EU Apple ruling – Will Europe’s “Vodafone” moment
unleash a global tax war?
News item offered by Taxsutra, week 37, 1 September 2016
In one of the most controversial moments in the war on corporate tax avoidance in recent
times, the European Commission (the executive arm of the European Union) has ordered
Ireland to recoup EUR 13 billion in back taxes plus interest from Apple, after ruling that a
special tax arrangement to route profits through Ireland was illegal State aid. This landmark
ruling (which is being seen by the United States as an assault on the international consensus
via BEPS on tackling tax avoidance) has certainly complicated international tax diplomacy.
In a defiant statement, the tech giant has accused the European Commission of launching “an effort
to rewrite Apple’s history in Europe” and “upend the international tax system”. For us Indians, it is
but a striking reminder about India’s own “Vodafone” moment, triggered by retrospective
amendments to the tax law relating to indirect transfers that also sent the global tax fraternity into a
tizzy.
Does this historic verdict pave the way for an international political and financial dispute over the
European Commission’s role and authority? Will Europe’s Vodafone moment unleash a global tax
war? Does this ruling cast a murky shadow over the implementation of BEPS?
Leading tax experts share their views.
P. V. Srinivasan
(Corporate Advisor)
The “Double Irish Dutch Sandwich” structure put in place by US
corporations has received its first blow. The EC verdict on the preferential
tax regime allowed by Ireland to Apple is indeed unprecedented, since the
tax bill of EUR 13 billion is not a result of any claim of Ireland. Ironically, no
country wanted the tax, and yet the tax is imposed! At first glance, it may
appear to be a ruling which encroaches on the sovereign taxation powers of
Ireland as an EU Member State. If one looks at the regime holistically, it is
the application of EU directives which has allowed segmenting royalty streams within the European
Union in a tax-neutral manner.
The EU verdict is possibly founded on the premise that intangibles of Apple were residing in Ireland
on account of a pre-concluded cost sharing agreement between Apple Inc., United States, and its
subsidiary in Ireland. The cost sharing agreement is governed by US regulations. Ireland was only a
beneficiary of the US regulations. If any country at all could be aggrieved by Apple’s tax
arrangement, it is the United States. Further, the United States has allowed loopholes in its
controlled foreign corporation regulations to remain, but for which the royalties from intangibles
would have been taxable in the United States. If one makes a quick analysis, no EU Member State
has foregone much tax on profits of Apple. Ireland, ordinarily, would have imposed a tax withholding
on the royalty pay-outs. But it is the Dutch subsidiary that received the royalty paid by the Irish
subsidiary. The tax withholding was not required on account of an EU directive, and it is not a relief
granted by Ireland on its own.
The European Commission would have no jurisdiction to decide on tax regulations of the United
States, which is the crux of the matter. I guess this will be the contention once the EC verdict is
appealed against. It is no more a mere tax litigation. The White House will express solidarity with the
US corporations, and rightly so. Harmful tax practices, no doubt, should be curbed. The EC verdict
EU Apple ruling – Will Europe’s “Vodafone” moment
unleash a global tax war?
News item offered by Taxsutra, week 37, 1 September 2016
is apparently a message to the EU Members States against granting preferential tax regimes,
though it is Apple at the receiving end now.
Porus Kaka
(IFA President & Senior Advocate)
There seems to be a transatlantic tax war brewing. The Apple decision of the
European Commission is today one of the largest tax claims ever. The
decision is at the heart of a conflict between a country’s (in this case, Ireland’s)
sovereign right to levy taxes and its commitments to a union of states not to
encourage illegal state aid and thereby infringe competition. The issue stems
from a ruling that Ireland provided that allowed Apple to reduce its effective
rate of tax in the European Union. It is also coming at a time when the European Union is taking a
significantly proactive stance against what is perceived as tax avoidance. To prevent such rulings,
the OECD’s BEPS Action 5 is being worked upon. The last has not been written on this, and now
the case will proceed to the General Court of the European Union in Luxembourg and then to the
European Court of Justice.
Vipul Jhaveri
(Managing Partner – Tax, Deloitte Haskins & Sells LLP, India)
The principle enunciated in the BEPS Action Plan of taxing profits where
economic activity takes place and value gets created has been tested in the
Apple ruling. What’s also interesting is the European Commission propounding
previously unarticulated theories on impermissible State aid arising from a
Member State’s tax policy and rulings that hitherto was generally assumed
permissible, and applying it to past years, which in effect is retroactive. The Apple
ruling may well pave the way for the new tax order that is evolving for MNEs.
Ajendra Nayak
(Partner, International Tax Services, Ernst & Young LLP, India)
Recently the European Commission initiated a series of State aid
investigations primarily involving US-headquartered companies that had
obtained tax rulings from EU Member States. The Commission’s State aid
investigations, if continued on their current trajectory, have considerable
implications for international taxation and MNEs with EU operations. Where
State aid involves impermissible subsidies provided through the tax system,
the Commission requires the Member State to recover the amount of tax that,
in the Commission’s view, should have been imposed in the first place. These amounts can be
significant, since the Commission can require recovery for up to 10 prior years, with interest for the
period the illegal aid is granted until the aid is recovered.
Because the Commission’s approach in the State aid cases is new and was not foreseeable by the
relevant companies, recovery of past allegedly unpaid tax would constitute retroactive enforcement
of a newly adopted approach to State aid. With no indication of the Commission’s new approach,
taxpayers have been receiving rulings from EU Member States for decades and had no reason to
doubt their legality. Governments worldwide understand and share the Commission’s strong interest
in preventing multinational companies from achieving double non-taxation. But the Commission’s
new interpretation of State aid doctrine threatens to undermine the well-established basis of mutual
cooperation and respect that many countries have worked hard to develop and preserve, particularly
in connection with the BEPS project.
EU Apple ruling – Will Europe’s “Vodafone” moment
unleash a global tax war?
News item offered by Taxsutra, week 37, 1 September 2016
Gautam Mehra
(Partner & India Tax Head, PwC India)
The European Commission clearly has the authority to investigate whether
tax regimes and specific agreements constitute State aid. However, with the
Commission now questioning agreements concluded between governments
and taxpayers, we have entered new and uncharted territory, and this has
created some considerable uncertainty. This decision by the European
Commission is likely to be appealed, so this uncertainty will continue until we
see the final judgment from the Court of Justice of the European Union. The
strong US reaction to the announcement reminds us that the tax reform agenda is international.
Implementing the OECD's recommendations in future tax systems, whilst maintaining the ability to
use tax and broader policies to attract business and investment, will be an important balance for
many governments around the world.
Dinesh Kanabar
(CEO, Dhruva Advisors LLP)
The European Union slapping a EUR 13 billion bill on Apple for back taxes –
quite a historic development! Individual country vs EU policies! And now it is
the United States vs the European Union! This fight is going to spill over, and
many other MNEs will be impacted. All those who have parked funds in
Ireland, like GE, Google etc., could face similar consequences. In some
sense, a tax war is emerging".
T.P. Ostwal
(Member, UN Committee on Transfer Pricing)
After the BEPS Action Plan, it was bound to happen, and that is a clear
indication of a crack in the Action Plan, as interested countries will not agree to
such unilateral measures. Hence, be prepared for BEPS II.