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Explained: Why Ireland fought for its tax structure, refusing €13 billion from Apple

Critics have said that the ruling exposed the EU’s lack of arsenal in dealing with corporate tax avoidance– a problem that is being acutely felt as countries face Covid-19’s mammoth economic costs.

By: Explained Desk | New Delhi | Updated: July 19, 2020 11:41:29 am
apple, european commission, apple 13bn euro tax, Concluding that Ireland had provided illegal aid to Apple, the Commission had in 2016 ordered the company to repay the Irish government €13 billion in back taxes. (AP Photo/Mary Altaffer)

In a blow to efforts by the European Union’s executive body to rein in member states that offer tax advantages to large multinationals, the 27-member bloc’s second-highest court on Wednesday ruled in favour of the tech giant Apple, holding that the American company did not owe the Irish government €13bn (around Rs 1.1 lakh crore) in back taxes.

The General Court was hearing a joint appeal by Apple and the Irish government against a 2016 decision of the European Commission, which found that Ireland had given Apple an unfair tax advantage from 2003 to 2014, and had ordered the island nation to recover €13 billion from the technology company.

While the verdict has been welcomed by Apple and the Irish government, critics have denounced it as a setback to the EU’s tax collection efforts– which have become increasingly important in the wake of Covid-19’s economic fallout.

What did the European Commission say in 2016?

Ireland is the base of Apple’s operations in Europe, Africa, and the Middle East. Its office has been in the southern city of Cork since 1980, where it employs around 5,000 people.

In August 2016, the European Commission said that the Irish government had been illegally favouring Apple, giving it advantages that it had not offered to other companies. It alleged that Apple’s “so-called head office” in the country “only existed on paper”, and accused Ireland of allowing the company to pay “substantially less tax than other businesses over many years”.

The Commission said that by using two shell companies incorporated in the country and with the agreement of Irish tax authorities, the tech giant had been able to pay an effective corporate tax of 1 per cent on profits that it earned from across the EU in 2003. In 2014, its tax payment was as low as 0.005 per cent.

Concluding that Ireland had provided illegal aid to Apple, the Commission had ordered the company to repay the Irish government €13 billion in back taxes.

In September 2018, Reuters reported that Apple had finished wiring the vast sum, as well as an additional €1.2 billion (around Rs 10,000 crore) in interests. The money was held in an escrow account, its fate awaiting the completion of legal proceedings.

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So, why did Ireland refuse this money?

Ireland’s low corporate tax rate is a key feature of its economic policy. At 12.5 per cent, it is the second-lowest in the EU. It also has a relatively lenient data protection regime.

These factors have been instrumental in attracting large tech companies to the island, where American companies like Apple directly or indirectly account for about 20 per cent of all jobs, according to a Bloomberg report.

So, to protect its image as an investment destination for large companies, the Irish government took the view that Apple should not be obligated to pay back taxes. Thus, foregoing the massive amount, it jointly appealed with the company against the European Commission’s decision.

What did the court rule?

Annulling the 2016 decision, the Luxembourg-based court said that the European Commission had failed to prove Ireland’s breach of EU competition rules, and “did not succeed in showing to the requisite legal standard that there was an advantage”.

The Irish foreign ministry welcomed the verdict, saying,“Ireland has always been clear that there was no special treatment provided”. Apple, too, said, “This case was not about how much tax we pay, but where we are required to pay it.”

In the next two months, the Commission can choose to appeal the General Court’s decision at the European Court of Justice— the EU’s highest. According to a Financial Times report, chances of success are low, given that the Commission has lost the case at the General Court because of not meeting the burden of proof.

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Impact on the EU’s taxation efforts

Many have called the verdict a setback for the European Commission, which has in the past gone after several large multinationals including Starbucks, Amazon, and McDonald’s while scrutinising tax deals by member states that allow companies to declare profits in low tax jurisdictions– such as Luxembourg, the Netherlands, and Ireland.

This is also the second time that the Commission’s efforts have suffered a jolt; its case against Starbucks getting overturned last year.

Critics have said that the ruling exposed the EU’s lack of arsenal in dealing with corporate tax avoidance– a problem that is being acutely felt as countries face Covid-19’s mammoth economic costs.

Some experts believe that the ruling could bring together EU states to crack down on Ireland and other low-tax regimes, as well as bolster resolve within the Union for imposing a digital tax on large tech firms.

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