Transatlantic ties Smoulder as Ireland set to Collect €15 Billion from Apple

July 2017

Tax community members on both sides of the Atlantic are holding their breath for a reaction from the US government as the European Commission picks up its investigations into cross-border tax strategies and alleged state aid cases of US tech companies.

Ireland is now nearing an agreement to collect from Apple between €13 billion and €15 billion ($15 billion-$17 billion) in back taxes, including interest, before the end of the year. The recovered amount will be paid into an escrow account until a final ruling is made in European courts over the validity of the European Commission's decision, the Irish Department of Finance announced on Saturday.

US chipmaker Qualcomm also faced daily fines of €580,000 in July after losing an appeal in the Luxembourg-based EU General court over antitrust allegations. While Qualcomm and Apple also meet in court over a patent dispute, they both are under the looking glass by the European Commission.

Apple’s case won’t be heard by the EU’s General Court before 2018, but the US tech giant is appealing the decision based on several factors, including that, according to Apple, the “commission failed to recognise that the Irish branches carried out only routine functions and were not involved in the development and commercialisation of Apple IP which drove profits”.

The jury is still out on whether retroactive cases can have a desirable effect in informing companies’ tax strategies. Ivo Entchev, attorney at New York-based Holwell Shuster & Goldberg, tells TP Week that this regulatory climate injects uncertainty into tax planning of companies. “[It] demands that companies be prepared to offer strong defences of the business purposes of tax-lowering structures, including those that have already been blessed by [EU] member states.”

“Tech and digital companies should be on notice that the EC is pursuing a pragmatic mode of tax enforcement that interprets tax rules, including those relating to permanent establishment, in ways that tend to foreclose perceived tax avoidance schemes,” Entchev comments. “The Apple case undermines Ireland as a destination for US tech companies because it underscores that favourable local tax rulings are not necessarily the final word on the matter.”

“However, the EC fine against Apple may yet be reversed on appeal and companies can seek to mitigate their risk by requesting that Ireland consult the EC on the legality of its future rulings before they are implemented,” he adds.

The EC had last month begun to exerted pressure on the Irish government for not executing its order to collect money from Apple within four months of the ruling.

Ireland, however, has been reluctant to enforce the order as it denied state aid allegations, and is also concerned by potential lawsuits that Apple could bring on for missing returns from the €13 billion if its appeal succeeds. On Saturday Paschal Donohoe, minister for finance and public expenditure and reform, said, “Due to the unprecedented quantum involved, and the complexities of the European Commission decision, this is a novel and highly intricate process requiring time to implement.”

Ireland’s former Finance Minister Michael Noonan at the time expressed dismay over the EC ruling, saying "this affects how Ireland could be treated by other jurisdictions, damages Ireland's credibility in the international tax debate and inhibits Ireland in pressing arguments that serve our national interest.”

In 2015, Apple was among the top 15 export companies in Ireland, according to the Irish Exporters Association, with Microsoft and Google Ireland taking first and second place respectively.

With Love from Brussels

The EC and Margrethe Vestager, European commissioner for competition, are said to have been on the warpath against Silicon Valley companies in Europe over the past three years, with Apple being among the crown jewels.

Vestager on her most recent visit to Washington, DC, earlier in March said the EC would like to bring “the question of subsidies into international competition fora where global antitrust agencies discuss cooperation and convergence”.

Meanwhile, Sean Heather, vice president of the US Chamber of Commerce’s Center for Global Regulatory Cooperation, wrote in a blog post on the eve of Margrethe Vestager’s visit to Washington DC in March that “periods of transatlantic divergence lie ahead”.

Doug Stransky, partner at Sullivan & Worchester in Boston, tells TP Week: “Every US-based multinational has known about the concept of illegal state aid for years, but until the Apple case did not fully appreciate that these rules would actually be invoked.”

“Indeed, as we have seen, there is no time limit on how far the EC can go back to look at something even if the statute of limitations have otherwise closed in the country. Going forward, all US-based multinationals should spend more time considering the implications of the rules around state aid,” says Stransky.

“To the extent that companies are considering new investments in countries, eg., as a result of an acquisition, the implications of state aid, BEPS and the MLI have to be considered. This is even more important with the potential US tax reform that will likely have a major impact on how US-based multinationals conduct business,” warns Stransky.

Under Siege

Tax authorities in Europe have increasingly focused audits on applications of permanent establishment (PE) of technology companies. At the end of 2015, Apple settled allegations in a PE dispute with the Italian tax authorities, paying €318 million.

In a recent success by a tech company in France, Google was, for now, able to fend off a €1.1 billion bill in back taxes as a Paris court rejected claims that the tech giant has a permanent establishment for which it should be paying taxes. The Finance Ministry is already preparing to appeal the decision.

Google also got slapped by the EC on June 27 with a record-fine of €2.4 billion for breaching European antitrust rules by abusing market dominance in favour of its own shopping service.

Transatlantic Movements 

Reports earlier in July indicated that the US had filed an application with the EU General Court in support of Apple against the retroactive recovery.

Stransky reminds TP Week that while the Trump administration has not spoken publicly about these state aid cases and its possible response, Finance Committee members of the US Congress, Republicans and Democrats jointly, had sent a letter in January 2016 to the US Treasury, stating that if the EU Commission imposes retroactive state aid penalties on US companies, then the US should impose Code section 891.

Stransky points to this interesting section of US tax law, where the Internal Revenue Code, section 891, states that “whenever the President finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, the President shall so proclaim and the rates of tax imposed . . . shall . . . be doubled . . .”, up to tax rates of 80% for companies in those countries.

“In light of the Trump administration’s public comments on the trade imbalance in general and its protectionist stance, one could imagine that if these state aid investigations lead to more taxes on US-based multinationals that the Trump administration would respond,” Stransky says.

Other commentators have mooted the idea that the current US administration may not take an aggressive position on the EU’s tax and state aid cases for the simple lack of expertise in such matters and, instead, focus on domestic tax reform.

The US is indeed busy introducing its own tax reform, which includes a proposal for a one-off tax amnesty to encourage American businesses to repatriate profit from abroad.

Speaker of the House of Representatives Paul Ryan said on June 20 in Massachusetts that reform would be done in 2017, as the US with “the worst business tax code in the industrialised world” couldn’t compete internationally with countries such as Ireland that have a 12.5% corporate tax.

However, New York-based attorney Entchev believes that a reaction from the Trump administration is perhaps more likely than under the Obama administration.

“President Obama admonished European regulators for engaging in what he saw as blatantly protectionist policies against US tech giants that were merely disguised in the rhetoric of higher ideals. But the Obama administration itself had a globalist agenda. With an openly protectionist administration now in Washington, a clash with Europe over regulators' clampdown on US tech companies seems more likely,” Entchev says.

MNEs have now taken note. Aligning tax compliance with OECD transfer pricing guidelines does not guarantee a free pass in Europe, especially as the EC challenges national interpretations, the Atlantic rift is set to widen.

The above article was published on on 24 July 2017 and has been republished with the approval of the Publisher.