What the EU Court Ruling On The Apple-Ireland Tax Case Means
By Isha Neurgaonkar
On 15th July, the European General Court in Luxembourg ruled that the Republic of Ireland did not give Apple illegal state aid, reversing the decision of the European Commission. In 2016, the Commission stated that Ireland broke EU state aid rules by granting undue tax benefits to Apple. It had ordered the Irish government to collect €13.4 billion of unpaid taxes from 2003–2014.
Ireland has one of the lowest corporate tax rates in the EU (12.5%). It is Apple’s base for Europe, the Middle East and Africa. In 2016, the European Commission said that Ireland had allowed Apple to attribute nearly all of its EU earnings to an Irish head office that only existed on paper, thereby avoiding paying tax on EU revenues. The Commission declared this constituted illegal aid given to Apple by the Irish state. The Irish government argued that Apple should not have to repay the taxes, deeming that its loss was worth it to make the country an attractive home for large companies.
In 2014, Apple’s Irish structure consisted of two subsidiaries, Apple Operations Ireland (AOI), an Irish-registered holding company and the Apple Sales International (ASI) an Irish-registered subsidiary of Apple Operations Europe (AOE). Apple did not follow the Double Irish structure by using two separate Irish companies but instead used two separate branches inside one single company, ASI. The EU Commission alleged this was illegal state aid. This structure was not offered to other multinationals in Ireland, which had used the traditional “two separate companies” version.
The Commission argued that the rulings allowed Apple to make most of its European sales through an employee-less head office, which was non-resident for tax purposes. Only the activities of the Irish branches within the same units were subject to tax in Ireland. The intellectual property behind Apple products lay inside these Irish branches, signifying that most of the profits were taxable by Revenue. Apple argued that it was held outside the branches and controlled by the group headquarters.
A report from the OECD predicts that the rate of Foreign Direct Investment (FDI) internationally may fall by 30-40% as companies re-evaluate their strategies post the COVID 19 pandemic. FDI has been an integral part of the Irish economic strategy since the 60s. To this day, the Irish economy is still reliant on FDI. Eduardo Baistrocchi, a professor of tax law at the London School of Economics, described Ireland as a “non-G20 hub in the international tax system” to DW. He then explained that Non-G20 hubs are “a group of countries that connect multinational enterprises (MNEs) with market jurisdictions to minimise the tax entry and tax exit costs of the MNEs. Ireland connected Apple with markets across all continents. Baistrocchi also remarked that “in 2014, for every $1 million of profit that Apple earned from its European operations, Apple paid $50 tax in Europe: an effective tax rate of 0.005%.”
According to both Baistrocchi and Liz Nelson at the Tax Justice Network, this problem is global. Baistrocchi comments that the tax-hub model is not prohibited by the international tax regime. Thus, the international tax regime is “broken” due to the power and influence of big multinationals like Apple. While the General Court said that there were “inconsistencies” and “defects” with Revenue’s approach, the Commission failed to show that the outcome was flawed and that Apple paid less tax than it should have. The ruling of the court has since been appealed by the European
Commission before the Court of Justice of the European Union, the EU’s highest court.
In the current global politico-economic scenario (where all countries are fighting to gain more in an environment of uncertain economic globalisation), abiding by the rules of geopolitical organisations like the EU and implementing strong FDI policies are both important factors for the growth trajectory of relatively smaller economies like Ireland. Ultimately, balancing these factors correctly could help both national and global economies and businesses thrive.