Taxation and State aid, when valid bilateral legal agreements are against the EU rules
by Emanuele Bonini
The Apple case is by now «the case». It doesn't happen every day to see a big corporation recognised as beneficiary of 13 billion Euro of illegal state aid. The European Commission found the tax rulings signed between the Irish government and the American farm against the EU rules. After an investigation lasted more than two years, the European Commission has in fact concluded that Ireland granted undue tax benefits, leaving Apple pay an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits. This is the story, and it has been now become the cult event of the year. Apple replied by announcing all the possible negative consequences for both investments and employment that this decision can create. Call it a blackmail if you want, but of course this is story doesn't stop here. It is a very complicated case, whose solution is not easy to be found. However some considerations are possible.
No sanctions. «This is not a penalty, it is unpaid taxes to be paid», pointed out Margrethe Vestager, the European commissioner in charge of competition policy. Although everybody wrote already that the EU imposed a fine against Apple, there are no fines under EU State aid rules and recovery does not penalise the company in question. As a matter of principle, EU state aid rules require that incompatible state aid is recovered in order to remove the distortion of competition created by the aid. The decision of this nature simply restore equal treatment with other companies. It is up to the Member State getting the money back.
No actions against Apple. As already said, the decision taken in Brussels neither hit nor penalise Apple. Illegal State aids oblige national authorities to ask the company in question to repay the unfair benefit. In case of non compliance with the European Commission requests, the European Commission can open an infringement procedure against the Member State for non-recovery of State aid. The infringement procedure can bring to a fine against the member State. So, the action of the EU Commission has been taken against the Irish authorities, as underlined by the official press release issued («State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion»). Nevertheless, Apple is the beneficiary of a tax agreement signed in violation of EU rules.
The agreement is valid but against the law. Tax rulings issued by Ireland to Apple have «bilateral» nature. The two parties have engaged in a contract and in its respect. There is nothing illegal in this, being taxation area of exclusive competence of the Member States (articles 2-5 of the treaty of the EU). The European Commission has exclusive competence in competition, and the national bilateral agreement stipulated between Ireland and Apple breaches rules in the area the European Commission is responsible for. «This selective tax treatment of Apple in Ireland is illegal under EU state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules». In other words, the EU antitrust found that tax rulings - even if «perfectly legal» - created a distortion of the market through an unfair competition. Apple has been in an unduly privileged positions in comparison with its competitors.
Ethics. Both Apple and the Irish government are decided to appeal the Commission decision. They have the right to that. As a matter of principle, all Commission decisions are subject to scrutiny by EU courts. We can be sure this will be the case. However, even if a Member State decides to appeal a Commission decision, it must still recover the illegal state aid but could, for example, place the recovered amount in an escrow account pending the outcome of the EU court procedures. Despite all the legal aspect of the story, it is a fact that Apple paid only the 0.005% of taxes on profits. This poses a question on ethics: is this acceptable? How to explain this fiscal benefit to the normal taxpayers whose tax rate is more than 100 times higher?
Paradox. «Decisions are taken by facts», stressed Vestager. It is a fact that Apple paid an almost-zero tax rate on profit, it is a fact this created unfair competition, it a fact national competences and EU competences are overlapped. And it is a fact that the European Commission is asking Ireland to do something the Irish government refused to do since the beginning. «We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don't owe them any more than we've already paid», wrote the CEO of Apple, Tim Cook, in his message to the Apple community in Europe.
source: European Commission |
The Apple case is by now «the case». It doesn't happen every day to see a big corporation recognised as beneficiary of 13 billion Euro of illegal state aid. The European Commission found the tax rulings signed between the Irish government and the American farm against the EU rules. After an investigation lasted more than two years, the European Commission has in fact concluded that Ireland granted undue tax benefits, leaving Apple pay an effective corporate tax rate that declined from 1% in 2003 to 0.005% in 2014 on the profits. This is the story, and it has been now become the cult event of the year. Apple replied by announcing all the possible negative consequences for both investments and employment that this decision can create. Call it a blackmail if you want, but of course this is story doesn't stop here. It is a very complicated case, whose solution is not easy to be found. However some considerations are possible.
No sanctions. «This is not a penalty, it is unpaid taxes to be paid», pointed out Margrethe Vestager, the European commissioner in charge of competition policy. Although everybody wrote already that the EU imposed a fine against Apple, there are no fines under EU State aid rules and recovery does not penalise the company in question. As a matter of principle, EU state aid rules require that incompatible state aid is recovered in order to remove the distortion of competition created by the aid. The decision of this nature simply restore equal treatment with other companies. It is up to the Member State getting the money back.
No actions against Apple. As already said, the decision taken in Brussels neither hit nor penalise Apple. Illegal State aids oblige national authorities to ask the company in question to repay the unfair benefit. In case of non compliance with the European Commission requests, the European Commission can open an infringement procedure against the Member State for non-recovery of State aid. The infringement procedure can bring to a fine against the member State. So, the action of the EU Commission has been taken against the Irish authorities, as underlined by the official press release issued («State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion»). Nevertheless, Apple is the beneficiary of a tax agreement signed in violation of EU rules.
The agreement is valid but against the law. Tax rulings issued by Ireland to Apple have «bilateral» nature. The two parties have engaged in a contract and in its respect. There is nothing illegal in this, being taxation area of exclusive competence of the Member States (articles 2-5 of the treaty of the EU). The European Commission has exclusive competence in competition, and the national bilateral agreement stipulated between Ireland and Apple breaches rules in the area the European Commission is responsible for. «This selective tax treatment of Apple in Ireland is illegal under EU state aid rules, because it gives Apple a significant advantage over other businesses that are subject to the same national taxation rules». In other words, the EU antitrust found that tax rulings - even if «perfectly legal» - created a distortion of the market through an unfair competition. Apple has been in an unduly privileged positions in comparison with its competitors.
Ethics. Both Apple and the Irish government are decided to appeal the Commission decision. They have the right to that. As a matter of principle, all Commission decisions are subject to scrutiny by EU courts. We can be sure this will be the case. However, even if a Member State decides to appeal a Commission decision, it must still recover the illegal state aid but could, for example, place the recovered amount in an escrow account pending the outcome of the EU court procedures. Despite all the legal aspect of the story, it is a fact that Apple paid only the 0.005% of taxes on profits. This poses a question on ethics: is this acceptable? How to explain this fiscal benefit to the normal taxpayers whose tax rate is more than 100 times higher?
Paradox. «Decisions are taken by facts», stressed Vestager. It is a fact that Apple paid an almost-zero tax rate on profit, it is a fact this created unfair competition, it a fact national competences and EU competences are overlapped. And it is a fact that the European Commission is asking Ireland to do something the Irish government refused to do since the beginning. «We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don't owe them any more than we've already paid», wrote the CEO of Apple, Tim Cook, in his message to the Apple community in Europe.
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