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Apple’s € 13 billion (plus interest tax bill)
Trowers Public Insight

Apple’s € 13 billion (plus interest tax bill)

The EU Commission has for some time had what it perceives as 'unfair' tax advantages offered by some EU member states to selected multi-national corporations. Its rationale is that this distorts competition against those other businesses which are not so favoured. Starbucks and Fiat have previously been found to have benefitted from similar tax advantages.

The reasons behind the decision

At the heart of the EU Commission's concerns is an element of tax planning under which businesses in group structures charge each other for goods, services, trademark usage and loans – known as 'transfer pricing arrangements'. An astute tax planner could arrange these group transactions so that a business based in a country with relatively high corporate taxes is disproportionately left with the costs of the group, reducing its profits and its tax liabilities, while businesses in lower tax regimes are left with most of the income. The result being higher profits for the group's shareholders and lower tax receipts.

Transfer pricing arrangements require the relevant tax authorities, such as the HMRC, to review and agree the costs and charges made between businesses in the same group. These should in principle be based on the arms-length principle. Group companies should charge each other the same as 'unconnected' businesses might be expected to.  The EU Commission found that Apple's' "artificial" head office arrangements led it to paying taxes starting at 1% and reducing to a mere 0.005% on its profits. The EU Commission also found that Apple virtually avoided payment of any corporation tax from the sale of products elsewhere in the EU.

Though the EU Commission does not have competence over corporate taxes, which is for each EU member state to determine, it is responsible for ensuring that competition in the single European market is not distorted by unlawful aid from the state. The discriminatory application of business taxes can give rise to unlawful state aid. The UK business group 'Fair Tax' group has long argued that favourable tax treatment for multi-nationals is anti-competitive.

Some global brands, when under the media spotlight on tax, have relied on the defence that their legal duties are maximising profit for their shareholders, rather than paying avoidable taxes. No doubt this is true, though some shareholders might wonder whether maximising profits also encompasses protecting the reputation of a brand (as a responsible corporate citizen), avoiding both consumer boycotts and the new risk of repaying substantial amounts of unlawful state aid.  Apple has a loyal consumer base and it will be interesting to find out whether the decision will affect their brand choice.

State Aid law will in itself not solve aggressive tax planning. It is primarily concerned about preventing distortions in market competition. If Ireland treated all of its corporate-tax payers equally it may have a defence.

With more than € 13 billion at stake it is unsurprising that Apple intends to challenge the EU Commission's decision in court. Ireland which previously attracted tech companies through its relatively favourable corporate tax policies has also decided to challenge the decision.
The OECD (the Organisation for Economic Co-operation and Development), a club of economically advanced nations, has led the international campaign for reform of multi-national corporate tax arrangements.

What the EU Commission's action does raise is the question of how countries need to co-operate to ensure global brands contribute taxes to the markets they operate in. Some have called for a fundamental reform of corporate taxation, including companies being taxed on the turnover or value of their operations in each tax jurisdiction.

With the UK having voted to leave the EU the question is whether it will continue to support a level playing in market competition or itself seek to attract multi-nationals through favourable tax deals. Some commentators have called on the UK to effectively adopt a regime which is favourable to multi-nationals.

The EU Commission and most of the other 27 EU member states are likely to take a dim view of that approach and it may form part of the UK's exit negotiations.


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