Apple, the ECJ and the OECD: The End of Ireland’s Corporate Tax Regime?

APPLE, THE ECJ AND THE OECD: THE END OF IRELAND’S CORPORATE TAX REGIME?

Calem Martin

Introduction

Irish lawmakers breathed a sigh of relief following the General Court’s opinion in Ireland v Commission. 35 A four-year standoff between Ireland and the European Commission, following its ruling that Apple owed Ireland €13 billion in back taxes, seemed resolved. In ruling that Ireland’s tax arrangement with Apple did not constitute state aid and that therefore no money was owed, the General Court seemed to have spared Ireland’s tax regime a severe blow. Despite this verdict, the future of Ireland’s tax regime remains uncertain. The Commission immediately announced its intention to appeal. Meanwhile, the case has put Irish tax arrangements under unprecedented scrutiny which may lead to legislative responses, the most significant of which is the introduction of a global minimum corporate tax.

This paper argues that Ireland’s tax regime in its current form will not survive these developments. Ireland’s ability to make favourable trade rulings with multinational corporations will be severely undermined by the Apple case. Even if the Court of Justice does not overrule the General Court, legislation is likely to curtail such activities. Moreover, the global minimum tax will end Ireland’s 12.5% corporate tax rate which has been a major draw for foreign direct investment.

Ireland v Commission

The case concerned two subsidiaries of Apple, Apple Operations Europe (AOE) and Apple Sales International (ASI), both of which were incorporated in Ireland but were not tax resident there.36 The subsidiaries did not pay US corporate tax as they were incorporated in Ireland. However, they were exempt from most Irish taxes as their head

35 Cases T-778/16 and T-892/16, Ireland and Others v European Commission [2020] ECLI:EU: T:2020:338. 36 On State Aid SA.38373 (2014/C) (ex 2014/NN) (ex 2014/CP) implemented by Ireland to Apple Commission Decision (EU) 2017/1283 [2016] OJ L187 [45]. 132

office was deemed to be that of their parent company in California.37 The issue was whether two Irish tax rulings made in 1991 and 1997 provided Apple with state aid in violation of Article 107(1) TFEU.38

As the tax rulings were directed solely towards Apple, the Commission held that they were selective.39 Meanwhile, as they gave Apple the advantage of substantially lower taxes, it was held that they had the effect of distorting competition.40 According to the Commission, their effect was that ASI and AOE had substantially lower taxable profit than that of similar companies with corporate tax arrangements in Ireland. In determining this, the Commission applied the arm's length principle that the allocation of profits between associated companies must be reasonably approximate to what would occur between independent companies as a result of normal market forces.41 Apple's allocation of profits between its subsidiaries violated this principle and gave them an unfair advantage. This was the basis behind the Commission’s order that Apple pay Ireland €13 billion.

The General Court reversed this decision. It held that the Commission failed to show that the Irish tax rulings gave a selective advantage to the Apple subsidiaries.42 While the Court rejected Ireland’s argument that the arm’s length principle did not apply, it held that the allocation of profits between the subsidiaries did not breach this principle.43 Meanwhile, it held that even if the Irish tax authorities had given the Apple subsidiaries favourable treatment to other companies in a similar situation, this was within the scope of their discretionary powers.44 Therefore the tax rulings did not constitute state aid. This ruling vindicated the arguments of Ireland and Apple and appeared to support the legality of Ireland’s provision of favourable tax rulings to multinational corporations. Although a favourable outcome for the Irish government, the case is not resolved. Following this verdict, Commission Executive Vice-President Margrethe Vestager

37 Chantal C Renta, 'A Cute Cowboy Stole Our Money: Apple, Ireland, and Why the Court of Justice of the European Union Should Reverse the European Commission's Decision' (2018) 24 Sw J Int'l L 177, 196. 38 On State Aid (n 2) [9]. 39 ibid [361]. 40 ibid [222]. 41 ibid [235]. 42 Cases T-778/16 and T-892/16, Ireland and Others v European Commission [2020] ECLI:EU:T:2020:338 [505]. 43 ibid [225], [249]. 44 ibid [495]-[496].

announced the intention of the Commission to appeal the case before the Court of Justice.45 In the appeal, the Commission argued that the General Court made several errors of law relating to the finding of advantage.46 It further argued that the Court of Justice should set aside the verdict and refer certain questions back to the General Court. The appeal remains pending.

A ruling against Ireland would have the effect of drawing out an already protracted case while increasing uncertainty among investors. It would force Ireland to reassess several of its tax rulings with other multinationals. Ireland’s use of tax loopholes to attract multinationals would be severely hindered. Meanwhile, the intake of €13 billion in unwanted tax revenue would provoke a response from the US, who believe that the income, if collected, should be theirs. While this case may not in and of itself end Ireland’s tax regime, it may provoke a legislative response which would erode the existing system.

Legislative Reforms

The Court of Justice may uphold the verdict of the General Court. However, the saga has put heightened scrutiny on the tax arrangements between multinational companies and so-called ‘tax havens’. The Apple subsidiaries in Ireland were paying extremely low effective tax rates due to their ability to shift profits offshore, with ASI only allocating €50 million of its €16 billion profit to Ireland.47 While Ireland may win this particular case, both the US and EU have made moves to curtail companies shifting profits offshore to avoid their tax liabilities.

