Last Wednesday there was a collective sigh of relief from the Irish government. The EU’s General Court had ruled against the EU Commission in their case against Ireland/Apple. The Court found that the 0.005% corporate tax rate that Apple had availed of here in Ireland did not constitute illegal state aid.
Thus, Ireland would not be receiving the €14.3 billion in back taxes that’s been sitting in an escrow account. Our Finance Minister Pascal Donohoe described the ruling as a vindication for Ireland which would ‘lead many to reassess their view of our corporation tax regime’.
The Government spent over €8.4 million of taxpayers’ money on legal/consultancy fees to successfully oppose receiving this windfall from the world’s first trillion-dollar company. It will seem like a pyric victory to many. And as regards this ruling’s potential for a reassessment of our corporate tax regime, take the words of one prominent member of the EU Parliament who was quoted in Bloomberg; ‘This is a really black day for tax justice and tax efficiency’. So, I wouldn’t be so sure that this ruling is going to repair our dismal reputation as a corporate tax.
What the case was about
The Commission’s case of illegal state aid arose because of two tax rulings our Tax authorities had given to Apple in 1991 and 2007– so called ‘sweetheart deals’ – which allowed two Irish incorporated subsidiaries to pay little to no tax on approximately €104 billion in profits. It’s important to remember that the reason the Commission initiated the case was because of a US Senate sub-committee inquiry into Apple Ireland. This first drew attention to the fact that Apple earned about 60% of its global profits here whilst paying virtually no tax.
As the Senate sub-committee pointed out, key subsidiaries of Apple had ‘no declared tax residency anywhere in the world’. In response to a sub-committee question regarding where one of its Irish subsidiaries was managed and controlled, Apple replied that it ‘has not made a determination’ but that it ‘has determined that Apple Operations Ireland [AOI] is not managed and controlled in Ireland’.
Wednesday’s ruling does not contest the fact that Ireland facilitated these arrangements that ensured the certain subsidiaries were not taxable in Ireland or anywhere else in the world – hence this tax avoidance scheme often being referred to as ‘stateless income’. It was about whether in allowing Apple to pay 0.005% constituted an act of illegal state aid.
What the case was not about
In 2016, our then Finance Minister Noonan described the Commission’s ruling as an attack on our 12.5% corporate tax rate, and hence a threat to our sovereign taxing rights. A line many of those in our leading centre right parties Fianna Fail and Fine Gael have largely held to. However this case was not about the right of small states to set their own corporate tax rates and attempts to frame it as such are a smokescreen. This was about a specific deal for a specific firm.
Nor was the case really about Ireland’s tax driven approach to attracting the kind of real FDI that creates actual jobs. Less than a year ago, an IMF study found that around 60% of Ireland’s FDI is what they refer to as ‘phantom FDI’, which amounts to profit shifting by multinational that’s designed to minimise their tax liabilities rather than financing productive activity. This gets nearer to the heart of the Commission’s case.
Corporate Tax avoidance: victimless crime or race to the bottom?
For some people this case may seem obscure and unimportant. So what, they might think, if we facilitated a large multinational avoiding tax due elsewhere who cares so long as they create jobs? Is that not simply the nature of tax competition? The problem is that for decades many countries have been following the old neoliberal line that low corporate tax rates equal economic success, with major tax subsidies to wealthy multinationals becoming the norm. This locks in a race to the bottom mentality.
As the academic literature shows, average corporation tax rates around the world have been falling for the last number of decades. Unfortunately, the cost of running nation states hasn’t been falling. So how do we bridge this shortfall? Well, invariably it falls on ordinary people to compensate through increases in the likes of income tax, consumption taxes, stealth taxes, and a whole host of other new taxes like carbon tax, water tax, etc.
Appealing the ruling and the road ahead
This case can, and I believe it will be, appealed by the Commission to the Court of Justice [ECJ]. Margrethe Vestager, the European Commissioner for Competition, in a statement said ‘The Commission stands fully behind the objective that all companies should pay their fair share of tax’ and that it ‘will continue to look at aggressive tax planning measures’.
Whether it’s successful is another matter. But it’s worth noting that previous appeals have been successful. For instance, in 2016 the ECJ overturned a General Court ruling regarding selective tax treatment involving Spanish bank Santander – so this is not the final word.
Nevertheless, the real threat to Ireland is unlikely to be from illegal state aid cases, but from an obscure and hitherto unused element of the Lisbon Treaty [Article 116]. This article allows the Commission to make corporate tax changes at the European level without unanimous agreement of the member states. So, Ireland would not be able to link up with the other EU corporate tax haven jurisdictions like Luxembourg and the Netherlands to block such changes.
The Irish state needs to build an alternative economic model, because the current one based around low taxes, low wages and the pilfering of other countries tax receipts is fast running out of steam. My party Sinn Fein, who are Ireland’s lead opposition party, are ready to bring this about. We are prepared to build an entrepreneurial state that not only funds public services properly and allows for collective bargaining but seeks to develop a high value-added indigenous sector, based on good wages and good employment conditions.