In today’s global economy, taxes for multinational enterprises can get elaborate, particularly as entities operate in multiple taxing jurisdictions and look for ways to minimize taxation. To crackdown on alleged profit-shifting offenders who seek to reduce local taxes by shifting gains to lower tax jurisdictions, the Organization for Economic Cooperation and Development (OECD) recently proposed their Base Erosion and Profit Shifting (BEPS) Action Plan. The European Union’s Commission (Commission) has started aggressively taking steps to target companies that they suspect have sought illegal state aid from European Union (EU) member countries through sweetheart deals (in violation of the EU Treaty). This list has included: Amazon, Starbucks, and Apple.
This summer, the Commission made a judgement against Apple after an investigation in June of 2014. They allege that Apple‘s tax deals with Ireland over the past two decades (that’s pre-iPhone time) were really illegal state aid and such as, was in violation of Article 107(1) of the EU Treaty. This allegedly detracted from the competitiveness of other member countries, and Apple was found liable for around $15 billion in back taxes.
Ireland’s corporate tax rate is 12.5%, making it an attractive nation for international companies to base their operations. Taking advantage of Ireland’s tax laws, Apple added a twist to their Irish operations known in tax slang as the ‘Double Irish’ (this was phased out in 2015, but it was used by a large number of multinational corporations). The Irish operations were considered to be a non-citizen as management was located in another country. This essentially created an Irish company on paper and therefore all EU sales, profits, and taxes flowed-through, thus escaping local taxes in EU member countries, not to mention most of Ireland’s taxes as well. The Commission estimates that by using said ‘Double Irish’ tax structure Apple lowered their taxes paid to under 1% in some years (in 2014 Apple paid an estimated $50 euros for every $1 million euros of profit).
The Commission ruled that these tax deals were in actuality illegal state aid that harmed fellow EU member countries. They propose to retroactively cancel a decade’s worth of tax deals and charge Apple for past taxes due, plus interest payable to Ireland. Apple plans to appeal. Ireland’s Finance Minister, Michael Noonan, has also proposed an appeal in European courts. Ireland would prefer not to lose its position as a base for many corporations.
On August 24 2016, the U.S. Treasury published a 25-page whitepaper alleging the EU Commission of overstepping its authority. Concerns were raised on retroactively negating tax deals from prior years and the uncertainty that it would then create. In evaluating the tax deal, the Commission used judgements on transfer pricing outside of the OECD’s recent BEPS guidelines (which themselves were designed as a tool for everyone to use). Additionally, if the tax penalty paid is viewed as a tax expense, Apple would then be able to also repatriate some of the billions of cash held overseas and not pay US taxes as the tax payment would create a foreign tax credit available to offset US tax. Senators Orrin Hatch and Chuck Schumer have voiced similar concerns of targeting U.S. companies and the U.S. tax base. The US Treasury continues to consider potential responses should the Commission continue its present course.