It could be argued that Apple should not be punished for making use of a bona fide tax loophole.48 However, these loopholes, while important tools for Ireland, may be closed by legislative reform. The Biden administration has proposed a minimum tax of 21% to

45 European Commission, ‘Statement by Executive Vice-President Margrethe Vestager on the Commission's decision to appeal the General Court's judgment on the Apple tax State aid case in Ireland’ (25 September 2020) <https://ec.europa.eu/commission/presscorner/detail/en/statement_20_1746> accessed 15 January 2022. 46 Case C-465/20 P, Appeal brought on 25 September 2020 by European Commission against the judgment of the General Court (Seventh Chamber, Extended Composition) delivered on 15 July 2020 in Joined Cases T-778/16 and T-892/16, Ireland and Others v Commission [2021] 2021/C 35/33. 47 Rita Barrera and Jessica Bustamante ‘The Rotten Apple: Tax Avoidance in Ireland' (2018) 32(1) The International Trade Journal 150, 152. 48 Renta (n 3) 196.

be recouped from the foreign earnings of all US multinationals.49 This would reduce the tax incentive for such companies to shift profits abroad and therefore undermine the Irish tax model, which corporations such as Facebook, Google and Apple have taken advantage of.

This would present Ireland with a dilemma. Ireland could risk continuing with a lowtax model, despite the fact that its benefits would be greatly reduced. Conversely, it could increase its corporation tax to a moderate level, which would be a profound alteration of the state’s fiscal model. Regardless of the direction Ireland decides to move in, such a measure would change the nature of the Irish corporate tax system, which is in many ways designed to attract US multinationals.

The European Commission has also sought to clamp down on tax avoidance by multinational corporations. In her statement on the Apple case, Commissioner Vestager stressed that the Commission will propose ‘legislation to address loopholes and ensure transparency’.50 Having previously investigated Google and Amazon, the case reflects the Commission’s desire to eliminate illegal state aid and tax loopholes, which it has indicated will continue regardless of the outcome before the Court of Justice.51

Ireland has plenty to be concerned about in maintaining its corporate tax structure due to the potential responses from both the EU and US. The US in particular has an incentive to act against such arrangements and to prevent the Commission ruling that unpaid tax from US multinationals be paid to the EU member state they reside in.52 Therefore, while the appeal is a concern to Ireland, the response of the US would severely limit Ireland’s ability to operate as it has previously.

Global Minimum Tax

While the Apple case concerns individual arrangements with multinational corporations, Ireland’s tax system is facing challenges on another front. Ireland’s 12.5% corporate tax rate has long been considered instrumental in attracting foreign direct

49 Kimberly Clausing, Emmanuel Saez and Gabriel Zucman, ‘Ending Corporate Tax Avoidance and Tax Competition: A Plan to Collect the Tax Deficit of Multinationals’ (2021) UCLA School of Law, Law-Econ Research Paper 20/12, 4 <https://ssrn.com/abstract=3655850> accessed 15 January 2022. 50 European Commission (n 11). 51 ibid; Renta (n 3) 202. 52 Renta (n 3) 204-6.

investment.53 While European leaders have at times criticised Ireland’s substantially lower corporate tax rate and made references to fiscal harmonisation, this arrangement finally seems to be coming to an end. On 7 October 2021, the Irish government agreed to global tax reforms that would introduce a minimum corporate tax of 15%.54

There are some caveats. The increase will not be introduced until 2023 and even then will only affect firms with a turnover above €750 million.55 However, this represents a fundamental shift in Irish tax policy. Even during the most stringent Troika-imposed austerity, corporate tax was considered non-negotiable by successive Irish governments.56 The fact that the Irish government has accepted an alteration, albeit a partial one, displays an irreversible move away from the status quo. It is a concession that Ireland must adapt to reforms amid an increasing belief that corporate tax is a global issue rather than one for national policymakers. While it remains to be seen how this change will affect Ireland’s ability to attract investment, the longstanding 12.5% corporate tax rate is finally coming to an end.

Conclusion

Ireland’s corporate tax regime is undergoing several developments that it will be unable to survive. The Ireland v Commission appeal before the Court of Justice may determine that its arrangement with Apple constituted state aid and cause the Irish state to unwillingly recoup €13 billion. Significantly, that would render several of Ireland’s tax rulings with US multinationals illegitimate. Meanwhile, the US has formulated a policy that would eradicate the ability of its multinationals to use states such as Ireland to allocate profits offshore. Finally, in signing up to the global minimum tax, Ireland is accepting that it must move beyond its most vital fiscal policy. While Ireland’s corporate tax regime may not be at an end just yet, it is nearing an inevitable defeat from either legislative or judicial means.

53 Boyu Wang, ‘After the European Commission Ordered Apple to Pay Back Taxes to Ireland: Ireland's Future in the New Global Tax Environment’ (2018) 25 Ind J Global Legal Stud 539, 544. 54 Department of Finance, ‘Ireland joins OECD International Tax agreement’ (7 October 2021) <https://www.gov.ie/en/press-release/59812-ireland-joins-oecd-international-tax-agreement/> accessed 15 January 2022. 55 ibid. 56 Julien Mercille and Enda Murphy, Deepening Neoliberalism, Austerity, and Crisis: Europe’s Treasure Ireland (1st edn, Palgrave Macmillan 2015) 60. 136