Tax

Apple tax appeal

Peter Vale Peter Vale

Today sees the opening exchanges in the Apple tax appeal in Luxembourg, one that looks set to last for a number of years.

The essence of the European Commission’s case is that the profits generated by Apple’s “stateless” companies had to be taxed somewhere, and that somewhere must be Ireland based on the stateless company structure.

The global tax landscape has changed considerably since the historic Apple structure was established in the early 1990s. With the OECD driving change, tax laws have been amended in many jurisdictions, with Ireland having made significant changes in 2013, with the elimination of stateless companies and in 2014 through the abolition of the “Double Irish” structure. 

It’s worth noting that neither of the above structures were seen as being a problem of Irish making, but Ireland took an active role in  the global tax drive towards tackling tax avoidance.

The global tax mindset has changed remarkably in recent years, with immoral tax planning and potential reputational damage emerging as new thematic concepts in the tax world.

It is no longer possible to shelter profits in a jurisdiction with minimal substance. There is now a much closer alignment of taxable profits and substance (something which has actually benefitted Ireland in recent years given the considerable presence many multinational corporations (MNCs) have here).

The key point is that tax laws were very different throughout the periods in question in the Apple appeal. It is thus very difficult to reconcile the Commission’s decision with the tax laws in place at that time.

Broadly, a non-Irish tax resident company is taxed in Ireland on the basis of its operations in Ireland only. Ireland does not tax other profits of a non-resident company, something that is still the case today with the significant difference that many previously considered non tax resident companies now come under the scope of Irish tax residency.

It would appear that Apple was taxed in Ireland in line with the substance of its Irish operations, prior to the Commission intervention. From a distance, it seems that the Commission is attempting to rewrite historic tax rules based on today’s laws and mood.

The fact that the profits in question were for the most part not taxed in any jurisdiction was essentially a function of US tax law, which historically allowed a deferral of tax until the profits were repatriated to the US.

With the verdict in the General Court likely to be appealed either way, a final decision is several years away. However, a General Court decision is likely in a number of months and will be a significant indicator of the final verdict.

It is interesting to consider the impact of a negative finding on Ireland. Given how much has changed even since the Commission’s initial finding, it could be argued that a negative finding would be treated as a legacy of a previous era and no longer relevant. However we think this would be naive and the reality is that such a finding would be damaging for Ireland, and indeed ironically the EU as a whole.

With US tax reform encouraging US groups to do more in the US and less elsewhere, a negative finding would only fuel this narrative further, with much of the detail lost.

Hence the General Court finding is significant and will come at a time when the OECD is in the middle of round two of its global tax reform work (“BEPS 2.0”). With politics playing an even bigger role in the latest discussions, the General Court decision will undoubtedly have an impact and either strengthen or weaken the voices of key players.