Apple set to lose billions in EU state aid case
The Financial Times reported on September 30th that the European Commission has decided to open a formal investigation into whether Apple received illegal subsidies (“state aid,” in EU-speak) from Ireland going as far back as 1991. The FT quotes “people involved in the case” as saying that this can cost Apple billions of euros.
What the decision technically does is establish what is known as an “Article 108(2)” investigation, which means that the Commission has concluded from its preliminary investigation that state aid has been granted in violation of the EU’s competition policy rules. It is therefore opening a more comprehensive investigation. It is worth noting that if the Commission opens an Article 108(2) investigation, it almost always decides that illegal state aid was given. The only recent exception I can think of is state aid from Poland to relocate Dell computer manufacturing from Ireland in 2009, and I actually think the Commission should have ruled against that as well, as I discussed in my book Investment Incentives and the Global Competition for Capital.
As I speculated in June, one issue raised by the Commission is Apple’s “nowhere” subsidiaries created under Irish law. Both Apple Operations Europe (AOE) and its subsidiary, Apple Sales International (ASI), are incorporated in Ireland, hence not immediately taxable by the United States until they repatriate their profits to the U.S. However, they are managed from the U.S., which by the provisions of Irish tax law makes them not taxable in Ireland. It is these provisions that are at issue in the case. See, in particular, paragraphs 25-29 of the decision, especially paragraph 29: “According to the information provided by the Irish authorities, the territory of tax residency of AOE and ASI is not identified.” Richard Murphy suggests today that these corporate provisions account for the largest proportion of Apple’s tax risk.
What is especially important for this investigation (and the similar ones of Starbucks and Fiat) is that if the Commission finds that state aid was given, it was never notified in advance to the Commission. The state aid laws require that any proposed subsidy be notified in advance and not implemented until approved. Ever since the 1980s, the penalty for giving non-notified, illegal (“not compatible with the common market”) aid is that the aid must be repaid with interest. Since this alleged aid was not notified, and will probably be found to be incompatible with the common market, Apple will be on the hook for aid repayment.
As I reported in June, this would not be the first time the Commission has used the state aid law to force changes to Ireland’s tax system. In 1998, it ruled that Ireland’s 10% corporate income tax for manufacturing was specific enough to be a state aid. Ireland then reduced the corporate income tax to 12.5% for non-manufacturing firms, while raising it to that level for manufacturing (mainly foreign multinational) companies.
If the Commission rules against Ireland and Apple, this will send a signal that the European Union is going to take tax manipulation very seriously with all the tools at its disposal. It would be especially great to see one of the pioneers of arcane tax avoidance strategies taken down a notch. For Ireland, at least there would be a small silver lining from losing this case: Apple’s aid repayment would go to Ireland and help reduce its budget deficit.
Cross-posted from Middle Class Political Economist.
About time. I am an apple customer (iPhone 6+ supposed to be here Monday) and shareholder but consistently frustrated with this transparent and (now clearly illegal) tax dodge.
They can easily afford it and it’s at least as important as their much PR flogged green initiatives. I notice the stock is off on the news maybe this is a buying opportunity.
I’m bullish on the company and particularly the new CEO Tim Cook. But it’s time for them to walk the talk here.
All tax controversies are eliminated when governments abandon antiquated tax policy..
Today, that policy is the taxation of production, that is, all taxes are based on income, earnings and profits. That system worked when nearly all production, AND CONSUMPTION, occurred within the same tax jurisdiction. But, that hasn’t been the case since the end of World War II. Today’s economy is global, meaning goods are produced here and consumed there. This has led to a massive shift in manufacturing locale due to differences in tax rates. The migration of manufacturing to Asia is influenced by the cost of labor, but the primary reason is the disparity of production tax rates.
In this environment an item produced in a low tax jurisdiction is not taxed at all in the jurisdiction where it is consumed. To overcome this, consuming tax jurisdictions enact highly complex rules/regulations to eliminate the disparity. However, as we’re seeing play out here, enforcement of those rules are inconsistent. One must remember that corporate resources will always exceed governmental enforcement budgets. The brightest tax attorneys work in the private sector, and there are more of them. Using the complexities of regionally based tax laws to benefit clients has been going on for a very, very long time.
A simpler and fairer method of taxation is taxing consumption. Value Added Taxes (VAT) are a move in the right direction, but have two drawbacks. The first is that VAT’s do not tax the original value of imported goods, leaving intact disparities in regional tax rates. Secondly, VAT rules/regulations can be just as complex as production tax rules.
A national sales tax taxes imported and domestically produced goods equally, with the side benefit of being far more transparent to the consumer than are the multiple layers of hidden production taxes.
Bottom line is that production taxes encourage elaborate, though legal, schemes to avoid them, discourage work and savings/investment. On the other hand, consumption taxes encourage work (you keep what you make), savings/investment (again you keep what you earn), and manufacturing (increasing employment while reducing government subsidies to the unemployed).
The only resistance to consumption tax policy are the so-called social engineers that want to emphasize taxation on higher earners. Consumption tax policy continues this desire (but eliminates the election issue), as higher earners buy more expensive goods (and more of them) than do lower earners. What the social engineers fail to tell their constituents is that corporations do not have money printing machines. Corporations are nothing more than tax collecting agents of the government, collectors embedded taxes from those that buy their products. In other words, production taxes, whatever they may be, are passed on to the consumer in the form of higher prices.
Uh, no, false, Apple is not set to lose billions. The EU does not have that power. Please read Tim Worstall’s piece on iy.
http://www.forbes.com/sites/timworstall/2014/09/29/the-european-commission-is-not-about-to-fine-apple-nor-even-to-accuse-the-company-of-anything/
JDSoCal, Worstall quite explicitly says that the Commission can order illegal aid to be repaid. And he is right that aid repayment is not a “fine,” a term which has no place in state aid enforcement. The journalists using that word are simply wrong.
Given how much various analysts have said Apple has saved with its Irish tax arrangements, the Commission could indeed rule that the state aid totals in the billions. And the fact that the Commission has opened an official investigation greatly increases the chances that it will rule against Ireland and Apple.