By Triet Pham, Transatlantic Economy Analyst
Summary
The European Commission’s decision to impose a €13 billion ($14.2 billion) bill on Apple, payable to the Irish government, is one part of its new push to address tax avoidance by multinational corporations (MNCs) operating in the EU. While moves in this direction would significantly reduce member state deficits, they risk provoking a euroskeptic backlash. The Apple ruling’s retroactive character, in particular, could also undermine ongoing negotiations for the Transatlantic Trade and Investment Partnership (TTIP) agreement. To minimize these risks, the Commission should reform the European Fund for Strategic Investments (EFSI) to account for losses of tax revenue and jobs in member states that have established themselves as tax havens. It should also eliminate, or at least reduce, the scope for the retroactive recovery of state aid.
Background
On August 30th, the European Commission declared that the Irish government had accorded Apple €13 billion ($14.2 billion) of undue tax benefits from 2003 to 2014, which amounted to illegal “state aid” under EU law. Irish tax rulings in 1991 and 2007 permitted Apple to attribute nearly all of its taxable profits earned in the EU to a “head office,” which was not based in any country and consequently could not be taxed. Although this tax treatment expired in 2015 when Apple changed its structure in Ireland, the Commission ordered Apple to pay the Irish government the total amount past due. This equates to nearly 6% of Ireland’s annual GDP.
The Irish government is appealing the ruling, and many Irish politicians allege that the EU is unfairly targeting Ireland’s corporate tax rate of 12.5% – among the lowest in the bloc. Their main concern is that MNCs, which currently provide 20% of private sector jobs in Ireland and contribute 14% of tax revenue, will choose to relocate if faced with a higher tax burden. The U.S. Treasury and the OECD also criticized the decision as an overreach into state tax policy and argued that existing OECD transfer pricing rules suffice. Under these rules, most of Apple’s profits would be allocated to, and taxable in, the U.S.
For the Commission, the Apple case is a small part of the much larger problem of tax avoidance by multinational corporations (MNCs). The Commission has long-recognized tax avoidance as a barrier to a more competitive Single Market and successfully persuaded member states to adopt modest measures to counter it. But the issue gained greater visibility after the “LuxLeaks” scandal in November 2014, when the International Consortium of Investigative Journalists revealed MNC tax avoidance schemes in Luxembourg. It is estimated that total revenue losses to tax avoidance range between €160 billion and €190 billion per year across the EU. The Commission has signaled that additional investigations are forthcoming.
Despite the ongoing appeal of the Apple ruling, last month the Commission revived its March 2011 proposal to create a Common Consolidated Corporate Tax Base (CCCTB) to address tax avoidance by MNCs. In its first phase, the CCCTB would standardize the calculation of net profits subject to taxation for companies with revenue greater than €750 million. In the second phase, taxes collected would be apportioned to member states based on corporate activity as measured by assets, labor and sales. The Commission previously shelved the CCCTB proposal due to opposition to its highly controversial second phase from Bulgaria, Britain, Ireland, Malta, the Netherlands, Poland, Romania and Sweden.
Prospects and Implications for the EU
It is not clear how the Irish government’s appeal of the Commission’s ruling will fare, but Britain’s impending exit from the EU makes the adoption of the CCCTB more likely. If the Commission’s ruling stands and the CCCTB is implemented, member state deficits and debt will decline significantly. In 2015, when EU member states recorded a total budget deficit of €347 billion, the CCCTB would have reduced this figure by up to 55%. Retroactively recovering state aid would reduce budget deficits and debt further.
While fiscally beneficial, at the political level these moves are likely to strengthen and undermine the Union – with an unclear net effect. The EU’s political context is more euroskeptic than it was when the CCCTB was originally proposed in March 2011. Euroskeptic parties across the EU have gained electoral ground, and in a June referendum Britain voted to leave the Union. Additionally, prior to the Apple ruling, the Irish government warned that its low corporate tax rate was a “red line issue” for Ireland’s relations with the EU. Since then, prominent euroskeptics in Ireland and Britain have argued that the ruling justifies an Irish exit from the EU. Other prominent commentators argued that “the Commission appears to have forgotten about the consumers it is supposed to be helping” and “introduced uncertainty about corporate taxation” by creating the perception that it is retroactively collecting taxes rather than state aid.
The Commission’s ruling on Apple and revival of the CCCTB proposal are likely to divide euroskeptics. On one hand, these steps will garner support from those who are critical of the EU’s ability to produce tangible benefits for member states and citizens. On the other hand, they expose the Commission to the euroskeptic criticism that Brussels is unduly undermining member state sovereignty.
The Apple decision might also complicate U.S.-EU negotiations for the TTIP. Anti-trade politicians in the EU could use the Apple case to claim that the TTIP would further expose European markets to MNCs that have engaged in tax avoidance. On the other side of the Atlantic, U.S. negotiators and MNCs supporting the deal could point to uncertainty about EU powers over national tax law to block the deal. Business Roundtable, a lobbying organization for U.S.-based MNCs, expressed its concern that “business can never have certainty even on its past tax liability unless or until the [Commission] chooses to decide accordingly.”
Recommendations
Although the Commission, backed by most member states, is determined to reduce tax avoidance, it must adopt measures to minimize the likelihood of a euroskeptic backlash that would further undermine political support for the Union. Any solution will need to ease the loss of tax revenue and jobs in member states that have established themselves as tax havens. This could be accomplished by reforming the European Fund for Strategic Investments (EFSI), the EU’s €21 billion fund launched last year that is on track to attract at least €315 billion of private investment by mid-2018. As the Commission works to improve the fund’s geographic coverage, member states most affected by moves to counter tax avoidance should be accounted for. This would enable more investment in infrastructure, education, research and development, and small-and-medium-sized enterprises that allows these member states to reduce their heavy reliance on MNCs for tax revenue and jobs.
The Commission should also eliminate, or at least reduce, the scope for the retroactive recovery of state aid to minimize the impact on the TTIP negotiations. Opposition from U.S. business could render the agreement politically untenable, as its prospects have already dimmed over issues such as public procurement and the treatment of agricultural products. To increase the likelihood of concluding a comprehensive and ambitious agreement that will boost economic growth and create jobs, the Commission should remove this source of business uncertainty.