is as yet unclear.
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