Apple’s tax shenanigans finally come under serious fire from the EU

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Update: Sept 30 – the original FT story yesterday seems borne out by events – see the original EC document here.

Update, Sept 30: UK announces plans to crack down on tax abuses by technology companies.

From the Financial Times:

“Apple will be accused of prospering from illegal tax deals with the Irish government for more than two decades when Brussels this week unveils details of a probe that could leave the iPhone maker with a record fine of as much as several billions of euros.”

European Commission preliminary findings from the probe into Apple’s Irish tax affairs, where the FT reports it had a rate of less than two percent, reportedly show Apple benefiting from illicit state aid via backroom deals with Irish tax officials. We wrote about the prospect of this last June, and that the Commission is pursuing this avenue seriously is welcome news, and it follows Senate hearings in the U.S. last year in which one expert, Dick Harvey, testified:

“Apple does not use tax gimmicks? I about fell off my chair when I read that.”

But there’s something that we need to ask.

These gimmicks, like those of many other large multinationals, have been widely known about for many years. Why is the action only starting now? Pressure and publicity from TJN and its many allies, in combination with the global financial (and ensuing economic) crisis of recent years, have been major factors.

Note that the whole gamut of these shenanigans by Apple and others, whatever their legality, is engineering a continuous one-way reverse transfer of wealth out of European (and other) Treasuries, through what has been called “Risk Mining.”

The case highlights the age-old problem that international tax rules are dysfunctional: arbitrary, opaque, and they leave wide room for interpretation and hence favourable rulings. The OECD, through its Base Erosion and Profit Shifting (BEPS) project is leading the main effort to repair the rules, and we have reported that while the OECD’s moves are potentially welcome in as far as they go, ultimately they may end up only being fragile patches, like applying sticking plaster to a mortally wounded patient.

The G20 has called for reforms to ensure that multinationals like Apple are taxed “where their activities take place”, and we aren’t confident that the BEPS project takes us very far down this road. As we have noted, this implies a new principle of international tax, to treat multinationals according to economic and business reality, as unitary entities, and tax them in this way.

Indeed, the EU Commission has worked for 10 years to design a unitary tax framework, known as the the CCCTB (Common Consolidated Corporate Tax Base) but this proposal is being blocked in the EU Council of Ministers by countries such as Ireland, Luxembourg and the Netherlands, whose financial sectors have made a living out of picking the pockets of other EU countries – not to mention the pockets of developing countries, which are especially vulnerable to corporate tax abuse, not least because the corporate income tax tends to be more important for them than for richer countries.

We were heartened to see the Netherlands at least making a show of doing something about its abusive role here, but there’s a long way to go. Ireland, so far, seems to have focused its attention instead on pretending it’s not a tax haven. (And if you are still in doubt, take a look at this article, entitled If Ireland is not a tax haven, what is it? A bagel?)

The UK is being very hypocritical too: not only have successive UK governments opposed the CCCTB, but the present government is stubbornly defending appalling tax breaks to multinationals enacted this year, especially the patent box which gives subsidies estimated at $1b pr year mainly to pharmaceutical companies.

For more on that, read David Quentin’s recent article The UK’s “Patent Box” – a really nasty, disingenuous and hypocritical piece of tax law.

For the avoidance of doubt, here is the relevant EU regulation about state aid:

(i) the measure must be imputable to the State and financed through State resources;
(ii) it must confer an advantage on its recipient;
(iii) that advantage must be selective; and
(iv) the measure must distort or threaten to distort competition and have the potential to affect trade between Member States.
The main question in the present case is whether the rulings confer a selective advantage upon Apple in so far as it results in a lowering of its tax liability in Ireland.

Let’s not forget that this Irish story is merely the beginning of a bigger game that the European Commission is playing, also involving the likes of Luxembourg and the Netherlands, two big European tax havens. This tweet offers a pointer:

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