Heads turned a couple of weeks ago when it was announced that Apple, maker of iMacs and iPhones, owed Ireland 13 billion euros (about $14.5 billion), covering 10 years of back taxes, plus interest. This case was much more unusual than the run-of-the mill tax dispute between a taxpayer and the taxing authorities for several reasons.
Surprisingly, Apple wasn’t the only one unhappy with the decision; the Ireland tax authorities were too, with Ireland’s Minister for Finance saying that he disagrees “profoundly” with it. Who made the decision, then? It was the European Commission, basically an antitrust regulator for the EU. The Commission concluded that the arrangement which Apple concluded with the Irish authorities was “state aid,” which violated the Treaty on the Functioning of the European Union.
Article 107(1) of the treaty provides that “any aid granted by a member state or through state resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods shall, in so far as it affects trade between member states, be incompatible with the internal market.” In other words, “sweetheart” tax deals between a government and private companies, perhaps as an inducement for those companies to create jobs or locate facilities in that government’s jurisdiction, are a no-no in the EU. Both Apple and Ireland said they will seek to appeal.
This case is not unique; it is one of several. The European Commission’s antitrust enforcer already has handed down similar decisions alleging that Starbucks received state aid from the Netherlands, and that Fiat did the same with Luxembourg. Preliminary decisions were also handed down regarding McDonald’s and Amazon, and for pretty much every multinational who received an excess profits tax ruling in Belgium.
The U.S. Treasury issued a report saying that the EU’s investigations have considerable implications in the United States and for U.S. companies, and not good ones. Why? Clearly, these decisions have the potential to take the law in a new and dangerous direction. If you’re a company that is seeking to build a factory or a headquarters, and different states or countries compete for the privilege by offering tax incentives, do you now have to worry about the antitrust regulator coming in 10 years later and saying that your deal with the government was bad, and that you now have to unwind the deal and pay back taxes for all the years in which you kept your end of the bargain?
Tax agencies throughout the country and the world have programs that encourage companies to come in to get rulings and thereby avoid the time, expense, and angst of fighting later. The rulings are, in effect, a contract between the government and the taxpayer. So these contracts now are worthless because they can be torn up by a non-tax agency?
And finally, let’s not forget that the most skin in the game here may be from not Apple, but the American taxpayer. Why? We tax our residents, nationals, and companies on worldwide income and give them credit for foreign tax paid. If Apple ultimately pays $14.5 billion in foreign taxes, potentially $14.5 billion in foreign tax credits will be generated. Those credits could be offset dollar for dollar against taxes that otherwise would be paid to the U.S. Treasury. So Apple may have to pay a large amount of money at first, but will then be able to recoup all or most of it from Uncle Sam.
Perhaps the British were on to something when they said they wanted out of this system! We’ll see in the coming years how this story unfolds.
Tom Yamachika is president of the Tax Foundation of Hawaii.