The EU’s method for tackling corporate tax avoidance could harm investment
Christian Stensrud, 11 November 2016
On Wednesday Ireland submitted a formal appeal to the EU courts regarding the European Commission’s ruling that it must claim back €13 billion in taxes from Apple. Back in August the Commission ruled that two Irish tax rulings, one in 1991 and one in 2007, allowed Apple to pay a very low effective corporate tax rate, ranging from one per cent in 2003 to 0.005 per cent in 2014. These tax rulings were deemed illegal under EU state aid rules because they allowed Apple to pay less tax than other businesses.
The Commission’s Apple ruling is part of a wider set of Commission investigations into past tax rulings made by national tax authorities. The investigations started in 2013, and since then a number of national tax rulings have been declared illegal, including in Luxembourg and the Netherlands. Both countries have said that they will also appeal these decisions.
By deeming these countries’ past tax rulings as illegal, some of which were granted over ten years ago, the Commission is changing a member state’s tax arrangements and then ordering that state to collect back-taxes based on these changes. For example, Ireland has been ordered to collect retrospective taxes for ten years, from 2003 to 2014, even though Apple were paying tax rates Ireland had agreed to in the two tax rulings.
The courts should overturn the Commission’s rulings in all three cases. Otherwise a precedent will be set whereby EU states do not have the capacity to honour all of their tax rulings, thereby making them insecure and open to challenge.
If the courts don’t, then many businesses will become uncertain about tax rulings they have negotiated or will negotiate with an EU member state. This uncertainty will make some multinationals think twice about new or continued investment in any EU member state, and many could retrench their planned investments, thereby hampering foreign direct investment (FDI). This could particularly hurt the Irish economy since FDI accounts for a huge proportion of jobs and exports. This is one of the main reasons behind Ireland’s appeal.
This is not to say that companies like Apple shouldn’t be paying their fair share – they should. But any changes to corporation tax arrangements should be made clear from the start, and a company should only have to pay penalties on behaviour after these rules have been made clear. This strategy is fair and it will not hamper investment like the EU’s current retroactive strategy. The first step in enacting this new strategy would be for the courts to annul the Commission’s rulings against Ireland, Luxembourg and the Netherlands.