The European Union's recent ruling that Apple pay a huge penalty stemming from what had been a low-tax deal with Ireland prompts concerns about retroactive tax treatment of firms and the EU's own erosion of national tax sovereignty.

Philippe Braillard, who is Emeritus Professor at the University of Geneva, has already been published several times at this news service, discussing areas such as financial privacy and the Panama Papers saga. On this occasion, Prof. Braillard discusses implications of the European Commission’s recent demand that Apple, the American tech giant, pay billions of euros in tax to the Irish government, despite the Irish government actually not wanting such payment if it means its low-tax attractions are undermined. The saga highlights how the EU is, or is seen to be, eroding fiscal sovereignty of member states – a fact that was seized upon by proponents of Brexit in the UK recently. While some of the issues revolve around developments in Europe, the fact that a US business has been targeted will make this issue of interest to FWR's readers in the US. Google, for example, has fallen foul of EU anti-trust officials and a number of US-listed firms have taken advantage of low-tax jurisdictions to register their business in countries such as Luxembourg. With transatlantic relations and trade key issues in the current US elections, the way in which this issue has been handled and commented upon deserves close scrutiny by wealth management professionals in the US. 

As is always the case, the views of guest authors are not necessarily shared by the editors of this publication; such contributions are most welcome and we invite readers to respond. This article was initially published in French in the Swiss newspaper Le Temps and in German in Finanz und Wirtschaft, and is reprinted here with the author’s consent. We welcome responses from readers.

The European Commission's recent tax ruling on US multinational Apple, ordering it to pay a penalty of €13 billion ($14.5 billion), shows a clear desire to stop overly aggressive tax avoidance strategies used extensively by multinationals. The ruling seems entirely consistent with the OECD's BEPS (base erosion and profit shifting) programme. However, it also has a political dimension that should be highlighted.
The Commission is criticising Apple for having benefited from an enormous tax break, after setting up two subsidiaries in Ireland and forming agreements with the Irish government in 1991 and 2007. Apple's tax rate was apparently 1 per cent in 2003, and even as low as 0.005 per cent in 2014. For the European Commission, such arrangements, under which a company receives special tax treatment, breach European rules banning state aid.

Dublin strongly opposes the Commission's ruling, which is only natural because Ireland's attractive tax rules have been a central part of its economic strategy for around 40 years now. Foreign companies account for almost a quarter of private-sector employment in Ireland. Dublin disputes the notion that Apple has received any preferential treatment, and fears that this Brussels ruling will damage its economic development model by dissuading foreign companies from continuing to invest in the country. 

The Irish government is also accusing the European Commission of applying a new interpretation - of the transfer pricing principle regarding trading between a multinational's various entities - retrospectively to agreements formed 25 years ago between the Irish state and Apple. Finally, Ireland wants to defend its tax sovereignty, reminding observers that it has reformed its tax policy in recent years by removing arrangements that allow multinationals to gain unfair tax breaks, i.e. by eliminating cases of "stateless companies" and banning the "double Irish", a tax avoidance strategy used by certain US multinationals.

The European Commission, meanwhile, has jurisdiction over competition policy matters and its remit includes combating unjustified and unfair state aid. That is why it has decided to reclassify the tax agreement between the Irish state and Apple as state aid. It believes that, through this tax ruling, it is asserting itself against a powerful US multinational, striking a welcome blow against tax optimisation strategies. However, following the Brexit vote, there is concern that this interventionist approach, infringing a member-state's tax sovereignty, will strengthen the centrifugal forces that exist within the European Union. It also threatens to disrupt the international consensus within the OECD regarding BEPS transfer pricing rules. The concern is especially great given that the ruling forms part of an obvious trend within the EU towards protectionism in tax matters, as shown by the new ATAD (Anti Tax Avoidance Directive) and its CFC (Controlled Foreign Companies) rules.

As regards the US, the Brussels ruling has prompted angry responses from politicians, accusing the Commission of acting like a supranational tax authority and criticising it for targeting mainly US companies. Some members of Congress have even gone so far as to demand the introduction of double taxation on European companies in retaliation. The US attitude also shows a high level of protectionism in tax matters, aimed at preserving the US tax base. Looking beyond the specific case of Apple, Washington believes that the European Commission's policy could allow it to get its hands on part of the $2,400 billion of profits amassed by US companies in foreign countries, but which have not yet been repatriated to the US.

If US companies were to repatriate those profits, they could deduct tax paid to European tax authorities from the amount of US tax they would have to pay. The Apple case and the reaction it has prompted in the US therefore stem partly from the nature of the US tax system: profits made anywhere in the world are taxed at a high rate, but tax on non-repatriated profits is suspended. 

They show the perverse effects of the US system and the need to reform it. Finally, while showing a level of pragmatism that the Swiss authorities would sometimes do well to emulate, the affair shows up certain contradictions in US policy. On the one hand, the US projects its laws extraterritorially, but on the other, it fights tooth and nail to defend the interests of US companies when they are threatened by foreign tax authorities.