Many of our readers will no doubt have heard about the recent decision by the European Commission that Apple's tax structure in Ireland breached the EU state aid rules. But what, you may wonder, does that have to do with offshore funds? For me it raises an important question of principle of who should be deciding international tax policy for multi-national corporations and other companies – including investment funds – that operate on a cross-border basis in Europe.
As we've blogged about before, the OECD's been busy working on its BEPS plan to try to make the international tax system more joined up – and limit some of the mismatches that multi-national and other companies have for years (completely legally) used to reduce their tax bills.
Here in Europe, the European Council's also been working on introducing legislation building on BEPS and the Commission's 2015 Action Plan for Fair and Efficient Corporate Taxation in the European Union, via the Anti Tax Avoidance Directive. So far, this all looks suitably co-ordinated and sounds sensible when you bear in mind the Commission's website statement that "National governments are responsible for raising taxes and settling tax rates...The EC Treaty does not specifically call for direct taxes (income and corporate taxes) to be harmonised."
So how then does the 30 August 2016 state aid decision by the Commission about Apple's tax structure in Ireland fit into this?
Direct taxation, including corporate tax and the levels charged by an EU member state, looks like it should be dealt with by each state, co-ordinating with others to the extent agreed in any further anti tax avoidance directive, rather than at a centralised EU level. The Apple decision seems to throw that into doubt though, as the Commission decided that Ireland had given illegal preferential tax treatment to Apple under the EU state aid (competition) rules. The Commission's decision acknowledged that Apple's structure – which involved a head office not subject to tax in Ireland or elsewhere – was possible under Irish tax law. It also ruled though that Ireland's tax rulings endorsing a split within the relevant Apple company between its branch and head office amounted to a selective tax treatment of Apple in Ireland that is illegal under EU state aid rules and gave Apple a significant benefit compared to other businesses.
But how can the Council and Commission on the one hand be promoting a directive for all EU member states that recommends new tax rules in line with the OECD's BEPS plan, while the Commission's state aid team on the other hand is investigating and ruling on how multi-national companies should structure their businesses – and holding that they should pay more tax including retrospectively for up to a 10 year period under the state aid rules?
The Commission's press release said that "Apple would no longer be allowed to benefit from this tax treatment in Ireland". The Commission isn't a tax authority – or elected for that matter, but perhaps that's one for another day – so on what basis is it deciding Ireland's direct tax policy instead of leaving that to individual member states? Has the Commission decided that BEPS and the new directive won't achieve all of their anti tax avoidance goals and so it's trying to change EU tax policy via the backdoor of the state aid rules instead?
The Irish Government certainly seems to think that it is in charge of its own corporate tax policy as a matter of its sovereignty with various press quotes saying the European Commission doesn't have responsibility for tax and the Department of Finance's confirmation that Apple has paid all the tax it owes under Irish tax law. Similarly, the former EU competition commissioner Neelie Kroes was quoted in The Guardian saying the state aid rules should not apply to tax matters. She noted, "EU member states have a sovereign right to determine their own tax laws. State aid cannot be used to rewrite those rules. However, the current state-aid investigations into tax rulings appear to do exactly that."
The Irish government and Apple have announced they will be appealing against the Commission's decision and it will be interesting to see where the courts come out on the balance between state aid and member states' sovereign decisions on tax policy. The appeal can be expected to take a number years but will hopefully bring certainty for multi-national companies and other entities, including investment funds, that operate across borders in Europe. Those companies may currently be operating within the tax laws of the European jurisdictions where they've based their operations and clearly don't want to wake up one morning to find the Commission has decided they don't like the way they're structured, that they can't rely on the comfort they've received in good faith from their tax authorities, and that they owe massive amounts of back tax – in Apple's case, Euro 13 billion for 2003-2013.
This isn't the first time the Commission's used the state aid rules to decide that multi-nationals should be paying more tax. It strikes me that the courts now need to send a clear message that member states get to choose their own tax policy, not the Commission.
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